In June, Liat and Yoni were about to renew their lease and begin their third year in the small house they were renting in one of the Sharon area communities. They had competed for the house against dozens of other renters and passed the interview process with the landlords. They showed their salary slips to the landlords’ attorney, committed to guarantees of tens of thousands of shekels and even agreed to buy the sofa and refrigerator from the previous tenant.
When Liat arrived armed with postdated checks to meet the landlady, she was surprised to learn that contrary to earlier discussions, the rent was being raised by 500 shekels ($150), an 8% increase over the previous year. “I could have raised it last year, but I didn’t,” the landlady told Liat with a tight smile. When Liat asked her for a more moderate rent hike, the landlady said, “In any case, my daughter is thinking of moving into this house. If you won’t pay, you’ll have to leave the house by the end of the month. She’ll move in instead of you.”
For some 750,000 families living in rented housing – 29% of the Israeli housing market – that’s the reality of renting. There is no certainty about the rent payment or the rental period, the response to maintenance requests and problems depends on the mood of the landlord, and shared areas in rented buildings are neglected. The rental market is mainly the province of private property owners who keep an apartment or two as an investment and don’t feel obligated to provide quality service – they are mainly interested in turning a profit and guaranteeing financial security for their children or grandchildren.
“The relationship between a renter and a tenant in the private market is fragile and unequal,” explains Mati Dov, CEO and founder of Megureit, the first residential real estate trust, or REIT, in Israel, with about 1,600 rental units, about 500 of them occupied. “As a tenant you are usually dependent on the whims of the property owner, you don’t know whether his plan is to sell the unit in the coming year or use it to pay for his child’s expensive college degree, and you can’t plan long term and ensure you have stability.
“When you don’t know how far from home your work will be and what preschool to register your child at, there’s a lot of uncertainty and your quality of life suffers. I’m not talking about tenants who are students or young singles who can go back to their parents, but about families with children who have deliberately chosen to use their money for other investments and free themselves from the pressure of home buying, but are unable to find a reliable and suitable residential alternative due to the present market structure.”
Although the percentage of renters in Israel is constantly increasing – from 19.5% of households in 2005 to 28.5% in 2019, according to the Central Bureau of Statistics – only over the past five years have there been some initial changes that herald a new era in the rental market. The establishment of new REITs, including Megureit, Aura Reit, Reit Azorim Living, Menivim Reit and Akuna Reit, along with veteran companies competing in tenders to build long-term rental housing projects that combine rental and sales, such as Azorim, Shikun & Binui, Africa Israel, Zemach Hammerman and Prashkovsky, are just part of the movement ushering in the change taking place in the housing market.
The entry of wealthy, established organizations into the market is the beginning of a revolution that could turn rented housing from an “inferior” product that is considered a kind of fallback option into one that would bring “American” qualities to variegated and prestigious complexes in Israel, suiting them to younger people and their needs.
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Optimists estimate that the balance is about to change and about 260,000 private home owners who now own two or more units will sell their apartments or transfer them to their heirs in the coming years, as the corporate market managed by real estate companies, REITs and asset management organizations becomes stronger.
The reasons for this shift in real estate activity are the changes in housing patterns and the preferences of young people. More are choosing to prioritize flexibility and quality of life, say industry players. They view housing as a service rather than wanting to purchase property and become slaves to a mortgage – which is true particularly in the Tel Aviv metropolis, but also in Be’er Sheva, Jerusalem and Haifa in recent years.
Central Bureau of Statistics figures also show fewer people in Israel under the age of 34 are homeowners now compared to in previous decades, and that as of 2018 about 32% of men and about 18% of women aged 25-34 were still living with their parents.
It’s not just the cultural and financial differences facing this generation. The potential of the institutionalized rental market has grown due to the low interest rates. Along with improved tax breaks through the Encouragement of Capital Investments Law and the amendment to the REITs, the assessment is that the value of rental assets will continue to appreciate – especially given slowing land sales, and the increasing risk in the office and hotel market amid the coronavirus crisis.
