Israel’s Housing Prices Are Going Through the Roof. Many Investors Are Prepared to Take a Risky Gamble

Israel's rising prices are driving investors into deals with better returns as they convert storage space into apartments or take a risk on properties that are rent-controlled or where some construction may lack approval

Shlomit Tzur
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'540-square-foot storage space on a ground floor in Tel Aviv sells for $280,000.'
'540-square-foot storage space on a ground floor in Tel Aviv sells for $280,000.'
Shlomit Tzur

"We recently sold a 50-square-meter [540-square-foot] storage space on a ground floor in a residential area of Tel Aviv, near the sea, for 900,000 shekels [$280,000],” says Omri Abitbul, a real estate agent at Remax Ocean in the city. “The ground floor has a store in the front and a storage area in the back, which the buyer converted into an apartment and is renting out for 6,000 shekels a month. This is an 8 percent return in the most expensive place in the country.”

The conversion of storage space is a common phenomenon. “A storage area is a cheaper property than an apartment, making such conversions an attractive investment,” Abitbul says. “In some cases the conversion is done legally, with a request to the local planning committee, which issues a permit allowing unplanned use of an area, while in other cases it’s done illegally, with the buyer taking a risk.”

Rising purchase prices have reduced returns from renting out apartments. According to the Central Bureau of Statistics, housing prices rose 13 percent last year, making it more tempting to seek an investment that’s more complex, less common and riskier than an ordinary apartment properly registered at the land registry.

It's not always possible to obtain a mortgage for this riskier kind of investment, but they’re cheaper than apartments listed at the land registry, so they have the potential for higher returns.

An investment in storage space can be lucrative even outside Tel Aviv and without converting it for other uses. Haim Mesilati, the chairman of the Real Estate Appraisers Association, bought storage space in the BSR Group’s office towers in the Tel Aviv suburb Petah Tikva.

The BSR Group’s office towers in the Tel Aviv suburb Petah Tikva.Credit: Ofer Vaknin

“There are properties that aren’t apartments but yield nice returns.... The trick is to follow the law and still make a good return,” he says.

First, Mesilati bought an office in the Petah Tikva project. In December, toward the end of construction, the group discovered that storage space was still available in the basement. It was offered to members of the purchasing group for 5,000 shekels per square meter.

“I bought a 36-square-meter storage area for 180,000 shekels,” Mesilati says. Scattered among the project’s four high-rise towers will be some stores at ground level. “Whether they’re branches of Castro [a clothing chain] or Aroma [a cafe chain], they’ll need storage space. Even if I get 1,000 shekels a month, that’s a 7 percent return. ... Lots of people have bought such storerooms, and battles are being waged over the remaining ones.”

Haim Mesilati, chairman of Israel's Real Estate Appraisers Association.Credit: Ofer Vaknin

According to Abitbul, some investors only look for properties with a problem or defect. “Often, those investors believe they’ll be able to solve the problem soon enough, which will raise the value of their property. A few months ago, I sold a 50-square-meter two-room apartment on [Tel Aviv’s] Hakishon Street in the Florentin neighborhood. The problem was that it wasn’t properly registered at the land registry,” he says.

“The building, with 12 apartments, was registered as a bloc, with shared ownership by the tenants rather than individual registration for each apartment. Not every bank is willing to provide a mortgage in that situation. ... If they do give one, financing is limited to 50 percent of the property’s value, and the buyer needs to finance much more of the purchase than the usual 75 percent they can borrow.”

This transaction was made in cash. The buyer didn’t need a mortgage, and the apartment went for 1.79 million shekels.

“If it had been registered properly, the price would have been at least 2.1 million shekels, a difference of almost 17 percent,” Abitbul says. “By now, actually, it would have been 2.3 million due to rising prices. The buyer made a good deal because they’re now registering each apartment individually. When the process is completed, the price of this apartment will go up.”

Omri Abitbul, a real estate agent at Remax Ocean in Tel Aviv.Credit: Courtesy of Omri Abitbul

According to Mesilati, prices have risen so much that you can no longer find apartments under 500,000 shekels even in places like Dimona in the south or Migdal Ha’emek near Haifa. Anyone wishing to invest 400,000 shekels in real estate can do so by investing in real estate companies’ stock or in a real estate fund, but many people still don’t like relying on other people’s choices.

“At the BSR project I also bought a parking space for 120,000 shekels. Instead of renting it out for 600 shekels a month, I plan to install a charging station for electric cars. Installation costs 25,000 shekels, but very quickly everybody will know that you can charge electric cars at the garage; people will be able to pay by credit card. If only two Teslas a day use it, paying 80 to 100 shekels, that will be a nice return.”

Also cheaper are rent-controlled apartments earmarked for older people; that’s how the properties are classified at the land registry. In 1997, for example, the 15-story Gruner Tower was built on the corner of Jabotinsky and Rashi streets in Tel Aviv suburb Ramat Gan. According to municipal building plans, 120 units were designated for rent control and the two lower floors for commercial space.

