Real estate stocks hit 2-year low as credit crisis reaches Tel Aviv

"There is no doubt, the wild credit excess where everyone took part and anyone who could took out loans in the past two or three years, is over. Today fear has taken hold of the markets and paralyzed many financial areas," said Chaim Katzman a week ago. Katzman, the controlling owner of the Gazit real estate group, described the depressing mood in financial markets in general, and the real estate market in particular.

Only a year ago the situation on the Tel Aviv Stock Exchange was the exact opposite. Real estate shares were rising daily and the companies continued to leverage their balance sheets with hundreds of millions of shekels in bonds. Some of them used the cash to buy up property in all sorts of remote corners of Eastern Europe. But in July 2007 the subprime mortgage crisis exploded in the U.S. and financial institutions decided to write down tens of billions of dollars. Credit became much tighter, and liquidity dried up. This turned into a global credit crunch, which is refusing to disappear, and the biggest victims are the real estate and financial sectors.

The crisis has not ignored Tel Aviv. After chasing real estate stocks blindly in expectation that the party would never end, investors are now scared. The fall of developer Heftsiba last August, and the financial chaos in its wake, had its effect. True, in the real estate sector they never stopped trying to convince us that Heftsiba was a one-off, specific problem - mostly criminal and not economic. But it certainly should have set off a warning light.

The Real Estate-15 is now 46% below its record high of last May. Many of the index's firms are now trading at a value below its shareholder equity.

For now, the crisis has hit the smaller firms worst, but as the proverb goes: "When there's a flood, everyone gets wet." The losses certainly have not missed the big real estate firms that operate globally either. Africa Israel, Gazit Globe, Delek Real Estate and Alony Hetz have all dropped dozens of percentage points, even though they all have cash-filled kitties and years of proven experience.

Even tycoons such as Nochi Dankner and Yitzhak Tshuva are not immune. The two leveraged their huge Las Vegas project with hundreds of millions of dollars in loans, and are expected to have to take out more. But these new loans will be under tougher terms.

Dankner and Tshuva may be careful to say at every opportunity that the project is spread out over many years and by then the crisis will have ended - but sooner or later the day will come: they will have to repay the loans. It is clear today that the bankers who provided these loans are not sleeping well.

Examples include Eliezer Fishman's Jerusalem Economic Corporation, which is down 49% from its high and is valued by the market at only NIS 3 billion, 39% below its shareholder equity at the end of last September. Tshuva's Delek Real Estate has fallen 70% from its high.

What Israeli investors seem to be looking for at the moment are companies with most of their operations in Israel - companies invested in income-producing properties and residential construction such as British Israel and Melisron. Such firms have lost little value in recent months.