“More and more developers are entering the long-term rental market and demonstrating a willingness to accept low returns that don’t exceed 3%, due to the low interest environment and the low risks,” explains Daniela Paz Erez, one of the owners of the Paz Group real estate consulting firm. “Throughout the years there has been a lack of confidence in the rental market on the part of developers and decision-makers – they were totally opposed. They didn’t believe that people would choose renting as a permanent solution, and it was hard to discuss without hearing: ‘A Jewish mother won’t allow it, she wants her child to buy a house.’”
Paz Erez says now the situation is different: “Housing costs are making the Jewish mother more concerned about the mortgage burden, and she wants to create security for her child – not at the cost of a 1.5 million shekel mortgage, but by being able to eliminate dependence on a private landlord. That has led to developers who are voluntarily entering the long-term rental market, either by bidding on projects through the government rental housing company Dira Lehaskir (Apartment for Rent) or by taking advantage of the law to encourage capital investments and seeking out municipal land available for such uses.”
Inbal David is the new acting CEO of Dira Lehaskir, which publishes tenders for developing land at a discounted price for developers that commit to renting the apartments for 15-20 years before selling them, and that allocate some of the units for price-controlled rentals. “The institutional organizations are showing an interest after seeing that occupancy in the government-promoted projects can reach 100%, and in some, there are even long waiting lists. An annual return of 3.5% isn’t bad, even for them,” she says.
She says that the Planning Authority’s committee for priority housing sites, which is requiring around 30% of the new apartments in every project it approves to be designated for rental properties and affordable housing, is encouraging the trend.
“This step by the priority housing sites committee is a guarantee that the trend will continue – which is why the developers are voting with their feet and joining the projects, and the REITs are also multiplying,” explains David. “Our objective as the government’s executive arm is to place Israel alongside many countries in the Western world where corporate rental housing has been in place for many years. Today, led by our activity, Israel’s leading real estate developers see the growing potential of this product, and are aware of the high demand and need.”
David can’t promise that the balance between those living in rental housing (almost 30%) and those who own their homes (about 70%) will change, but she expects that the current players in the rental market will be replaced by institutional players. Prof. Danny Ben-Shahar, head of the Alrov Institute for Real Estate Research at Tel Aviv University, agrees with her.
“The market is run by older couples who buy apartments and rent them out sporadically and unprofessionally, however they like, as opposed to what happens in Western countries such as Canada and the United States and some European countries,” says Ben-Shahar. “But when access to home ownership is retreating due to the high housing costs and price increases, most families struggle to even come up with enough of a down payment to purchase a home in the high-demand areas near employment centers – and therefore there has to be a change that fosters a professional rental market.”
Ben-Shahar says that such a market must include regulation that ensures fair rent, basic maintenance and long-term options, which is what former lawmakers Stav Shaffir and Roy Folkman sought to do through the Fair Rental Bill that they promoted during one of Israel’s previous Knesset sessions – without much success.
“Even without talking about price control and rent ceilings, for many people owning a home in high-demand areas is not an option, and the government has a responsibility to provide them with the option of a stable home with a future,” says Ben-Shahar. “Young people today have to move far away to distant outlying areas in order to own real estate, and with the lacking transportation infrastructure and services that worsen the further away you are from the Tel Aviv metropolitan area, there is no mobility, and their employment options are limited.”
A study Ben-Shahar conducted in February 2021 on access to housing found that for people in the fifth income decile who want to buy an average 4-room apartment in Israel, it would take 10.6 years of channeling 100% of their household income into purchasing an apartment. If they want to buy in Tel Aviv, it would take another 5.4 years of putting 100% of their income toward the purchase. Clearly the vast majority of people do not save at that rate. “This calculation figures that for years, that family doesn’t spend a shekel on food – in other words they don’t eat, don’t send the children to school and extracurricular activities, and don’t buy clothes,” stresses Ben-Shahar.
