Israeli Government Floods Market With Land, but Builders Get Shy

Growing tendency toward larger and more elaborate developments has pushed costs up significantly.

In an effort to increase the housing supply and thereby lower housing costs, the government has been pressing ahead with a policy of flooding the market with land for new projects. But the growing land supply is outstripping demand.

TheMarker has found that land recently marketed by the Israel Lands Administration for thousands of housing units went unsold, particularly in peripheral areas.

Ilan Assayag

Less than a year ago, the picture looked different: Prices in the periphery were soaring, even in areas previously considered unattractive for real estate companies. By mid-2011, land prices in places like Yeruham, Dimona, Be'er Sheva, Acre and Afula had jumped from around NIS 50,000 per housing unit to as high as NIS 270,000. But over the last few months, the ILA has been having a hard time "moving" the land, remaining stuck with lots slated for over 3,000 units. The reasons vary but mainly add up to higher building costs and higher risk to developers, particularly in the periphery.

The growing tendency toward larger, more elaborate projects has pushed land development costs up significantly. Projects have also become more expensive due to the growing need to provide underground parking.

Developers also claim that there have been cases in which the land values set by government appraisers and on which prices are based were excessive considering market conditions. There were also times when the ILA tried selling problematic property, such as recognized archaeological sites, or land on which squatters had moved in illegally, thus discouraging developers from participating in tenders. But the main obstacle, according to developers we spoke to, is a bank-imposed credit crunch that is preventing them from obtaining loans for erecting new projects.

"Up until a year ago, we would suck it all up, but now it's different," says Gadi Naftali of Naftali, Nissan & Sons, which builds in the southern region. "We can't be squeezed from all directions. If the state wants to sell, it either needs to deal with the credit restrictions or lower prices."

"Developers won't take part in tenders in which the ILA is inundating the market with land," says Moti Ashkenazi, business development manager at Peretz Boneh Hanegev Assets. "Developers, clearly remembering the depression in Be'er Sheva from 2003, are afraid to vie for tenders, so fewer participate.

"Since then, we've followed a strategic decision not to participate in ILA tenders for places without a properly laid-out plan. Those areas don't have enough demand to cover the quantity that the ILA is marketing. Nobody is checking to see if the demand matches what is being marketed."

And according to Dan France, CEO at Carasso Real Estate, "The ILA's release of massive numbers of housing units in the periphery is a problem. The level of demand in peripheral areas like Yeruham, Netivot and Sderot is moderate and they can't be inundated with land for hundreds of units. This will lower housing prices and threaten the profitability of developers. The land marketed by the ILA right now doesn't appeal to our company so we prefer not to participate in these tenders.

"In recent ILA tenders, there has always been some aggressive bidder that has raised prices to levels we don't consider reasonable," France continues. "We believe much better deals in promising areas can be made with private owners. The ILA thinks the best solution is to flood the market; but in our opinion, there is no magic formula for lowering housing prices. What the market really needs is the freeing up of bureaucratic bottlenecks in planning and the easing of development and building requirements that drive up prices."

Scant demand

The lack of in demand isn't being felt only in the periphery. TheMarker found that only four of 18 recent tenders for marketing Amidar properties in southern Tel Aviv were successfully completed due to various restrictions on the land. One notable example was an ILA tender for about two dunams of land for 16 apartments at around NIS 16 million, or some NIS 1 million per unit. The plot offered for sale, at the corner of Marzuk Ve'azar and Shimon Ben Shetach streets in Jaffa, is on a recognized archaeological site with four existing units occupied by protected tenants and one unit illegally occupied by squatters, and where the building rights allowed in the city's master plan won't necessarily be realized.

The situation is much worse, though, in the periphery: A tender last month for 330 apartments in Kiryat Gat's Haprahim Quarter failed; more than 10 tenders for a total of 650 units flopped in two Dimona neighborhoods; ILA tenders for the building of 550 units in Be'er Sheva's Ramot neighborhood at the end of 2011 also fell short; the ILA sale of land for 584 housing units in Yeruham's northern neighborhood fell flat; tenders for 805 units in the Mount Yona area of Upper Nazareth were also unsuccessful, as were tenders for building 144 units in Tiberias; and a tender in Kiryat Malakhi for 525 housing units has already been postponed by the ILA twice, with local developers expecting it to end in dismal failure too.

