The gettergroup

Jerusalem Market Study

By Shia Getter - Aug 2014

1 GUIDING. REPRESENTING. EMPOWERING

WE REPRESENT YOUR BEST INTERESTS. YOU MAKE SMARTER REAL ESTATE DECISIONS

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CONTENTS 4

THE GETTER GROUP

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SUPPLY VERSUS DEMAND

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THE INCREASING GAP BETWEEN SUPPLY AND DEMAND

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ROLE OF FOREIGN INVESTORS IN THE MARKET

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GOVERNMENT APPROVALS & GOALS VERSUS COMPLETED CONSTRUCTION

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PRICES ARE STILL RISING

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POSSIBLE OUTCOMES IN APARTMENT VALUE

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DOES THE GOVERNMENT WANT PRICES TO DROP?

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LEGISLATION WILL KEEP DEMAND RISING

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The Getter Group The concept of a buyer’s agent has existed for years in the United States and England. Recently, due to the volatile real estate market, it has gained tremendous popularity. A buyer’s agent or broker acts as the liaison between the real estate buyer and the seller.

Shia Getter, a strong and effective advocate for the buyer’s best interests, founded The Getter Group, Israel’s first professional Buyer Brokerage service.

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We navigate clients through the maze and red tape of the Israeli real estate market, the banking and legal system, and government bureaucracy. With extensive and vast professional experience, we help you choose both the perfect location and the perfect lawyer. We handle the price negotiations and work hard to ensure that the agreed-upon price can be paid in the buyer’s preferred currency.

No detail is insignificant to us, and we take numerous precautions that investors often disregard.

We check over all of the investment figures to verify that they compute correctly, with all hidden expenses calculated in so that the final figure truly reflects the amount you will receive. We will meet with your lawyer and review the contract to confirm that all beneficial amendments and additional clauses were indeed included. Throughout every stage, The Getter Group is on the watch for potential pitfalls, thereby preventing much aggravation down the road.

Above all, we at The Getter Group protect your rights, your personal interests and your funds. We are dedicated to making the fulfillment of your dream into a pleasant experience, from theearly stages of decision-making up until you receive the keys. Clients of The Getter Group know that they are in good hands.

The Getter Group is a professional and reliable full-service property management company, specializing in Jerusalem real estate. We are committed to providing superior customer service and value for every aspect of residential real estate, including consultation for investment, home buying, renovations and rental management. ******* As experts in the real of Jerusalem housing, we are very involved with all the intricacies of this unique market. While talk in the media and on the streets may dramatically forewarn the decline of Israeli real estate, this is only hype. Allow us to acquaint you with the situation on the ground, and explain the many reasons behind the steady upward climb of Jerusalem real estate.

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Supply Versus Demand The amount of residential units in Israel consistently lags behind the ever-growing number of households. Simply put, the housing supply never meets the demand.

The year 2013 began with approximately 21,000 new homes available nationwide. Over the first six months of the year, these homes were purchased at a stunning pace of 2,040 per month.

Simple analysis states that unless residential construction picks up – and fast, the supply of new homes in Israel should be depleted within ten months.

The situation in Jerusalem is slightly less grim, with the reserve supply of apartments predicted to last about a year and a half. However with an average of 153 new apartments sold monthly, (268 new homes sold in the month of February alone!), Jerusalem also tops the chart of the nation’s housing sales.

In May 2013, The Ministry of Finance publicized that Israelis rushed the market with apartment purchases.

In anticipation of VAT increases scheduled for June, a record number of 12.4 thousand residential units were acquired. According to the Central Bureau of Statistics (CBS), these sales seized approximately 60% of the unsold inventory of apartments presently on the market.

Over half of the country’s housing supply vanished in one month.

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Be it S

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Re

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Ti

Av iv Pe t

Te l

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ESTIMATED # MONTHS THAT THE SUPPLY WILL LAST

10

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90

Ha ifa

15

As hk el on Ne ta ny a Be er Sh ev a

135

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20

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180

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# UNITS SOLD PER MONTH

HOW LONG WILL THE HOUSING SUPPLY LAST?

# UNITS SOLD PER MONTH (2040 units Nationwide)

ESTIMATED # MONTHS THAT THE SUPPLY WILL LAST

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The Increasing Gap Between Supply and Demand In 2012, there were an estimated 2,470,000 households and only 2,369,000 apartments. The nationwide housing shortage was then computed at a whopping 101,000 apartments.