According to the study, for those whose earnings are in the four lowest deciles, it would take from 12.9 to 36.9 years of saving their entire income until they could purchase an average 4-room residence in Israel.
The further one gets from Tel Aviv, the lower the cost per square meter (except for Jerusalem). While in Tel Aviv the average cost for a 4-room apartment is 3.08 million shekels, 40 kilometers from Tel Aviv the average cost is 1.4 million. “If this continues, the Tel Aviv metropolitan area will be composed of a homogeneous, elitist population, with everyone else living in the outlying areas,” adds Ben-Shahar. “In order to avoid a polarized society with a huge disparity between the center and the periphery, we have to enable social mobility and equal opportunity. Legislators must create quality alternatives, with certainty and financial security, for those who can’t afford to own a home.”
“There’s no reason why the institutional market, which in any case invests huge sums in real estate in North America, shouldn’t also invest in developing a rental market in Israel, particularly given the low interest rates and the low risk from rental returns. But in order for this market to become established, there needs to be more government intervention – and only after that can the government step out of the game,” he says.
One of the companies that is becoming involved in long-term rentals, encouraged by Dira Lehaskir’s activity, is the Ashtrom Group. The group has a long-term rental project in Haifa, and is expected to fill another 1,000 rental units in the next two years in Tel Aviv’s Mashtela neighborhood and Gadna complex, and in the Kiryat Yovel neighborhood in Jerusalem – all through Dira Lehaskir tenders.
“No renter would choose to rent from a random private person over an institutionalized rental company, if they have the option,” claims Gabriel Levy, CEO of Ashtrom Group Franchise. “Compared to what you get – a completely new property – our contracts and prices are significantly better than the private market. We are committed to government standards through the Dira Lehaskir tender process, and we also want to maintain maximum occupancy and optimal property maintenance, so we’re really carrying out constant improvement.
“Large companies that enter long-term rental housing initiatives invest in their projects and their management. They offer space to store strollers and bicycles, a meeting room, a gym for the tenants and more. We understand that the relationship with the tenants is the key and therefore offer activities for children on Hanukkah, Purim and Israel’s Independence Day, and other activities for small kids. We adapt public spaces to the tenants’ needs – such as communal prayer or lectures – and above all, in our 200-apartment project in Haifa for example there are four staff members who work 24/7 to provide a solution for every mishap or maintenance problem, even if means rescuing a child who got stuck in the bathroom or letting in someone who got locked out on Friday at midnight.”
According to Levy and other rental project operators around the country, the profile of the renters is not uniform, and they include varied populations of different ages and backgrounds. “Israelis are somewhat prone to stigmas and they have to learn to forget about their old-fashioned ideas about renting,” says Levy.
“In one rental project in Haifa there are people with three BMWs in their parking spaces, along with 12 doctors from Haifa’s Rambam Hospital, pensioners from Kfar Vradim who are downsizing, and young families from the Haifa suburbs. I know my renters well and work to guarantee cleanliness, appearance, maintenance and the finest services possible – and the renters want to stay in the apartments for 10 years and more.”
Levy believes that the current market conditions are sufficient and all that’s necessary to ensure the trend continues is to increase the supply of land designated for such rental projects: “There’s no need for a fair rental law or more regulations, or politicians who scatter promises. What’s needed is to let developers compete, and the market itself will respond and dictate the standard. The more competitive and capitalistic the market becomes, the better the services for the renters. They should just keep making land available.”
But the pace of tenders for land slated for long-term rental is not really at its peak, to put it mildly. In 2015 then-Finance Minister Yair Lapid set an ambitious target of 150,000 long-term rental apartments that would change the rental market within a decade, but since then these commitments have evaporated, and the heads of Dira Lehaskir, which was founded to meet that goal, have been forced to apologize and explain that these targets are unrealistic. Today, six years after Dira Lehaskir was founded, the company has helped build a relatively sparse 9,700 rental apartments, most of which are still under construction.