"We are considering the Kiryat Malakhi tender," says local developer Yaakov Vaknin, owner of the I.A.O. Construction, Development & Investment Co. "But we are doubtful about participating. We checked and found that the minimum prices set by the ILA are high for this area - between NIS 100,000 and NIS 120,000 for land per housing unit. Right now, I'm having difficulty completing the marketing of a project I won a year and a half ago for 120 square meter apartments at NIS 800,000, which would have cost NIS 880,000 to NIS 950,000 according to prices in the ILA tender. Although Kiryat Malakhi seems to have a promising future, we're still not getting what we're asking, so it would be very difficult to vie for this tender."

"Few will take part in this tender," adds Yossi, another local developer. "The tender requires us to build underground parking garages, which would add about NIS 100,000 to the price of each apartment. There is already hardly any demand."

High development costs

Following years of no new housing construction in Kiryat Gat, nearly every tender there since 2008 has ended successfully. The failure of the city's last ILA tender was therefore quite surprising, and is thought to be due to a combination of factors - a requirement under the terms of the tender to evict squatters, high development costs and the stipulation that underground garages be built, further adding to building costs.

"Development costs for the tenders that have been issued have been very high, reaching NIS 100,000 to NIS 120,000, excluding the price of the land and VAT; whereas a year or so ago, tenders were completed in the same area at a similar price, but with all additional expenses included," says Naftali, who recently won a small tender in the city for building 18 units.

"Since we are a building company, we'll make money mostly on implementation and less from promotion," he continues. "We simply played it safe. Our project is small, without squatters, and we aren't required to build an underground parking garage like in the other plots."

Developers in the Ramot quarter of Be'er Sheva have also been seriously hurt by development costs and the need to supply underground parking.

"There is no justification for paying such high development costs in the periphery and for providing underground parking," explains Jacky Avisror, vice-president at Avisror, Moshe & Sons Building and Development Works. "We recently won a tender in the city where development costs reached just around NIS 45,000 per apartment. But in Ramot, in contrast, development costs start at NIS 100,000. With a new 4-room apartment in the city going for an average of about NIS 850,000, the added expenses will raise prices by 15%."

The failure of tenders in Dimona is also rather startling, particularly in light of the fact that only last year special, "price-to-occupants" tenders put out by the Housing and Construction Ministry, where the state offers land at a presumably discounted preset price and developers bid on the lowest selling price for the units, were met with high demand, eventually closing out at market price levels. It now turns out that developers who won these tenders haven't been so successful with selling their units.

Uzan Bros. Building Co., one of the winners in these special tenders, tried competing in the new tender but failed because its bid of NIS 132,000 per unit for the land was almost 50% lower than the government appraisal of NIS 246,000 per housing unit - some 30% higher than in the previous year's tenders in that city.

"The situation today isn't like it was," says Yair Maimon, national marketing manager at Uzan Bros. "Under the ILA's current tender, I would need to sell an apartment at NIS 850,000, while apartments in the city are now going for about NIS 700,000. The price is out of touch with the area's market situation and, as proof, no developer took part in the tender except for our company, which submitted a bid that we think reflects market circumstances.

"Since 2010, when we won a 'price-to-occupants' tender for building 43 apartments, we have sold only 40% of the units. Other developers that won recent ILA tenders also report few sales."

Developer misgivings, particularly in the southern region, are largely due to lessons learned in 2003, when the market in Be'er Sheva was inundated with land sales by the ILA, while a government decision to cancel tax benefits to local residents left city and area builders with thousands of unsold units. This led to a 50% drop in transactions, lowered housing prices by over 10%, and resulted in some developers going bankrupt. The housing market in the city remained stagnant for at least four years.

"The state wants to flood the market, but it isn't right to put out 600 units in one shot in Yeruham or Dimona," says Avisror. "They can't absorb this and developers won't go for it. Nobody wants to go into a project with 10 other developers and market 40 units each; it would be a disaster. In areas where large-scale tenders went out, like in Yavneh, there's a scramble, with developers fighting tooth and nail. But marketing such a quantity in the periphery won't work. The risk is too great."