Take a leap to the year 2035. In line with the trends and on the basis of data analyzed in August 2013, the Central Bureau of Statistics estimates that about a million more Israeli households will have emerged by then. So if the next twenty years continue along the same graph as the last twenty years, a staggering shortage of 111,000 units will be reached. Unless construction in Israel shifts into turbo, it’s quite clear that the gap between need and availability will only get wider.

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HOUSING SHORTAGE GROWS AS POPULATION EXPANDS 3,500,000

2035

3,000,000 2012

2,500,000

2008

2,000,000 1,500,000 1,000,000 500,000 0 -500,000

# Households

# Housing Units

Shortage

Based on data publicized in October 2013, from the Ministry of Construction and Housing

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Role of Foreign Investors in the Market Real estate transactions in Jerusalem increased notably between 2011 and mid-2012, with some reports highlighting a 25% increase in that year alone. By mid-2013, the Ministry of Construction and Housing recorded sales of over 2,000 units per month.

According to the latest statistics – foreign investors have played a key role in Israel’s property market. As stated in a recent article (May 23, 2014), the Real Estate Appraisers Association, a government agency, reported that during the past five years, cities such as Jerusalem, Beit Shemesh, Tel Aviv, Modi’in and Netanya, have attracted in excess of one billion dollars in investments from American, Canadian, British and French buyers. Due to the relative strength of the euro and the British sterling, European interest is particularly high.

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FOREIGN INVESTORS IN LARGE ISRAELI CITIES 6% 5% Netanya

4%

6.6%

Tel Aviv

11.1%

3%

Jerusalem

2%

8.2%

1% 0

2005/6

2009

2011

In specific Jerusalem neighborhoods, such as Rechavia, Romema, Bayit Vegan and Sanhedria, foreign investors= 40% of buyers

HOW MUCH CONSTRUCTION IS NEEDED TO INCREASE SUPPLY ENOUGH TO DISSOLVE THIS SHORTAGE AND MEET DEMAND?

Last month, the government’s housing program approved a yearly construction volume of only 40-45 thousand units. Yet according to CBS’s estimates of a million more households in Israel by 2035, at least 50 thousand new housing units must be constructed annually in order to cover the shortage and ensure a surplus supply of apartments nationwide.

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Government Approvals & Goals versus Completed Construction Newspaper headlines may be encouraging with announcements about large numbers of government approvals for new buildings, yet these numbers are a smokescreen for reality on the ground.

After the government plan is released for new construction, the Israeli bureaucratic process can take up to 13 years until the structure takes solid shape. Building permits are granted only a few years later. A further five to eight years are then claimed by the planning committee, according to data publicized in the summer of 2013, by Dr. Karnit Flug, then Deputy Governor of the Bank of Israel. Following this, construction lasts two and a half years, with an additional half year dedicated to marketing.

In Jerusalem, the government set a goal for 9,000 housing units to be constructed in 2013, according to information from the Ministry of Interior. Ultimately, only 7,156 units were approved, which equals 80% of the original goal. The final number of housing units that will be physically constructed remains to be seen, yet either way it falls short of the intended amount.

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HOW MANY WILL REACH COMPLETION?

GOVERNMENT GOAL: 9,000 UNITS

APPROVAL GRANTED: 7,156 UNITS 80%

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Prices are Still Rising The International Monetary Fund (IMF) published their annual report on Israeli real estate in February, 2014.

The study found housing prices in Israel to be overvalued in some cities, perhaps by as much as 25%.

Levels of income and rent do not justify sale prices.

A Jerusalem Post article (Feb 12), attempted to use this IMF data to foretell a dramatic price drop, yet this is an unwarranted leap to false predictions.

For despite the high housing costs, prices are still rising – and there are no signs that this trend will change course.

In 2007, the housing bubble in the United States burst and traumatized investors. Housing prices in Israel also escalated and continue to climb, but these prices reflect a natural increase in market value – not a “bubble.”

A few different corrective courses may develop in order to adjust the value discrepancy, according to JPost. A slow correction would allow the economy to escape recession, yet a prolonged weak economy would ensue. In contrast, a rapid adjustment would shock the economy into recession, with consumption and output recovering only two years

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later. A third possible course would be a slow adjustment between prices and their equilibrium value, which would leave the economy relatively unscathed.

With this outlook, the IMF Report claims that there is a 20% probability of a housing bust during the next five years. If this were to happen, real estate would devalue approximately 10% over that time span. Accordingly, if prices were to fall 6.5% in one year, consumption growth would fall 3% in the long run.

Yet - according to the Central Bureau of Statistics, “Israel’s housing market remains robust, amidst strong economic growth. Property demand continues to rise and the residential construction sector is picking up.”

