For the 99%, Ways to Invest in Booming Israel Real Estate

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The Sharona complex in Tel Aviv, a REIT1 property.Credit: Moti Milrod

Investing in Israeli real estate is usually seen as reserved for the rich. Although many Israelis take an interest in the property market and keep an eye open for opportunity, homes are expensive and prices rise nearly by the day. If some years ago you could buy a nice investment property for a quarter-million shekels, now you’d be hard-put to find one for less than a half-million shekels.

But buying an apartment isn’t the only way to invest in property, nor is it necessarily the most lucrative. Income-generating properties such as offices, stores or warehouses can be attractive possibilities. There are also real estate investment trusts, some with high entry barriers and others with very low ones.

For those with as little as 1,000 shekels ($253) to spare, real estate investment trusts, a relatively new investment option in Israel, combine the attributes of investing in property with those of investing in securities. REITs use the investors’ money to buy property — malls, shopping centers, office buildings, industrial buildings — and then give investors a share of their returns, as periodic dividends.

REITs have been operating in the United States for small to medium investors since the 1960s. Today there are hundreds of them, some private and some publicly listed, together worth hundreds of billions of dollars.

Investing in a REIT has a built-in disadvantage, though. What investors are buying is shares in the REIT, which exposes them to the same volatility as any other share. On the upside, they also get cash flow through dividends.

Israel today has two REITs, both publicly listed. REIT1 has paid its investors dividends that have worked out to annual yields of 5% to 6% in recent years. Sela Capital’s dividends reflect returns of 8%-9%. On the other hand, REIT1’s shares have done better than Sela’s. Israeli investors can also get into the hundreds of American REITs, or into exchange-traded funds that track American REITs.

“REITs were created in order to make commercial real estate a possible investment for everyman,” says REIT 1 cofounder and Senior Vice Presdient for Investor Relations Nirit Bregman. REITs emulate direct investment in property, she explains, because they return to investors as though the investors owned a piece of the property.

Investing in a REIT is riskier than investing in property directly, Bregman admits. But like property, it’s an investment for the long run, and studies show that over time a REIT’s return mimics that of property. Also, a REIT relieves the investor of the headache of actually buying a store or office.

For somewhat better-heeled investors with 100,000 shekkels to invest , there is a wider range of real estate investment funds, each with its own entry barrier and business model.

One of the more popular is Hagshama, which says it’s raised a billion shekels from investors since it was launched five years ago. Its founder, Avi Katz, is more famous in Israeli circles for Cofix, a chain of kiosks that sell coffee and food to-go at the low price of 5 shekels per item.

Unlike REITs, which pool investor money, Hagshama’s invests your money in a specific property venture, usually as a financing deal. Each investor knows which project he or she is invested in and the contractor building it. Every member of the investment group is a partner in the project and owns a relative share of it.

Hagshama is involved in a wide range of projects, from urban renewal to a luxury residential tower in Tel Aviv to the construction of residential rental housing in the United States. Investors usually have to commit to a medium-term investment horizon of 24 months to 36 months.

For investors with 300,00 shekels to risk, offices can generate annual returns of 8% to 9%, but with prices starting at 9,500 shekels per square meter the cost of office space in central Israel is too high for many prospective investors.

Outside the central region, however, it’s possible to find surprisingly attractive opportunities. In Ashkelon, Ashdod and Kiryat Malakhi, for instance, prices range from 5,000 shekels to 6,000 shekels a square meter. Income-generating properties can be had for well under a half-million shekels.

Small-town offices

Haim Mesilati, a property assessor, says many people don’t even think about the need for office space outside of greater Tel Aviv. But if anything, he says, demand for offices is even strong in small towns beyond the central region, where the supply is more limited. “Every town and city has lawyers, accountants and other professionals who need offices. Sometimes, because of the supply constraint, you find apartments converted into offices in these towns.”

At the 500,00-shekel level, investors should weigh buying a cheap rental apartment outside of central Israel or in a poorer neighborhood in the central region.

Older apartments in Be’er Sheva, Haifa, Lod or Ramle have generated handsome yields for owners, but prices in these cities have soared in recent years. Not long ago you could buy a three-room apartment in one of these cities for between 250,000 shekels and 300,000 shekels, and earn annual returns of 8% to 10%. Today such apartments can cost a half-million shekels and more, and a 5% annual return is considered respectable.

