Reports of An All-Time Slump In Foreign Real Estate Investments in Israel Could Spell Out Opportunity for the Savvy Investor

Reports of a slump in foreign investment in Israel real estate could spell a real opportunity. In fact, a drill-down to the fine print may actually prove there is no cause for alarm. We took a closer look at the recent bespoke report issued by the Ministry of Finance's Chief Economist and our belief in the market and its increasing strength was restored: Investments in certain areas are down, but others are actually higher for the first time in years, prices for foreigners are high, but not everywhere and perhaps not for long, nonresidents aren't buying as much as in the past, but they aren't selling either.

A Closer Look at the Statistics

nonresidents aren't buying as much as in the past, but they aren't selling either
nonresidents aren't buying as much as in the past, but they aren't selling eitherDreamstime

Although anyone looking to purchase a property in a foreign country is heavily reliant on public information and media sources to steer the final decision, the wise investor always digs beneath the surface. At the end of 2016, The Chief Economist for the Israel Ministry of Finance reported a 36% decrease in overseas purchases of Israeli properties from the previous year. This sparked quite an interest among potential nonresident buyers and caused many to remain on the fence until the media smoke has cleared.

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In an attempt to assess the report's true contribution to the decision-making process, we decided to take a closer look at the report and drill down to its statistics. Once the numbers are aligned with other variables, such as political atmosphere and historical data, like us, you may find the picture revealed is that of an opportunity rather than one of concern. In real estate, an opportunity is defined by the deal's potential to generate return, by the deal's long-term value and, in the particular case of buying an investment or holiday property in Israel - by the deal's potential to give us peace of mind.

Buying Property in Israel Will Generate Return  

The survey, conducted by the Chief Economist revealed that between January-August low since 2003. Taken at face value, this statistic points to the fact that over the first 8 months of 2016, foreign investments came to a halt. Real estate isn't only about buying, it's about selling at the right price at the right time, and sales of Israeli properties went down during this period for both residents and foreigners. This is because the Finance Ministry's report does not consider the pricing trend in Israel and the fact that prices continue to rise despite a decline in Israeli demand for new properties and despite the decline in property purchases by nonresidents. 

Buying Property in Israel Will Generate Return
Buying Property in Israel Will Generate Return Dreamstime

Now, despite claims of a pending burst of the Israel real estate bubble, analysts are now  saying that this could be no more than a scare tactic being utilized by Finance Minister  Moshe Kahlon to lower prices and discourage foreign buyers from purchasing for investment purposes. In fact, although a massive decline in prices has been just around the corner for years now, some experts claim that Price increases in Israel are not out of line with other Organization for Economic Cooperation and Development countries.**

Although the Chief Economist Survey also pointed to a 36 percent decrease in purchase by nonresidents in the Tel Aviv area in comparison to the previous year, the decline was paralleled by a significant  year-over-year rise in prices of both new and used apartments, more so in the new apartment sector.

In terms of maintaining market value and ensuring profitability in the long run, Israeli properties have always been a wise investment based on the consistent rise in price alone. In terms of yield or return on investment, over the past seven years the value of residential apartments in Israel has appreciated by tens of percentages. Areas most popular with foreign residents like Tel Aviv or Jerusalem are increasing in value by 84% and 56% respectively. During the same time period, rental fees for apartments across the country rose by about 50 percent on average, particularly in central Israel.  In 2015, despite government efforts to lower housing costs, prices continued to rise on average by around 5% across the country. Local property experts say that apartment prices are not likely to decline in the foreseeable future and that a sharp downward movement (AKA the bursting of the bubble), would actually endanger the banking system.

Buyers are Shifting Interest To Other Areas In the Country

According to the survey, only 450 properties were sold in the Jerusalem area during the first 8 months of 2016 to nonresidents. This represents a sharp 41 percent decrease in comparison to the same period of the year before. This sharp decline also led to the Jerusalem area's dethroning from its leading position in foreign property investments in Israel. Hence, while the Jerusalem area was the number one area for nonresident buyers in the past, in 2016 investments in Jerusalem represented only 29 percent of the total, only slightly higher than the Netanya area.

In terms of maintaining market value and ensuring profitability in the long run, Israeli properties have always been a wise investment
In terms of maintaining market value and ensuring profitability in the long run, Israeli properties have always been a wise investment Dreamstime

The Ministry has attributed the decline in purchases in the Jerusalem area to the renewed rise in terror attacks in the area. It is also probable that the decline was related to the government's decision at the end of 2015 to enable a double property tax to be placed on "ghost properties" that are unoccupied for the most part of the year.

In the Netanya area, a total of 423 apartments were purchased by nonresidents between January-August 2016. Despite the 28 percent decrease in comparison to the previous year, this is still the area that listed the smallest decline among the top three most popular with foreign buyers (as well as Tel Aviv and Jerusalem). But the decline in Netanya also occurred following an exceptional 78 percent rise in purchases in the area by nonresidents the year before.

With regards to the Netanya area, the Ministry's survey also depicts a significant decline in the price levels of the apartments purchased by nonresidents - particularly in the second-hand sector. Meaning, if the average price of a used apartment purchased by a nonresident in the city during this period was 1.8 million shekels - the average property price was 19 percent lower than the price of the same apartment purchased the previous year.

The Ministry commented, "These developments have brought Netanya to the forefront of the foreign investment scene with numbers similar to those listed in Jerusalem and Tel Aviv at the top of the leader board".

Fewer Purchases, But with Fewer Sales

An interesting piece of information to emerge from the survey is the fact that although foreign residents have drastically reduced their property purchases in Israel, they aren't selling much less than during previous years. Meaning, between January-August 2016, there was also a sharp 35 percent decrease in the sales of Israeli properties by nonresidents in comparison to the previous year. According to the survey, despite the decline in purchases, the positive net balance in nonresident purchases remained intact.

Israel is an Eternal Home for Jewish Investors

The trends to emerge from the Survey are particularly intriguing in light of the fact that Israeli investors have essentially reduced their own market share, while the Ministry of Finance has emphasized that the drivers for nonresident investments are largely Zionism-related and not necessarily financial. While purchasing property in Israel holds many financial benefits, the global political atmosphere is making it increasingly clearer that the peace of mind that one acquires as a Jew buying property here is invaluable.

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