Israel’s real estate prices increased 4.6% in 2013, as they did similarly in 2012, showing few signs of abating. As the Global Property Guide study points out, this continuing incline is occurring in spite of domestic political uncertainty, security threats, and the global financial meltdown.

In sum, the IMF Report cannot be read as an accurate indicator of the future. For real estate investors the market trend remains optimistic.

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Possible Outcomes in Apartment Value According to the 2014 IMF Report REAL ESTATE SCENARIO #1: A Five Year Projection STEP 1

STEP 2

STEP 3

STEP 4

Apartment in Israel purchased on paper, a few years prior to completion

Apartment value possibly drops 10% (according to the 2014 IMF Report, there is a 20% probability of this decrease)

Apartment value increases between 3 and 5% yearly, due to the inflation index.

This equals a total rise of approximately 15%.

Apartment is completed five years after puchase, and is now worth approximately 105% of the original value

REAL ESTATE SCENARIO #2: A Five Year Projection

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STEP 1

STEP 2

STEP 3

STEP 4

Apartment in Israel purchased on paper, a few years prior to completion

:Real estate market remains stable, with no bubble that bursts (according to the 2014 IMF Report, there is an 80% probability that this is what will happen)

Apartment value increases between 3 and 5% yearly, due to the inflation index.

This equals a total rise of approximately 15%.

Apartment is completed five years after purchase, and is now worth approximately 115% of the original value

Government tax revenue

Inflation index

Shortage of available land

WHY IS REAL ESTATE ALWAYS ON A NATURAL RISE IN ISRAEL?

Long delays from approval until construction begins

Booming population growth

Dwindling supply of apartments

Insufficient construction

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Does the Government Want Prices to Drop?

The Israeli government has aimed a number of new policies at lowering housing costs. However, it seems that the State may not actually be so interested in lowering the prices. After all, don’t they know what the rest of us know, that the only way to lower prices in Israel is to increase supply to meet demand?

Let’s take a look at how the Israeli government has actually influenced supply in 2013.

In a study done by Madlan and published by Calcalist a few months ago, the State canceled tenders for over 1,000 apartments in 2013 because the offers were too low. They continue to cancel land tenders for this reason this year.

The ILA (Israel Lands Authority) set a minimum price that is unknown to the contractors submitting their offers for the tender.

The State’s minimum price for a tender is generally fixed according to other tender prices in the area. So that if a tender nearby had a minimum price of NIS 100,000, and was bought for 150,000, the next lot will be put up for tender with a minimum of 150,000 – any offers below that will be denied. This is how the State is actually forcing prices higher on these new apartments.

Such policy harms the real estate market and the public in two ways – it jacks up contractors’ expenses, making the final price higher, and it robs the market of those additional units that it so badly needs.

Canceling this minimum price, would mean forgoing some of the income from the sale of the land.

Instead, what happens is that they put that land on hold, then a few months later re-adjust the minimum price higher – based on more recent sale prices of parallel projects– and look for a contractor who will pay the higher price. This puts land that is ready for construction in bureaucratic stall and ends up offering the apartments to the public at a higher price.

For example, take Tirat Carmel near Haifa. In January 2013, four lots were up for tender. On one lot, the highest bid was NIS 125,000 per unit, which was 3,000 lower than minimum. According to Madlan, that lot stalled for six months before it was put up again. This time it was sold for 132,000 per unit. So in this case we have a clear example, like a number of the cancelled tenders, where the State’s not accepting the initial price caused a six-month stall and a mark-up 18

of NIS 7,000.

The government has passed a series of laws and rules aimed at holding foreign investors at arm’s length. They changed tax law last year and placed regulations that favor first-time, domestic buyers for mortgages. These endeavors have been only partially successful; prices continue to rise.

WHY HASN’T ANYTHING WORKED?

Because the ILA is still trying to protect its income from land sales, it will not loosen up bureaucracy to allow any quick and significant increase in supply. All its attempts thus far have hardly affected the State coffer. The obvious solution of the State making less money on sale of land, in order to offer its citizens enough housing supply, has been left for last.

0% VAT may be the first step in the right direction, however it has limited applicability.

A price control program proposed this past March is also being considered. This “target price” plan would sell certain apartments at a regulated price, about 15% below market average. Other ideas were raised at the same time, such as awarding a NIS 100,000 benefit to young couples buying their first apartment.

The program would award land development contracts to builders who guarantee that they can build homes that they can sell at 80% of market price, without compromising on quality. This is a form of target costing, where the final price is decided on in advance. The materials must be standard in order for the apartments to qualify, and therefore one of the only variables which can be lowered in order to create these thousands of affordable units, is the bidding price. In other words, the ILA would be agreeing to lower their land income, under these standardized conditions that ensure that the buyers will be the ones to benefit.

