A Panoramic View of Jerusalem, for Just $6 Million and Change

Despite a precarious global economy and local geopolitical turmoil, Israel's luxury property market is buoyant. Who are the buyers, where are they coming from and what do they want?

Itay Sikolski

Simply make out a check to Africa Israel Residences for 19.5 million shekels ($5.6 million) and the eighth-floor penthouse apartment on 7 Harav Kook Street in downtown Jerusalem is yours to move into.

The 250-square-meter home is not only replete with wood-paneled walls constructed from the Busatto workshop in Italy, its rooms have been furnished with pieces by Cavalli, Fendi, Versace and Clive Christian. True, the refrigerator needs stocking, but the kitchen cabinets contain a full of array of utensils – down to forks and knives in the drawers – and the beds are made.

Open up the electric blinds, walk out to your 50-meter deck and in front of you is a panoramic view of central Jerusalem – whose most prominent feature is three other luxury towers, either newly completed or under construction.

A decade ago, downtown Jerusalem was a shoddy place, filled with dark and dusty shops and historic but ramshackle buildings; an area bereft of good restaurants, culture or entertainment. But the center is changing rapidly, and the area stretching from the Old City through the Mahane Yehuda open market has become one of the destinations for people buying luxury properties. The Mamilla shopping mall has created a large new shopping and eating area, the light rail has made transportation easier and upgraded the city’s shabby Jaffa Road, pedestrian malls have been created and Mahane Yehuda now sports trendy cafés and boutiques.

“It’s like Neve Tzedek in Tel Aviv – an area that was once ugly but is changing,” says Dalia Azar Malimovka, a spokeswoman for Africa Israel, sitting under a 300,000-shekel chandelier that hangs over the main lobby at the Harav Kook building.

Africa Israel Residences alone has two other projects downtown – one around the corner from Harav Kook on Hanevi’im Street, a second for which it won a tender on Mapai Street, off Jaffa Road (the company is controlled by Israeli billionaire Lev Leviev).

The market for luxury properties in Israel has been growing at a faster rate than the stock of available properties, forcing buyers in Jerusalem and Tel Aviv to look further afield than their traditional bailiwicks. Older, central neighborhoods in the big cities have little available land, and existing properties are protected by preservation rules. Not only is downtown Jerusalem seeing an influx of the well-heeled, but middle-class neighborhoods like Arnona (in the city’s south) and French Hill (adjacent to the Hebrew University campus at Har Tzofim) are attracting luxury pioneers.

In Tel Aviv, the favored areas along the beachfront, on Rothschild Boulevard and in the historic sections of Neveh Tzedek and Lev Ha’ir offer few opportunities for new developments, so luxury buyers are now exploring the area between Keren Hatemanim and the sea in south Tel Aviv, and between the city’s funky Florentin neighborhood and Jaffa – an area popularly known as Noga.

“It feels a lot like Neve Tzedek – like a small town: Low-rise buildings, artists living in them, and lots of bars and restaurants. Lots of old Arab-style houses with character, but the prices are 20% less than Neve Tzedek,” says Matthew Bortnick, whose Maki Group specializes in upscale properties in Tel Aviv, Herzliya, Beit Yanai and Arsuf.

Why is demand growing?

At first glance, Israel shouldn’t be a big draw for foreign buyers. The last decade has witnessed an intifada, a war in Lebanon, rocket attacks and the chaos of the Arab Spring on its doorstep. The world economy suffered a big blowout in 2008, from which the United States and Europe haven’t fully recovered. The shekel has appreciated some 25% on the dollar in the last eight years, adding appreciably to the cost of a home for people buying in foreign currencies.

Last year, Israel imposed an 8% purchase tax on luxury homes, luxury being defined at a mere 4.5 million shekels ($1.3 million). And the 60% increase, after inflation, in home prices in the general real estate market over the past six years has caused many people to worry that they’re buying into a bubble.

In fact, prices for Israeli luxury real estate – in Tel Aviv, at least – rose sharply by world standards last year. Knight Frank’s Prime Global Cities Index, which surveys homes at the top 5% of the real estate market, estimated that prices climbed 12.7% there, making it the sixth-highest among 30 cities surveyed. It was ahead of gains of 10.04% for New York and San Francisco, 7.5% for London and just 0.2% for Cape Town.

Interestingly, realtors talk about more modest rises in Jerusalem and Tel Aviv than that Knight Frank figure. In the capital, prices for top-end properties are rising at a fairly steady 5%-7%.

