Government Launches New Drive to Build Rental Housing

Treasury seeks to develop market for long-term rental apartments in Israel; tenders for 1,000 rental units to be published in coming weeks.

Nathan Sheva
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At Monday's opening of a conference sponsored by the treasury to develop the long-term rental market, Finance Minister Yuval Steinitz promised: "We are launching an undertaking that will bring change to the rental market in Israel. The goal is massive construction of rental housing that will enable prices for rentals to fall and will give young couples the option of renting for the long term at fair prices."

Unlike in the United States and Europe, Israeli developers do not build large-scale apartment projects for renters. "That is an anomaly that we are trying to change," Steinitz said.

One of the conference's goals was to lure institutional investors, such as pension funds, to invest in rental housing. The participants included just those kind of investors, such as Yoni Tal, deputy CEO and head of investments at the Menorah Group; Hagai Badash, CEO of Psagot Investment House; and Yadin Entebbe, CEO of Dash Investments.

Also present were executives from the real estate sector, including Natan Hertz of Alony Hetz and Hanan Mor, who controls Hanan Mor Ltd, as well as a clutch of mayors, including Holon's Moti Sasson.

This is not the first time the government has tried to encourage rental housing in cooperation with institutional investors. In 2006, when Meir Sheetrit was finance minister, proposals were being made.

Bentzi Lieberman, director of the Israel Lands Authority, said that in the next several weeks, land for about 1,000 rental units would be put up for tender in Jerusalem, Rishon Letzion, Kfar Sava and Be'er Sheva. But Tal expressed skepticism.

"The market doesn't yet exist, and so there is some concern, which is expressed in demands for returns of 7% minimum after costs," he said. "If we see that it works, we can ask for lower returns."

But the same barriers remain. The first is the low rate of returns on rental housing, currently about 4% annually, while institutional investors typically aim for a rate of 7% or 8%. To close the gap, the government is prepared to offer tax breaks and lower land prices significantly.

The program being drawn up by the Finance Ministry seeks to spur construction of thousands of rental units every year by offering tax exemptions to contractors on profits from building, and other exemptions on income from rental payments. To ensure low-cost housing for those who most need it, 25% of the projects built under the program would be price-controled.

The goal is to end the annual or biannual house hunt that renters often have to undertake as their leases end. The apartments built under the treasury plan would leased for five or even 10 years.

At the conference, Housing Minister Ariel Atias pointed up another complication - difficulties with tenants.

"Building for rentals hasn't developed because it didn't pay to invest in rental housing, but there is also the matter of the quality of the tenants," he said. "For those investing in real estate it is much easier to invest in shopping malls, where you can evict tenants more easily than you can evict people renting apartments." The government has to develop legal protections for both sides, he said.

Reuven Kogan, the treasury's deputy budget director, dismissed the claim that Israelis prefer to buy than rent. He pointed out that even in today's renter-unfriendly market, some 55,000 households live in rented homes, and the number has been rising in recent years. Israelis are less likely to own their own home (66% ) than citizens of the euro block (72%), he noted.

"From the renter's perspective, there are good economic reasons to want to live in projects like these," Kogan said. "Moving apartments costs thousands of shekels and for those uncertain about their place of employment, it's preferable to live in rental housing."

Institutional investors have NIS 100 billion to NIS 150 billion under management, he noted, saying: "If part of that money goes to investing in the rental-building projects, it will lower the cost of credit for the entire [building] industry."

Construction in Hadera.Credit: Ilya Melnikov