Housing in Crisis

Builder’s Money Woes Send Tremors Through Industry

Weighed down with hundreds of millions of shekels in debt, Ortam Sahar asks Tel Aviv court for a stay of proceedings.

An Ortam Sahar development in Rishon Letzion, 2011.
Viewpoint

Ortam Sahar, one of Israel’s biggest builders, sent shock waves through the construction industry after seeking a stay of proceedings order from Tel Aviv District Court last Wednesday, citing hundreds of millions of shekels of debt.

Judge Tamar Avrahami said she would wait another week before holding hearings on the petition, but already building industry sources and treasury officials say they were concerned about the effect Ortam’s problems could have on the pace of construction nationwide.

Ortam had sought to become a full-fledged developer, but its main business was acting as building contractor for others. It has about 40 projects or some 5,400 housing units under construction. It is a developer for another 1,382 homes, mostly as part of the government’s Machin L’Mishtaken (target pricing) program. CofaceBdi, a business research firm, said the number of bankruptcies in the construction business has been growing since the end of 2014 and in the last 18 months 10 builders have gone under. Since the first quarter the credit risk for building contractors is now 7.15, compared with 6.62 for all businesses.

“The growing phenomenon of building contractors filing for bankruptcy will have an impact on the quality of construction and the supply of homes,” warned CofaceBDI CEO Eyal Yanai. “The collapse of builders in general and Ortam in particular on the sector is dramatic.”

Through Machir L’Mishtekan and other programs, Finance Minister Moshe Kahlon has sought to increase the supply of homes and rein in prices that have skyrocketed in the past decade. But housing construction starts actually declined by 6.9% in the first half of the year from the same time in 2015. Yanai said the precarious finances of many builders could exacerbate an existing shortfall in construction capacity. “We expect some projects won’t get to the finish line this year and that there will be further delays in the time it takes to complete projects,” he said.

Vis a vis Machir L’Mishtaken – Kahlon’s flagship program that markets government-owned projects to builders at a discount on condition they pass along the savings to home buyers – Ortam is involved in three projects comprising about 950 housing units. It is also involved in another government project involving construction of 276 units.

In one project, in Kiryat Motzkin, Ortam is a contractor, not a developer, and in the other two in Rosh Ha’ayin and Tirat Hacarmel, the government hasn’t held a lottery to award rights to homes, so no buyers are in jeopardy.

Last Thursday, the treasury sought to reassure the public. “The Finance Ministry hopes Ormat Sahar can exit the crisis and wants to reassure buyers that there won’t be any significant effect of Machir L’Mishtaken projects,” a spokesman said. “In order to prevent any harm to the public, like a failure to meet deadlines, a stay of proceedings or bankruptcy, guarantees were given an the outset to the state.” Ortam is sitting on 330 million shekels ($85.8 million) of bond debt and 216 million in payments due to suppliers and subcontractors. It has another 433 million shekels in outstanding guarantees that will convert into debt if it goes bankrupt. The company’s troubles were in part due to a failed effort to diversify from the contracting to higher-profit property development.

The company was responsible for a highly publicized 2013 collapse of an apartment balcony in Hadera, which led to lawsuits and reputation loss. Its construction backlog fell to 700 million shekels at the end of September from 2.4 billion in March 2015.

Another blow to the company occurred in June when senior executives, including CEO Amir Nachum, were arrested for fraud and other violations, although not all of the accusation related to Ortam. Two other executives are suspect of embezzling 9 million shekels from the company.