In the central region, where land value is sky-high, more added value can be extracted from a plot of land through National Master Plan 38, or Tama 38 in Hebrew, which enables contractors to add apartments onto an existing building in exchange for reinforcing it against earthquakes. But more on that below.

Rotem Namir-Pardess, a real estate investment coach, says her students carried out several successful investments of this sort. One involved a four-room apartment in Pardes Hannah, bought for 500,000 shekels and returning nearly 6% a year as a rental.

Apartments that are suitable for investment are usually in disadvantaged neighborhoods, Namir-Pardess notes. Alongside long-term investors, there are those who leap into the water, kick about, flip the property and walk off. These people buy properties, usually in poor condition, or buildings where the building rights haven’t been used up. They put in between 50,000 shekels and 100,000 shekels in renovations, sell the property at a profit and move on.

According Namir-Pardess, though, this type of investment is increasingly hard to find. That’s because even the dregs of the real-estate market are expensive these days. A fixer-upper that might have sold a few years ago for 200,000 shekels less than comparable properties in the area that were in better condition might now cost just 50,000 shekels less, she explains. If someone wants an adventure of this sort, well and good, but the flip will take longer — perhaps two or three years, she estimates.

Anybody with 1.5 million shekels in hand who wants better returns than the residential market is likely to yield might consider properties such as stores, offices and shopping centers.

Pooling resources

That amount might sound low for such properties, and it won’t be enough for a mall in a major city, but half a dozen people, each with that much available, could pool their resources and find a serious investment project.

Poli Tetro is a partner and co-CEO in Top Capital, a private investment company that specializes in real-estate financing. He says that such a group can earn returns of 8% or 9% a year from rent alone, and more if their financing costs are low. If the property can be improved, returns can be excellent, he adds.

Tetro says he wouldn’t touch office space in greater Tel Aviv area right now, given that a glut seems to be developing. But there’s plenty of potential in shopping centers in central Israel and beyond that need a bit of work, he says.

There are two main ways to get into investments of this sort, Tetro explains. The first is to create a corporation of small investors that lends money to the developer. It can command interest rates of 12% to 14%, he says. The second is to go into partnership with the developer. That will bring in income from rent as well as from any increase in property value.

Some contractors who have had difficulty borrowing from banks in the past year, if only because of the uncertainty in the real estate market, have sought relief in such creative financing solutions, he adds. It’s good for them and for the investors who want returns,.

The relative disadvantage is that at least one member of the group must know the market inside and out, especially when partnering with the contractor. Ignorance of property and rental prices, permissible use and financing, not to mention of the construction quality of the asset, can be disastrous.

From 3 million shekels: Building upgrade deals

Investors with a taste for development and several million shekels in hand could find opportunity in areas suitable for urban renewal or National Master Plan 38. Such projects are better investments when investors get in early on, before the upgrade process has begun.

Assessor Haim Mesilati explains the process. “First you locate an apartment building that’s appropriate for NMP 38, and you start buying apartments in it,” he says. Then you can start negotiating with a builder specializing in such projects.

If an investor owns more than one apartment in such a building, says Mesilati, it’s easier to get a majority vote from the apartment owners, which is essential. Without it, no project.

Long-term profits

It is clear why this method can be profitable for long-term investors. Applying NMP 38 to the building will improve each of the apartments acquired, by tens of percent.

However, says Mesilati, short-term investors also do well, because the mere promotion of a building upgrade program means an immediate jump in asset value.

But be careful. Not a few people with NMP 38 in mind, or urban renewal, bought a building that proved unsuitable. You need the help of a lawyer, assessor or architect specializing in such things, who knows the plan for the zone, he urges.

Buying luxury housing might seem to violate the principle guiding most real-estate investors, of obtaining maximal returns. Buying a property costing 5 million shekels and up all but guarantees that even if you find a tenant willing to pay rent, your returns will be lower than if you’d bought a number of cheap apartments. But some people are convinced that buying a property in the best areas, like the Tel Aviv beachfront or Jerusalem’s Old City in, is where the real money can be made.

Returns might be better in the periphery but the potential for value increase is greater in Tel Aviv, where the ceiling on potential price is enormously higher, says Ran Ben Avraham, a marketing vice president at construction company ZMH Hammerman.

That applies to the ultra-prime areas. In merely prime areas of Tel Aviv, such as Tel Barukh, prices are really high — but there’s a limit to how high they can go, Ben Avraham feels. If you buy an apartment there for 3 million shekels there, you won’t be able to sell it for more.

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