Clearly no politician involved in housing since then – neither former Finance Minister Moshe Kahlon or Housing Minister Yaakov Litzman – saw the rental market as something meriting special efforts, despite the fact that 30-somethings are struggling to save for a down payment on their first home. Kahlon preferred to invest billions in slating land for home purchases through the Mehir Lemishtaken program for first-time home buyers. While Litzman expressed interest in developing the long-term rental market as a solution and an immediate response to the housing shortage among Haredim, the current government, which lasted all of six months, didn’t give him enough time to do so.
Given the dangerous combination of high land prices, local authorities’ and the central government’s paralysis in expediting construction projects in public spaces, and the time-limited tax incentives and the Dira Lehaskir terms that enable developers to sell off rental homes after 15 years, even the current awakening of the corporate rental market is likely to disappear so long as the economic model is based on selling in the end.
Paz Erez says, “The basic problem of the rental market is that developers and funds join a project because they’re thinking about the exit – the sale. That undermines the essential nature of long-term rental projects, which are supposed to be planned to deliver a service that centers around the tenant. Anyone who keeps a rental property for 30 years sees real estate as a means, and not an end. Only then can you have a high-quality project, with shared spaces and apartments suited to the tenants, and tenants who invest in the apartment and the area and see them as a real home that they want to maintain.”
Paz Erez claims that taking public land and using it to build rental homes is not the solution, but rather creates new problems as local governments give up areas designated for municipal and community services. She says that the solution is to designate land for rental homes from the get-go, while drafting municipal zoning plans and master plans.
Shimon Ginny, the CEO of Golden Art, which operates long-term rental projects in Haifa and is currently building another project in Jaffa, believes that the current market activity is a short-term patchwork. “It’s not clear why the State of Israel is willing to subsidize land, invest efforts in publishing tenders, and then give the developer another perk and allow him to profit from the sale after 15 years.
“After all, 15 years is no time in terms of real estate, and that means the long-term rental market won’t expand and improve. That’s a hitch. In the United States, for example, the municipal zoning plan includes rental sites designated in advance, the price of the land is derived from that. There’s another series of incentives, and the land is always designated for rental. This is how an inventory can be built over time.”
Planners and architects believe that creating land designated for rental in the first place, as part of programs being advanced by local and regional committees, would give rise to quality projects adapted to renters’ needs. “The rental projects have to adapt themselves to 2021 rather than resembling another sleepy suburban community,” says Yoni Pick, one of the owners of Pick Architects, which focuses on mixed housing complexes and student dormitories. “A rental housing complex has to include shared spaces for the tenants: shared courtyards and gardens, a swimming pool, a laundry room, music rooms, a shared roof, a work space and more, like we imagine Melrose Place,” he says, referring to the apartment complex that was at the center of the eponymous TV series.
“These apartments must and can be smaller than the standard 120 generic square meters, and some should be 40 square meters, and some should be prefurnished with furniture and lighting,” adds Nitza Pick, a partner in the firm.
Eran Anavim, the CEO of the Azorim Living REIT fund, says,“A rental apartment can be priced high and not as a rent-controlled service due to the added value such apartments can offer in the future, when we expand the portfolio. In the future these projects will set themselves apart with unique features in private and public spaces and services adapted to the community of renters, based on the project’s values” – such as a shared car, a shared scooter, activities and services, a storage room for deliveries and so on, as well as activities for those who live there.
“In order for such projects to gain momentum, we have to plan them in such a way that you, as a tenant, want to be identified with the project: They have to be cool, prestigious, high quality,” says Anavim. “We have to create something with significant added value – a strong community, good services and facilities that aren’t available in every building – and they will constitute an incentive to drop out of the race for owning your own home.”