Investing in Commercial Property, Israel-style

David Amsalem, 60, is a tax consultant who started to invest in office space about 20 years ago. He hasn’t sold a single property and is glad about that.

• Two Israels: One's at war, the other's doing business as usual
• The 7-year glitch: Will Israeli housing prices ever stop rising?
• Luxury construction hits central Tel Aviv – again
• Forget Tel Aviv, Israel's house price boom is really in Ariel
• U.S. property developers flock to Tel Aviv debt market
• The suite life: $14 an hour buys you a desk, secretary and an espresso machine

“My first investment was in my own office, because I figured it was better to own than to rent,” he says. “Then I bought another office about 100 square meters large." He then snapped up more and more in the greater Tel Aviv area, using his own equity and loans.

“My return on investment is double that on housing,” he notes. And if the investment is financed using loans, returns can be even higher.

Amsalem isn’t bothered by the fact that in recent years housing prices have climbed a lot more than commercial-property prices. Housing may be the bonanza now, but apartment prices have been known to retreat; for instance, the whole decade from 1996 to 2007.

In any case, Amsalem feels it’s safer to rent to professionals like lawyers and small businesses than to families – and what’s in an office? Walls. “No need to fix up the bathroom or worry that they’ll trash the apartment,” he says. “Except for one tenant who suddenly left, I’ve had no problems all these years.”

When a space is vacated, he finds a new tenant in a month or two.

According to Man Properties, a 100-square-meter commercial property in Tel Aviv  costs 1.3 million shekels ($370,000), and it can be rented out for 8,800 shekels a month ($2,500). That’s a handsome return of 8% a year. Commercial-space prices aren’t much lower elsewhere in Israel, especially when you’ve got a quality tenant like a bank, Man Properties adds.

Still, commercial-property investments aren’t common even though apartment investments return maybe 4% to 5% a year. Maybe it’s because commercial property isn’t sexy. It’s a lot more familiar to buy an apartment, divide it up into smaller apartments and rent it out to students, for instance.

Or maybe it’s because housing prices have been soaring in recent years while commercial property prices haven’t – in fact, office rents have sagged 5% on average in each of the last two years, Man Properties says.

So who could invest in commercial property? Anybody with a million shekels, says Eliav Eini, manager of Maof Real Estate Consultants.

The most popular commercial spaces for both purchase and renting are wee ones starting at 60 square meters, says Eini. That’s enough room for two lawyers and a secretary.

Who’s the target audience for offices like that? “Usually professional-class people like lawyers, accountants, insurance agents, startup founders, manpower companies and so on,” says Eini.

The way to do it

There are three ways to invest in commercial property: Buy new space directly from a builder, buy new space through a purchasing group, or buy an existing property.

Purchasing groups building new properties usually say they offer cheaper prices, but don’t bank on it – the final price will depend on how much the group pays for construction. And since it’s the nature of purchasing groups to get in early, you can’t know what the final price will be until the fat lady picks up her check.

Tel Aviv is Israel’s business hub; the farther you go from its towering glass skyscrapers the lower prices drop. That’s why even major companies like Migdal Insurance and the Excellence investment bank have moved to cheaper suburbs like Petah Tikva and Bnei Brak.

Meet the neighbors

So what should you check before buying commercial property? Well, the rent you can charge will be a function of location, not to mention access, parking and building quality, says land appraiser Ehud Hameiri.

“If you’re buying existing property, take a stroll around the building and check the quality of the tenants,” he says. The character of the building and its residents can make a difference; is that a lawyer next door or a tattoo parlor for ex-cons?

Again, make sure if an existing property is up to building standards or will need renovations. And investigate the surroundings. If a skyscraper will be going up anywhere in a certain radius, it’s not just a nuisance during construction, it could depress rental prices.

Maintenance fees typically fall on the tenant, not the landlord, but if the city tax in the area is sky-high, it may depress the rent you can charge, Hameiri notes. And as Eliav puts it, whoever you’re renting to, get a good contract that locks in a rent increase every few years and provides security.

Forecast: Serious glut

Yet there’s a cloud over the commercial property market, a big black one. In about two years, almost a million square meters of office space now under construction will hit Tel Aviv, Ramat Gan and Bnei Brak.

Nobody knows how Israel’s economy will look in two years, but economic downturns are generally accompanied by layoffs and a tendency to move to cheaper offices, which would worsen the glut even more.

“Anybody buying a property now that will be ready in two years needs to know that its price will have dropped,” says Eini, who thinks rental prices will drop by as much as 20%.

Arnon Toren, the chief executive of Azrieli Malls, estimates that Tel Aviv needs 200,000 square meters of new space each year. He notes that the market has weathered tough times before, such as the bursting of the high-tech bubble more than a decade ago. In the end, an equilibrium will be reached.