Foreign real estate developers are expected to issue over $1 billion in bonds in Israel in 2015, as small-to-medium sized firms take advantage of favorable terms provided by Israeli institutions that are limited to investing locally.
These real estate firms typically raise around $200 million – an amount not considered of interest to investors in the United States but seen as large in Israel, said Eliav Bar-David, chief executive of underwriting firm Apex Issuances. Bar-David said the firms had until now usually resorted to mezzanine financing, a hybrid of debt and equity that is normally provided quickly to the borrower but carries a cost.
Demand for the Israeli debt issuance has been driven by local mutual funds, most of which can only buy shekel-denominated bonds traded in Tel Aviv. They see it as an opportunity to buy bonds of stable foreign firms, while also receiving interest rates that are about 2 percentage points above comparable Israeli real estate bonds. “By bringing U.S.-based companies to Israel, it allows mutual funds to diversify with better terms for funds,” Bar-David told Reuters.
The trend started in 2008 with a 200 million shekel offering by real estate developer Abraham Leser. After a years-long pause, it resumed apace last year, when foreign bond issuances amounted to 2.87 billion shekels ($760 million), according to the Israel Securities Authority.
Lower interest rate
The total amount raised to date by foreigners is tiny compared to the 300 billion shekels of outstanding corporate debt on the bond market, but it is steadily rising. Of nearly 23 billion shekels in debt raised in the first half of 2015, 15.2% came from foreign firms – up from 8% in 2014 and 1.2% in 2013, Securities Authority data show.
“If those companies tried to raise money in the United States they wouldn’t be able to pay the same amount of [low] interest for the risk,” said Moty Yamin, director of the authority’s corporate department. Four more U.S. companies are expected to publish plans for Israeli debt issuance in the next quarter while Canadian firms have also expressed interest, he said.
So far this year, foreign developers have raised 3.5 billion shekels – or $915 million – in five offerings. Bar-David estimated this could reach $1.5 billion if New York developer Wharton Properties goes ahead with a planned $500 million issue.
Apex, which is 20% held by Meitav Dash, Israel’s second-largest investment house, underwrote a $300 million bond offering in 2014 for Extell Development, the New York company that built One57, the city’s tallest residential skyscraper. Extell has since done another offering, bringing its total to 1.65 billion shekels, and Bar-David said a third was likely. Apex will also bring Toronto developer Urbancorp to test the waters this summer. Bar-David expects that within five years European realtors will also begin selling bonds in Israel.
The bonds typically are for five years, offering on average 5% to 5.5% interest and are given high credit ratings by local affiliates of Moody’s and Standard & Poor’s.