But developers marketed these apartments with no rent-control restrictions, hoping the planning committees would allow them to be used as regular apartments. This attempt reached the Supreme Court and failed.

As a result, apartments in this high-rise, which has a pool, gym, around-the-clock security guards and 50-to-60-square-meter apartments on its upper floors, each with a balcony, storage and parking, cost less than 2 million shekels.

“It’s obvious that if these were regular apartments, their price would be higher due to their central location,” says Maya Meiri, a real estate lawyer in a deal now being closed in this building. “Since they’re earmarked for rent control, the prices are lower,” she says, adding that two-room apartments with in-house bomb shelters in central and north Ramat Gan cost around 2.3 million shekels.

“For investors it’s profitable to buy an apartment in this building because the age limit only applies to the tenant,” Meiri says. “The investor can rent out the place to an older person, and since there are many of these in Ramat Gan, the demand for such homes is very high, while the investor pays less than for a regular apartment registered at the land registry.”

Profiting from illegal building

Ofer Mazor, a developer who buys apartments as investments, says one way to make a deal under the market price is to look for illegal construction. This deters many buyers, and banks are reluctant to provide mortgages. When appraisers for the bank give their assessment, they exclude areas that weren’t approved.

“People like me are specifically looking for such apartments. Not all illegal construction is the same. It could be an entire room without approval, or an extra door on the ground floor,” Mazor says.

“Not everybody is ready to contend with these issues. So if you look carefully at the type of illegal construction, whether it can be fixed and at what cost, you can definitely buy an apartment for less than the price of an equivalent one without illegal construction.”

This also applies to hazardous structures. Local authorities might declare a structure hazardous for defects like a substandard support pillar or exposed iron.

Or the culprit might be a crack in a non-supporting wall, a loose railing or crumbling plaster. In some cases, apartment owners get together, collect funds and repair the defect.

“But in other cases, some tenants won’t pay, the citation for the building remains, and anyone having to sell there has a problem. Many people are deterred from buying an apartment in a building labled as hazardous,” Mazor says.

“But often the problem isn’t so serious. The trick is to figure out how much it costs to fix it. You can often buy an apartment for 20 percent less than its value.”

Another investment target is the vacation market. The Supreme Court ruled that a vacation apartment can serve as a dwelling for 90 consecutive days, and the rest of the year be used for short-term rentals. These apartments go at lower prices.

One of the better-known vacation rental projects is the Colony Beach apartment hotel on Ben-Gurion Street in Tel Aviv suburb Bat Yam, which has 374 such apartments.

According to Eran Rosenberger, a senior real estate consultant at Remax Platinum, two apartments are now for sale in this complex, one of 1.5 rooms and 35 square meters for 1.3 million shekels and one with two rooms and 45 square meters for 1.5 million shekels. This is less than the price of an equivalent regular apartment.

“These apartments provide the option of living right on the beach for a reasonable price if you’re looking for a small apartment with a swimming pool and gym. The target market includes single or divorced people, or older people, which makes it easier to rent out these apartments,” Rosenberger says.

The Colony Beach apartment hotel project in the Tel Aviv suburb of Bat Yam.Credit: Tomer Appelbaum

“For investors, it’s a lucrative venture. The 1.5-room apartment would sell for 1.45 million shekels if it were a regular residence. The two-room apartment would go for 1.7 million shekels.”

A risky gamble in the United States

Investors hunting for rental houses often hear of opportunities abroad, lured by offers touting low prices and high returns. Sometimes faulty scouting and excessive optimism make this foray a mistake.

Neta Or, a developer in Texas, has for years helped Israelis looking to buy investment apartments in the United States.

“The optimistic Excel tables don’t really stand up to the test of reality. ... Beyond the fact that this is a property investment thousands of miles away, it’s dependent on many factors beyond our control such as housing prices, management companies, the U.S. economy and exchange rates,” she says.

“Often Israeli investors are presented with a business plan that shows returns of 9 or 10 percent, with maintenance costs estimated at 5 percent. When rents are $1,000, this means $50, which in most cases doesn’t come close to the actual maintenance cost.

“Houses in the United States are often 100 years old or more. Most houses are made of wood, and the climate there has a serious impact on wear and tear and maintenance costs. The rental market in the United States is vastly different than in Israel; there are no guarantors, bank guarantees or prepaid checks.

“Rent is collected monthly. Many tenants have a hard time paying their rent, and it’s common for renters to stop paying, requiring action by the owners. It’s quite common to have to evict a tenant for not paying. It’s a big problem with high costs. Evicting a tenant and preparing the apartment for a new renter can wipe out the investor’s returns from the previous year.

“So one problem in this area is an overly rosy presentation of the upside, as if the investment would yield easy returns from the first day. So maybe a 9 percent return is possible in Excel, but then you come up against reality and the numbers change.”

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