Sderot Comes Back to Life

Home prices in Sderot, a desert town more famous for unemployment than prime property, have doubled in the last four years

In January 2007, as Sderot was peppered by rockets from Gaza, property broker Alex Aviram noted a new pattern in the city. For every Qassam bombardment, a new "for sale" sign appeared outside an apartment.

Things were so dire that Aviram consideredleaving the city himself.

Yet today Sderot's real estate market is booming, and it looks like the southern city has yet to realize its full potential.

But back to 2007. Frequent rocket strikes and frantic runs for bomb shelters became part of everyday life, which did nothing good for the housing market. While the city had averaged 50 to 70 housing sales per quarter, there were only 55 sales in total for the first half of 2007.

The nadir came that February: only four apartments changed hands. Sellers cut prices, but the buyers scorned the town.

The few who did buy got absurd prices. That March, a 6-room apartment sold for NIS 450,000 - 30% to 40% less than the prior market price for such an apartment.

In 2008, there were several lulls in the fighting, and more than 40 homes sold in both the first and second quarters of that year. Yet the security situation deteriorated midway through the year, and the number of quarterly transactions fell to 30 in the fourth quarter.

Prices rise with Cast Lead

That December, the Israel Defense Forces launched Operation Cast Lead. That campaign returned Sderot its security, and sent the number of transactions up to 50 to 60 per quarter throughout 2009. Prices rose as well. The gains continued through 2010, and the number of transactions peaked in the final quarter, at 81.

In 2011, the number of transactions dropped nationwide. In Sderot, the figure fell to 65 to 70 per quarter. The social justice protests, which sent the nation's housing market into deep freeze in the final quarter, affected Sderot as well, pushing the number of transactions down to 47, a 40% drop versus the parallel quarter in 2010. Things began to pick up in the first quarter of this year, both around the country and in Sderot, where 55 transactions were completed.

Steep price rises

"The moment Operation Cast Lead began, the real estate market picked up and sales started coming through," says Aviram. "People who wanted to sell did so, and investors started to show up and buy apartments in bulk - from 2-3 at a time up to 20 or 30."

As the market changed direction, so did prices. Single-family homes that had sold for NIS 800,000 to NIS 900,000 in 2008 are now selling for NIS 1.5 million or even more; new 5-room apartments, which went for NIS 550,000 in 2008, are now going for NIS 850,000 to NIS 900,000; new 4-room apartments, which cost NIS 400,000 to NIS 500,000 four years ago, now can garner NIS 700,000.

For all the good statistics, the number of apartments being built in high-density buildings - namely, apartment towers - is still small. "The reason is simple," says appraiser Haim Mesilati. "Land to build a single-family home costs NIS 400,000 to NIS 500,000, while the total cost of such a home is typically NIS 1.2 million to NIS 1.3 million. So the difference between a single-family home and a 5-room apartment is NIS 300,000, so a good number of people prefer investing in single-family homes and not apartments."

But the big story is still in the small apartments: Second-hand 3-room apartments, which cost NIS 150,000 to NIS 200,000 in 2008, are now going for NIS 300,000 to NIS 400,000 - a much more significant jump in percentage terms than happened to other homes in the city. Anyone who bought such an apartment in 2008 apparently carried out the country's most lucrative real estate transaction.

Why did these smaller apartments really take off? There are several reasons. The first is most likely the extreme drop in prices between 2007 and 2008 as residents fled the city. Once things calmed down, prices rebounded. The second reason is the massive demand by investors who took advantage of the situation to snap up property. Safe returns

Safe returns

"Investors came and bought the homes at absurd prices. When the market was at its nadir, some homes sold for as little as NIS 80,000, and they were recently resold for NIS 300,000. In the meantime, they were rented out, bringing in returns of more than 15%," says Amiram.

Investors see Sderot as a good investment due to nearby Sapir College. While Sderot has only 21,000 full-time residents, the college draws 9,000 students a year, which means it could become the country's top college town. Sderot municipal director general Shimon Peretz often says that students are the municipality's target audience.

Despite the influx of investors buying apartments to rent out, the city still lacks space for some 2,000 students. "This forces some of them to rent apartments on neighboring kibbutzim and in nearby cities, while others are commuters," says Peretz. "As a former student, I think that this isn't the student experience, and we'd prefer that they'd stay here through the evening."

One factor keeping students in the city after class hours is the cinematheque. But the city and the college could form a tighter relationship. The first stage is getting more students to rent within the city. The second stage - and this is much harder - is convincing them to stay once they've received their degrees. Improving employment opportunities in the city would be a good way to achieve the second goal, says Peretz. Sderot is home to an Amdocs plant, while most of the land in the developing industrial zone has already been sold and is now going through the planning process. Unemployment isn't a problem in Sderot, and it has commercial centers and coffee shops that pull visitors from other cities, he adds.

Pulling in students from Sapir is a short-term goal, and it depends mainly on the availability of rental apartments, or in other terms, real estate investors. Now that home prices have increased two- or threefold since 2008 and 3-room apartments are renting for NIS 1,800 to NIS 2,000, returns in investment are down to 6% to 8%. Some investors rent out their apartments to two or three roommates, which significantly increases their returns. Still, Sderot contains latent potential.

But is this the explanation behind the huge increase in prices? It's not the full story. The main reason for the sharp increase in the value of small homes is that the government funded the construction of reinforced rooms - essentially, an extra room for every apartment.

"Anyone who bought a 3-room apartment a few years ago now gets a 3-room apartment with a reinforced room. We're still not calling them 4-room apartments because the fourth room hasn't been registered in the land registry (tabu )," says Aviram.

From the outside, the reinforced rooms look like foreign appendages stuck onto the buildings, and in many cases they don't mesh well with the apartments' internal structure, either. "Sometimes they connect to the apartment through one of the bedrooms, while in other cases they're attached to the living room, so the apartments need to be redesigned," says Aviram. "But a free room is a free room, for both apartment owners and investors, who can rent out the homes to an additional roommate and thus increase their returns."

Where are things going from here? Given the volatile situation along the Gaza border, no one is willing to bet that the relative quiet is going to continue for too long. But compared to the situation in 2007 and 2008, when Sderot was the main target of the onslaughts, now other cities in the area such as Ashkelon and Netivot are also under fire, which means Sderot is no longer worse off than its neighbors.

"There are no more refuge cities, and Be'er Sheva, Ashkelon, Gedera and Netivot are exposed to rocket fire just as much as Sderot is," says Mesilati. "In that context, Sderot is one of the few cities with decent land reserves at decent prices. The city has great potential."

Currently, a new home in Sderot costs about 30% less than a comparable home in Ashkelon and 20% less than a comparable home in Be'er Sheva. Renting out a small apartment in Sderot generates significantly higher returns than renting out a similar apartment in these other two cities. So if the security quiet continues, prices may continue traipsing upward in Sderot, albeit not at the pace of the past few years.

Ilan Assayag
Ilan Assayag