The uncertainty which dominates the economy in times of crisis, raises serious questions about which strategies investors should follow to ensure a flow of savings to consolidate their financial future.
The real estate market which, for decades, has been a natural destination for safe investments, today presents a structural change in its physiognomy, which modifies its profitability and the way that the Return on Investment (ROI) should be estimated.
The exceptional rise in property values in Israel over the past four years, has revealed the country’s real estate market’s striking resilience, having successfully overcome the subprime mortgages crisis and its macroeconomic effects in America and Europe as well.
In this sense, the Israeli real estate market holds an advantageous position in which local and foreign investors can profit, by understanding the competitive advantages of the real estate sector in Israel, together with the keys that should be taken into account at the time of purchasing apartments in Israel, outlined below.
Obviously, as with any subject, know-how is an essential tool to optimizing ROI, while minimizing risk and accelerating the payback of the project.
Without belittling the relevance of ideological reasons, the State of Israel offers investors, both local and abroad, a number of attractive benefits for the purchase of real estate assets. Among them are the low risk of loss of value, legal certainty, the tax advantages offered by the country and the macroeconomic soundness of the mortgage system.
Counting close to 110,000 real estate transactions per year, Israel is characterized by a significant housing shortage. With an annual supply of 30,000 new properties and a demand of 40,000 per year, the Jewish state shows only 105 housing units per 100 households; a ratio that is among the lowest in the developed world.
The inability of the government to promote residence construction without overstressing the economy, along with shortages of transport and communications infrastructure for its inhabitants, make it unlikely that property prices in Israel will experience downward trends.
Moreover, foreign investors in Israeli real estate find a level of legal certainty that they often don’t find in their own nations. Unlike what happens in many countries where rental contracts last between two or more years and tenants have juridical means to dishonor their commitments, contracts in Israel are usually per year, and the landlord has legal tools for the immediate eviction of the tenant, in cases of breach of contract.
The tax advantages offered for both Israelis and the world Jewry to have a home in the Holy Land, represent a significant reason why many investors from the United States, Canada, Europe and Brazil have purchased a large amount of properties in Israel. These include tax breaks of up to $360,000 on the purchase of a first property, and for income from leases starting at $1,300 a month.
Even though no country in the global village is immune to the contagion effects of an international crisis, the implosion of the housing bubble in the United States in August 2007, allowed the Israeli mortgage system to improve its protection for future economic collapses. The macroeconomic soundness of Israel, shown by its role in the Organization for Economic Cooperation and Development (OECD), is herein strengthened by cautious financial and mortgage systems, which minimize volatility without compromising the stability of the housing market.
The 7 primary keys to investing in real estate
1. Clearly identify the goal of the property: For use or for investment
Buying a house or apartment is a major economic decision in the lives of many families. The undertaking aims to meet multiple expectations, from providing familial, educational and social stability to the household, to assuring future savings.
However, not all properties can be considered as an investment. When you buy a house or apartment for habitation, you waive the rental income, which is the most stable source of income provided by real estate investments.
In Israel today, these returns represent between an annual 2-4% of the value of property in Jerusalem and Tel Aviv, and between 6-10% in peripheral areas, consistent with the global average values, estimated at 2-7%.
When acquiring property for personal use, we recommend that the buyer weigh the quality of life of his family over the potential gains of the purchase. In contrast, when investment is the goal, subjective elements should be excluded from the analysis, focusing instead on the payback timeframe of the project, its profitability and its financial potential.
2. Targeting opportunities
Many real estate investors start the purchasing process by choosing an area, city or neighborhood. Under this procedure, the buyer is likely to pay a high market price for the product, which dramatically restricts the property’s future profitability, as well as its Internal Rate of Return (IRR).
Periods of crisis and volatility, when major asymmetries of information are present, are also the optimal times to find the best real estate opportunities, while acquiring houses and apartments at values 10-20% below the market price, optimizing the ROI and ensuring the highest IRR’s for the conservative investor.
3. Check the evolution of real prices, not nominal prices
The market value of housing is commonly stated in terms of nominal prices. However, what matters for long-term investments is to know the evolution of these prices over time. As the value of money differs today from the past, significant changes in the value of property should be calculated by using the real prices.
Unlike nominal prices, real prices take into account the falling value of money due to inflation. In the past four years, the Israeli real estate market has experienced increases of over 50% in nominal property value, but in real terms, this increase was less than half.
4. Information and knowledge mean power
Choosing the best real estate opportunities involves having a significant price advantage and estimating the appreciation of the future values of the properties. To obtain these you must have the right networking and contacts, with the ability to provide direct access to all relevant information and to process it on your behalf.
While courage is necessary to make good real estate investments, it is essential to receive all-inclusive professional counseling to address legal, tax, technical, commercial and financial aspects, to ensure the profitability of the investment.
5. Understand the role of real estate agents
Some foreign investors turn to real estate agents of their own nationality and language, to guide their portfolios in Israel. The experience of the past ten years shows that these purchases have not always been positive in terms of ROI.
Part of the investor’s responsibility is to understand that the agent is focused on making the sell, while a real estate investment requires professional intervention, to analyze the profitability equation, and ensure the transparency of technical and legal records for the property being offered.
6. Be aware of the business of Investment Funds
Real Estate Investment Funds in Israel are a good way to diversify risk. By investing simultaneously in several construction projects and public lands, these funds offer a comprehensive solution for managing investments, which in many cases are guaranteed by the properties or lands involved in the project.
Like any for-profit company, the task of an Investment Fund is to maximize its own profitability, as well as creating the necessary incentives to encourage increased investor participation. Therefore, by participating in a real estate fund, investors temporarily lose control of their estate, by becoming a share of the financial leg of the business conducted and controlled by the Investment Fund.
7. Read market research critically
In recent years, numerous sources have forecasted a fall in property prices in the Israeli real estate market. This did not occur and, on the contrary, the sector experienced an upward trend.
While all studies and projections adhering to scientific methods are worth consideration, they can sometimes be affected by sectarian interests, which drive them to skew the interpretation of results. Believing in content without analyzing what you read, can be as dangerous as avoiding reading it because of potential skews.
Nothing can replace critical analysis and confidence in those who are truly qualified, due to their honesty, academic training and teamwork, to optimize returns on real estate investments.