Matti Munk
Specialises in multi-tier corporate finance for real-estate developers
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Converting Israel’s office buildings to apartments is doomed to failure

This supposed housing crisis quick-fix appeals to voters, but it's a money-loser for developers. Vacate inner-city apartments used as offices instead

On paper, it seems like a good idea. Israel’s cities have a surplus of office space, which has increased with Covid as working habits change, and a massive shortage of housing which is constantly increasing, so why not change the offices into housing? A quick fix killing two birds with one stone.

The law currently waiting to be passed plans to do just that. The Treasury is requesting for at least 50% of offices to be given the approval to be converted into residential properties. Innovative as the treasury is, this is not their invention but a mimic of the 2015 law passed in the UK to create close to 1 million new homes by converting suburban offices into apartments. This mountain fairly quickly turned out to be a molehill.

Most office buildings are shaped to fit office use. This is very different from residential use. Whereas offices need as many windows as possible, homes need privacy. The whole infrastructure is different. The airflow to areas such as toilets and kitchens is different. To meet safety requirements, homes in Israel require bomb shelters which are used as rooms. Offices have shared shelters in the center of the building, often used as conference rooms or storage areas. By converting, at least 30% of the space will be wasted, ruining the economic model for the developer. The building contour only allows for very small units, decreasing gross/net space ratios and, in eventuality, creating tomorrow’s slums.

If by comparison, we look at the UK model, we will see that the only places where these projects succeeded were in and close to the main cities where house prices were high enough to warrant conversion. In the UK, creating a residential unit out of an office costs approximately £80k. In towns where apartments sell for £150 k and below, there is no economic model to buy the building and pay to convert. So the national plan ended up being relevant to very few cities. In Israel, the numbers are less attractive.

Take a city like Ramat Gan, which probably has the highest amount of surplus office space in Israel. Office land costs around 3,000 NIS per Sqm and residential land around 9,000 NIS. If new construction costs 5,500 NIS per Sqm, converting an office building, adding parking devices, gutting, infrastructure, will cost in the region of 7,000+ all-in. 30% of the space is lost, and converted apartments sell at 20% less than those originally planned as residential, due to the compromised layout. Doing all the mathematics, if the developers do not make money they will walk away.

Additionally, most office buildings do not provide the amenities that residential buildings do. Parks, schools, and social areas. One of the motivators for the current Minister of Finance is that these are high risers and the apartments will have no balconies, so the housing will not suit Ultra-orthodox buyers.

Mr. Bennett, Mr. Liberman. This may seem like a quick fix and make good populist headlines, but, from experience in The UK, it will not work in Israel. Why not start by vacating inner-city apartments used as offices. There are thousand’s of these. The cities have been speaking about doing this for years, but then see the losses in city taxes and shy away. Use the budget to give the cities one-time grants for every apartment thrown back into the residential use. The only office conversions should be the small city center offices which could be converted to student accommodation. Offices can be successfully converted to units no larger than 40 square meters. This will free up thousands of large apartments currently shared by students across cities, and revitalize city centers. In the UK, the local councils mapped every potential convertible building, permitting conversion only to those in the city center or on the outskirts of residential areas. Have them do the same here.

But more importantly, use the budget to digitalize the planning process. A streamlined process for every piece of land based on a city master plan and endorsed by the regional council. Use your hi-tech experience to see that once the simple algorithm is created, this constant race to achieve further and greater amounts of building rights will cease, there will be certainty in the system, land prices will stabilize, processes will shorten, reducing finance costs and total building costs. The only risk of development will be future sales; lower-risk projects attract investors and funding.

The claims developers currently make about having the right connections and contacts in the right places to obtain further rights or uses will become irrelevant when people are taken out of the equation in a digitalized system. If a city grows taller, the system can be changed with the push of a button, and with the correct technology, all related municipal needs and requirements can be adapted accordingly. Developers today spend up to a year going back and forth with city planning officials before even initial planning requests. A state-of-the-art digital system will eliminate this.

The housing shortage is a thorn in the side of every recent government. Dear ministers, your predecessors have reverted to populist methods to solve this and all we got from them was cheaper cellphone bills. Where are they now? Please refrain from wasted time, funds, and media space on office conversions. For once, forget the quick fixes and change the system.

About the Author
Married + 4, Oleh from UK, living in Jerusalem. Founder of Western Wall Street, former Manager of International Division in Mercantile Discount Bank and Bank of Jerusalem. Board Member of several NGO's.
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