Israeli Real Estate – Island of Stability in Turbulent Global Markets

Navigating the unpredictable waters of the stock market can prove to be a very difficult task, even for the experts. Anyone trying to understand exactly what is happening in the financial markets, by following economic journalism over the past few weeks, has probably reached the obvious conclusion: it’s turbulent.

During times of turbulence in financial markets, people look for safe shores. I cannot think of a better investment than the Israeli economy and a safer investment than the real estate market in Israel. American Billionaire investor, Warren Buffet, told Forbes magazine in an interview in 2018, “I am a big believer in the Israeli economy”. According to Mr. Buffet, if you’re looking for “brains, energy, and dynamism,” Israel is the place to go.

Few people in the world possess the same level of expertise and confidence that Warren Buffet has when it comes to investing in technology markets. You don’t need to be a self-made billionaire, however, to understand the profitability of real estate in Israel.

The steady appreciation of property values in Israel has consistently defied international trends. From 1948 until 2019, the national average of property prices has risen every year barring perhaps a short period in the mid-’90’s in which they plateaued due to the Israeli government overcompensating for the amount of new housing necessary to facilitate massive Soviet immigration. 

We have a client, at the Yehuda Raveh & Co. Law Firm, from overseas who has been visiting Israel on a semi-annual basis for about a decade, and purchasing a residential apartment or two in cities around Israel from year to year. Today, some ten years and fifty apartments later, the value of his portfolio has more than doubled. Although his ROI from rent revenues may be 2-3% per annum, he has been extremely satisfied with the rate of his capital gains. In fact, over the two decades that I have been practicing law in Israel, I have never heard any client complain regarding a real estate investment. 

Even between 2009 and 2010, when property values crashed around the world, and many people lost a lot of money due to the subprime crisis, in Israel real estate appreciated by over 10%. This is probably due, in part, to Israel’s conservative banking system.

The very fact that it is so difficult for young families to purchase housing in Israel, and that a plan to create affordable housing is something that virtually every politician is over-promising during our current election season, is testimony that reversing the trend of rising property values in this country is extremely unlikely. 

Predictable Profits

The predictability of real estate appreciation in Israel is due to a few factors. 

First of all, to state the obvious, Israel is geographically a very small country. 

Second, around 93% of undeveloped land is owned by the Israel Land Authority, a bureaucratic government agency which releases land for new development projects at a painstakingly slow rate. 

Third, Israel has the highest birth rate of any developed nation. Our fertility rate in 2018 was 3.11 per woman, the highest rate among OECD countries—the OECD average is around 1.7, with Mexico coming in at second place with a much lower rate at close to  2.2. 

Fourth, around 30,000 Jews from other countries immigrate to Israel each year. Israel has a “Law of Return,” which grants all Jews and people of Jewish descent worldwide the right to citizenship. Today, 27% of Israel’s population emigrated from another country, which also sets it apart from trends in other developed countries. Since its founding in 1948, Israel has experienced “waves” in which numbers of immigrants spike dramatically, such as the FSU immigration in the mid-nineties, which created a 20% population increase over merely a few years. Many Christians and Jews interpret these phenomena as a fulfillment of Biblical prophecy, and believe that it is likely to continue.

Fifth, according to many Jewish advocacy organizations, anti-Semitic rhetoric and violence are on the rise worldwide, occurring at the highest rate that we have seen since the 1930s. And what do Jewish families, with financial means, living outside of Israel do when their communities experience an anti-Semitic attack? Many of them choose to purchase a house or apartment in the only Jewish state, just in case they may need to move there someday.

Last, with interest rates currently so low that it is relatively difficult to make profitable investments within the banking system, many Israelis with the ability to do so, invest their savings in the one market which has proven itself to be stubbornly profitable for the past seventy years: real estate.

All of these phenomena have created a perpetually increasing demand for housing, which the Israeli government is struggling to satisfy. There is a minimum annual demand for housing exceeding 45 thousand units. According to our law firm’s estimations, the Israeli housing market today is short of about 100,000 residential units. If we add the minimum annual demand for housing units and the shortage existing today, then in the coming 8 years the Israeli market would need over 460 thousand new residential units (even before calculating the impact of the annual increase in population).

Candidly, for all of the same reasons listed above, real estate in Israel is relatively expensive, which can be prohibitive for people looking to invest modest sums. Israel does have, however, several publicly traded real estate investment trusts (REITs), which allow trading of fractional ownership units.

To borrow a quote from Donald Trump, who has made a pretty penny from real estate investments, “It’s tangible, it’s solid, and it’s beautiful. It’s artistic from my standpoint, and I just love real estate”.

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To take a deeper dive on investing in real estate in Israel, I recommend checking out this lecture, by attorney Nir Kimhi, Partner at Yehuda Raveh & Co. Law Offices, at the 2018 ARISE Business Matchmaking Summit.