One reason the top end of the market is showing growth is that new categories of buyers have emerged in recent years. Once, the foreigners acquiring homes in Israel were mainly wealthy Americans and Europeans, mostly older, buying second homes or for their retirement.

Nowadays, new categories of buyers have entered the market. One is young families that have earned or inherited enough money to make aliyah in a multimillion-dollar home. “Historically, it used to be more the people who were close to pension age, buying to live in Israel in a semi-retirement situation,” says Raphi Bloch, manager of the Re/Max Vision real estate office in south Jerusalem. “What we’ve seen in the last year or two is that the age of the luxury buyers has dropped. We’re finding people buying 5-million and 6-million-shekel homes in their 30s – young high-tech entrepreneurs or financial whizzes.”

For that reason, realtors say, the phenomenon of “ghost towns” no longer characterize the luxury segment. (Whole residential complexes like Jerusalem’s David’s Village are empty for most of the year, save for holidays when their owners come for brief visits.) In the Harav Kook building, children can be seeing trooping through the lobby in the morning, on their way to school.

In Jerusalem, those buyers are motivated by Zionist and/or religious considerations. But in Tel Aviv, a new class of young and relatively well-heeled buyers are often moving to Israel for business reasons or because they are attracted to the Tel Aviv lifestyle. The city was named one of the world’s top 10 for nightlife by the Lonely Planet travel guide in 2012, and city officials are actively promoting it as a destination for global technology entrepreneurs.

The Russians are coming

“For Americans who make aliyah to Tel Aviv, it’s not for classical Zionist reasons. It’s because they started working here at a start-up for business reasons, or came on Birthright,” says Bortnick, referring to the program that brings young Diaspora Jews to Israel for educational tours.

He says the trend began at the height of the world economic downturn, when unemployment in the United States and Europe rose to the double digits. “Just then, things were getting exciting here,” he recalls.

Another factor driving the luxury market is fear of anti-Semitism and political instability in home countries. That has prompted many Jews from France, South Africa and Russia, for example, to buy in Israel, although what they choose as a first home (if they are already making aliyah) or second home (if they are buying an “insurance policy”) differs from one nationality to another, realtors say.

French buyers tend to be at the lower end of the luxury market, or even a notch below it, while South Africans spend more. Russians, says Bortnick, are looking for ultra-luxury homes priced at nothing less than $3 million to $4 million. “They’re not living in them – they are mostly pied-à-terres they use once or twice a year … The Russians are looking for something specific, and they’re very detailed-oriented. They’re willing to pay more for high quality.”

In addition, there is also a new class of very wealthy ultra-Orthodox Jews who want a primary or secondary residence in the Holy Land, says Shia Getter, whose Shia Getter Group sells and services homes and apartments. As a result, upmarket homes have even popped up in places off the luxury track, like the city of Beit Shemesh, situated between Tel Aviv and Jerusalem.

“You have more people with money today than you did years ago,” Getter explains. “Years ago, people waited to allow themselves the luxury of buying a new home. Today, young people have the money and they like to spend.”

Indeed, while the economies in the United States and Europe remain sluggish six years after Lehman Brothers imploded, triggering the global financial crisis, the wealthy have prospered. Stock markets are at record highs, high-tech companies are booming and banks and other financial institutions are paying generous bonuses.

Considering the existential motivations outlined above, it’s not difficult to see why factors such as security, and strictly financial considerations that might deter buyers, fade into the background.

Although Israel has undergone a tumultuous decade of war and terrorism, foreign buyers have become inured to it. The real estate market experienced downturns during the second intifada (which started in 2000) and again in 2006, during the Second Lebanon War, but both prices and Israel itself recovered. “Since 9/11, people have realized that political instability can happen anywhere,” says Bloch. “Prices go down – it’s a knee-jerk reaction – but they go back up very quickly. We don’t have long ‘down’ periods.”

And if the exchange rate serves as a deterrent, ultra-low mortgage rates are proving a lure. The London Interbank Offered Rate (LIBOR) – which serves as the basis for home loans in dollars – is very, very low, so the total cost can be had for 2%, or even less, says Getter. Moreover, even if they didn’t buy as an investment, homeowners can hedge their risk by renting out their properties to other tourists.

“Banks are giving very good terms, and people are realizing that they can leverage part of their investment and rent it out when they’re not there,” says Alyssa Friedland of Re/Max Vision in Jerusalem. “We’re not talking about multimillion-dollar properties, but $600,000 to $800,000 properties can easily be rented for $200 and $250 a night … and during peak seasons, rentals can be upward of $500 a night.”