The Israeli appetite for real estate abroad, particularly in the United States, has become a widespread phenomenon in recent years. It seems that almost every day a new report emerges about some Israeli investment house, publicly traded company or private investor buying a prime property in a major American city.
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U.S. real estate has become such a big part of their portfolios that over the last several years many of Israel’s biggest investment houses and insurance companies have established special units for managing them. But small investors seem equally as infatuated with the U.S. market: The internet is flooded with marketing campaigns pushing investment in homes and offices to private investors.
Israeli exposure to the American real estate market is quite varied. Most of it is made through pension and provident funds, which are managed by institutions, mainly investment houses, insurance companies and fund management companies. Usually, the institutional bodies acquire properties directly together with American partners. Institutions sometimes enter the sector one step removed via real estate investment funds or by making loans to property companies.
Not just provident and pension funds, many of Israel’s publicly traded companies are investing in the U.S. property market with equity or debt raised on the local capital market. The range of real estate holdings by Tel Aviv Stock Exchange-traded companies is so wide that an investor can choose to focus on commercial real estate, mainly shopping malls, via Israeli companies like Gazit Globe and Big, or opt for the office segment through companies like Alony Hetz, or rental housing through Electra Group. In the last several years, North American real estate companies like Extel, The Leser Group and Moinian Limited have tapped Israeli capital directly by issuing debt on the TASE and to finance real estate projects mainly in the greater New York area.
All told, Israel institutional investors have put an estimated 50 billion shekels ($13.2 billion) in U.S. real estate.
The Finance Ministry, whose capital markets division monitors institutions’ investment portfolios of these investors, creates an upper ceiling of how far the Israeli craze for American property can go, although the benchmarks give investors a lot of room to increase their exposure. Real estate can’t exceed 15% of all assets under their management, and no single investment can exceed 3% of a portfolio’s value.
They are also barred from putting more than 2.5% of the portfolio’s value in real estate that does not generate revenue. “The exposure of institutional bodies to real estate abroad is less than 1% of their entire portfolio, and exposure in the United States amounts to less than 0.2%,” explained one treasury official.
Private investors, too
Private investors have also jumped in with significant investments. For example, the Wiesel family, which owns the Fox apparel chain of stores, announced last week that it had bought with partners about half of the Brill Building – a landmark tower next to Manhattan’s Times Square famous as a music center in the Tin Pan Alley era – for about $140 million. Meanwhile, small-time investors are using brokerage firms like Hagshama to buy real estate.
The flood of money heading over the Atlantic would seem to be counter-intuitive. In Israel, home prices have been soaring since 2008, which would seem to make investing in Israel an easier and much more lucrative target than the U.S. But think again. The return on American property investment is higher. An industry source says that price increases have reduced the return on real estate investments in hot markets like New York to 3% or 4%, but other places like Florida, Maryland, Georgia, Texas and New Jersey offer returns of 6-6.5%. He stresses that returns vary considerably from one investment to another and that savvy investors can do much better.
“Despite rising prices, the American market is very interesting,” says Jay Zwiebel, executive managing director of Israeli-American firm Harbor Group. “It’s a huge market, very fluid and very transparent – conditions that attract investors. We see that despite higher prices, New York continues to be a very strong market. There are many buyers and very many sellers.”
His company has bought real estate worth hundreds of millions of shekels together with Israeli institutions, among them the insurance companies Migdal, Clal and Menorah, and the Amitim pension fund.
“The United States, by virtue of being a very big country, offers a huge range of real estate investment opportunities. There are differences among the regions in the U.S., and it has a very significant advantage relative to Western Europe, including the fact that they speak English there,” adds David Daniel, Psagot Investment House’s real estate manager. Psagot has invested 1.5 billion shekels of its pension fund assets in American real estate, which Daniel says it plans to expand.
Daniel maintained that Israeli institutions are piling into American real estate because of a dearth of similar options in Israel. “It’s very hard to do real estate deals in Israel,” he says. “There are no properties for sale, and certainly no quality properties. Exposure to America diversifies your portfolio.”
Daniel also asserts that regulations are pushing investors out of Israel and into the United States because institutions are permitted only to invest in countries with higher credit ratings than Israel’s, or in countries that belong to the Organization fro Economic Cooperation and Development.
Besides offering a way to diversify investment portfolios and the high return, America is well ahead of the rest of the West in recovering from the 2008 global financial crisis, says Yoni Ophir, a manager for investment house Altshuler Shoham. “The American economy is the strongest in the world, which is expressed in low unemployment figures,” he says. “We also saw there a quick recovery relative to other countries after the economic crisis. In contrast, the fear of Europe is clear. The situation of the Euro zone is challenging, so that exposure to the continent will be to specific countries like Germany, the Netherlands and Britain.”
In contrast to most other Israeli real estate investors, Altshuler Shoham has opted to invest in the American real estate market via loans to American companies. That’s a safer alternative than taking an equity stake, but also generates a lower return on investment. Altshuler has loaned some $200 million of its provident fund money to American companies and has partnerships with foreign banks, among them Bank of America, Citi Group and Deutsche Bank, as well as Israel Discount Bank’s New York subsidiary.
America: Land of the easy deal
Ophir notes that the modus operandi in the American market makes it easier for his company to make deals. “The level of legal certainty is very high in the U.S. Business practices are very transparent compared to other countries,” he says. “We know that if we get stuck in an insolvency situation down the line, we [understand] the field we’re playing on and what the collateral is worth. We won’t need to do this alone because we have a local partner, so that there is a physical presence in the U.S. who can deal with the repercussions.”
But not only general parameters push Israelis to invest in American real estate. It seems the story includes social and cultural elements. Like in other places, the main reason for increasing Israeli involvement in American real estate is the Jewish connection, which opens doors.
“There’s nothing to be done. At the end of the day, many of the big real estate players are Jews,” says Zwiebel. “The Jewish connection impacts availability.” Zwiebel says that when someone knows people in Israel he feels comfortable speaking with them, reaching out and finding partners. “I think that it really helps, and closes many circles more quickly.”
He notes that in the case of Harbor Group as well, the connection between the Israeli part and the American part of the company was created on the bases of family.
“Israelis have the ability to connect to very strong groups in the United States because of the Jewish connection,” adds Daniel. “The reality is that major real estate investors in New York are Jews. It creates accessibility. It creates a connection to partners much easier than to other countries, like Germany.”
Daniel’s company, for example, bought an office building in Manhattan with the real estate company controlled by Larry Silverstein, which famously bought rights to the World Trade Center shortly before 9/11. His other real estate holdings include 1177 Avenue of the Americas, 529 Fifth Avenue, and 570 Seventh Avenue in Manhattan. “The Jewish connection doesn’t mean that we get breaks, but the principle that real estate people [in Manhattan] are Jews allows us to skip many of the stages it would normally take to get to know one another,” says Daniel.