Real Estate in Israel: A New Era of Growth, Investment in Rental Properties

Beautiful 1920's to 1940's Bauhause buildings renovation along Ha'yarkon street. This sea front section of Tel Aviv was left neglected for decades. Now during the Real Estate investment growth, the section is getting much needed facelift.

Tel Aviv apartments are being bought by Israelis for investment. They are rented at higher prices than in the past. There is also a rise in apartment renovation both by investors and by owners. This trend reflects a shift of money from investment in financial instruments which started two years. Mutual and hedge funds are shrinking while investment Real Estate is growing. I believe this is an opposite trend than the American and European economies, where Real Estate was booming for many years until the bubble burst. Usually a long trend in investment is a good sign for the future strength in the economy. The new investors in apartments are also raising rental prices. While rental price rise in Tel Aviv is mostly seen as a negative economic trend, there is not much said about the huge amount invested by individuals. Israelis have been pushed to own their own apartments ever since the state was founded in 1948. This desire to own your own apartment came at a cost of a rental apartment market specially in Tel Aviv. But like cities all over the world, there is a need for good rental apartments. Since the rental market was not a strong investment destination for Israelis, rental apartments are usually in bad shape and are owned by out of towners.

A bit of history on rentals and ownership in Israel (with emphasis on Tel Aviv.) Real Estate in Israel does not get lots of media attention. The only real business section on Real Estate is in the Globes an evening business paper [English section]. This is in contrast with the Real Estate / Sub-Prime bubble in the US which still gets lots of media attention. Besides media attention, Real Estate is a strong and crucial sector in the Israeli economy. It has evolved from a purely governmental business in the early 1900's to a business only for large commercial investors in the 1950's. Israel's economic growth also stimulated a home grown building industry. Israel's builders and architect-engineers are considered some of the best in the region. Israeli companies have been building in Africa, Europe and Asia for decades. Today it is estimated that 50% of all design and construction management projects are outside of Israel. Home ownership is high and considered a basic economic right for all Israelis. Today building all over the country is driven by demand for cheaper and bigger apartments as well as the government's desire to settle people outside the Tel Aviv central area. There is also a trend to build higher and denser. Standard buildings in the central area were 12 to 15 stories in the 1990's. Today buildings above 20 stories are seen in Tel Aviv and in central towns. Demand to live in the middle of town or as close as affordable is still strong. According to the Globes article the average investor is around 50, invests about US$ 150,000 which is about 4 year's worth of income. From January to July 2009 31% of the apartments sold in Israel were investment property. An interesting trend is investment in cities outside the center: Haifa (2,273), Beer Sheva (1,947) and Rehovot (1,930) (Jan-Jul 2009 apartment bought for investment.)

Real Estate investment tends are slow in the Israeli market. But slow trends are not necessarily bad. Other sectors can be a model to predict what will happen with rental property investments. From other investment trends, once Israelis start they create a new business segment and we end up with a new industry. The financial investment industry is new in Israel going back about 20 years (mutual funds, hedge funds, insurance and other investment services.) Since the 1980's, the Israeli financial management sector has become a world class player with money from around the world under management. The building and engineering sector has also become a world class services segment when the domestic Real Estate market suffered ups and downs from the 1980's to the early 2000's. When the domestic economic changes cause unreliable building flow, firms simply needed to smooth out their work. Again, Israeli firms looked for customers outside the country. While Real Estate management is harder to export, we may be in for a surprise. With technology, cultural diversity and money to invest, Israelis may be looking for investment property and providing services in this old, some say stagnant sector.