As part of the plan, similar to the 0% VAT plan, buyers must meet certain criteria, and must agree to own the apartment for at least five years. The two plans however are different and mutually exclusive – an apartment that is part of the price control program will not be eligible for 0% VAT.

Shia Getter is the CEO of the The Getter Group, a full-range real estate services firm in Jerusalem catering to the Anglo investor. He is a noted expert, columnist, and author of “Everything You Need to Know About Buying Real Estate In Israel”. He and his professional team manage many upscale Jerusalem properties and have helped countless people buy, sell, and renovate property in Israel. Look out for more of his articles in the coming weeks.

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Legislation will keep demand rising, without enough supply Legislation to make housing more affordable has instead closed the real estate market to first-time buyers for the better part of 2014, while buyers and contractors await the new regulations.

Real estate pricing in central Israel has been a prime source of concern in Israeli discourse over the past few years. How far the government is willing to go to lower prices is yet to be seen, but this March, the first steps were taken towards legislation that will demand government cooperation so that more families can own their homes.

Minister of Finance Yair Lapid’s new law is supposed to be the beginning of a solution: as of September 1st the government will stop charging VAT to new homeowners. Experts on the field assume it will take a few months longer until the actual application of the benefit, perhaps until January 1st.

Value Added Tax in Israel is 18% and is added to many products and services, including construction materials and a finished home sold by a developer company. When buying a home, the VAT is included in the final price quoted to the buyer, so cutting out that tax would translate into a 15.5% reduction from the final market price. The plan is controversial, but many are hopeful that it will positively affect the market.

In March, the Housing Cabinet approved the 0% VAT law and a parallel plan, the target price program. This would mean the sale of thousands of units in sought-after neighborhoods at controlled prices considerably beneath market price. The logic is that this price control will bring down prices of other similar units to match competition.

Where do these programs leave buyers for the next few months?

The real estate market right now is facing an unusual stall, as buyers who are or may be eligible for the benefit sit and wait. The benefit targets young couples with at least one child, or individuals over thirty-five, who have done army service and have not owned a home since 1995. None of these potential candidates are going to buy right now when they could wait and save 15.5%.

Since publicizing in March the possibility of a plan granting certain buyers a 0% VAT benefit, buyers who may be eligible for this significant benefit are waiting.

As only certain apartments will qualify for the benefit, Nissim Bublil, president of Bonei 20

Haaretz, the Israeli contractors association, reported that contractors are likewise waiting with their unbuilt projects until the regulations are finalized. These months of not knowing exactly what the criteria are, and which apartments will qualify, may hold up the construction industry by 20% – meaning that by the time the law begins to apply, the market will have held off on the building of 8,000 units.

Since March, when these two plans swung into the processes of legislation, the real estate market has entered the doldrums, waiting for the criteria to be clarified to see if they can build in a way that qualifies, and waiting for the plans to take effect. According to ynet (June 2), April saw 19% less real estate transactions compared with February.

What this means, aside from the temporary loss of income to contractors and real estate professionals, is that when these plans do go into effect, the market will be completely saturated. In its natural state, real estate in central Israel suffers from a supply shortage. After months of stalled building and 20% less buyers, all those people who were waiting to buy, and many more, will jump on those discounted apartments, and there will be nowhere near enough. And what happens when demand hugely outpaces supply? Prices increase yet again.

While the government is talking about putting the target price project into effect within just a few weeks, contractors are not sure this can happen. They fear that the process will take a number of months, as the plan is not so simple and is still attracting legitimate criticism.

Foreign investors or other potential buyers who know they do not meet the criteria for the VAT exemption or the price-controlled apartments may want to examine whether they can benefit from the temporary lull in real estate transactions. Feel free to call us to discuss the options.

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NOTE: THIS BOOKLET IS SHIA GETTER’S MARKET ANALYSIS AND SHOULD IN NO WAY BE CONSTRUED AS ADVICE TO BUY OR SELL PROPERTY. THIS BOOKLET IS INTENDED TO PROVIDE GENERAL INFORMATION ABOUT THE SUBJECT MATTER COVERED. IT IS NOT MEANT TO PROVIDE LEGAL OPINIONS, OFFER ADVICE, OR SERVE AS A SUBSTITUTE FOR ADVICE BY LICENSED, 23 LEGAL PROFESSIONALS.

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IL: 077-234-6011 EXT 503 I US: 718-437-3950 EXT 503 I UK 020-8150-6082 EXT 503 HOMES@THEGETTERGROUP.COM WWW.THEGETTERGROUP.COM 24