What is in the Works for Israeli Real Estate?
In the past couple of years anyone dealing with Israeli Real Estate has been occupied with several issues. When purchasing an apartment in Israel it is important to understand some or all of these issues and how they can affect your transaction.
- Is there a real estate bubble in Israel? This question has been on everyone’s mind. The press is full of articles about this. The Governor of the Bank of Israel, Mr. Stanley Fisher has been concerned with this as well. The fear of many government officials is that if there is a real estate bubble this can have an adverse affect on the economy just like it did in the United States. There has been an increase in real estate investments in Israel due to the fact that many people who invested in real estate abroad lost a lot of money when problems arose there and many people lost money on the stock market as well. Many people with money to invest began to look towards real estate investments as a safer form of investment and they chose to invest in Israel, which remained relatively unaffected by the real estate crisis in the rest of the world. Therefore, the government has put into place a series of changes designed to lower the prices of real estate in Israel. These changes include raising purchase tax for additional apartments in order to deter people from purchasing additional apartments as an investment and allowing for more exemptions from capital gains tax thereby freeing up the market for more apartment sales by people who own more than one apartment, but did not want to sell until this point so as not to incur capital gains tax. The Bank of Israel has made new rules pertaining to the different mortgage tracks and how high a percentage of financing a purchaser can take. More land was freed up for the construction of new apartments, thereby bringing into the market more apartments under the old rules of supply and demand. However, many complain that there are not enough new apartments being built to really bring the prices down and the construction companies are complaining that construction costs have gone up.One thing that I personally feel will help the situation is if the Israeli Land Authority (the government body that controls most of the land that is being used for this new construction) would lower the prices that they charge for land for new construction projects.
- Strengthening Buildings Against Earthquakes. Experts predict that there will be an earthquake in Israel. They don’t know when but they know there will be one. There has been much debate in Israel about what would happen if there was an earthquake in the country. Buildings built after a certain year are safe because by this time many laws and building codes providing for the construction of buildings that could withstand an earthquake were in place. However, this is not the case with many buildings built before the 1970’s. On the other hand not many people can afford to pay for the strengthening of their buildings by themselves. The zoning authorities have passed a national zoning law called “Tama 38”. This allows for owners of apartments in a building needed to be strengthened against earthquakes to enter into a contract with a contractor who will do the work. It is a win-win situation for both the apartment owners and the contractor. The apartment owners get an upgraded, modernized building (able to withstand an earthquake with new plumbing and electrical wiring etc.) and an additional room added to their apartment (this is usually a security room built of reinforced concrete which strengthens the apartment and building even more). The owners of the apartments sell building rights to the contractor who can add a few floors to the building, construct new apartments which he can then sell thereby getting reimbursed for the construction work on the existing building and making a profit as well. Tax breaks have been given to apartment owners for this type of project.
- The Preservation of Historical Buildings. This has been a hot item in the past few years. On the one hand the State of Israel is a very young state but on the other hand the Jewish people have been around for thousands of years and there has always been a Jewish presence in the holy land. Although, buildings built before the 1700’s have always been preserved, this was not always the case with buildings that have been built in the last 150 years, thereby ignoring the more recent history of the State of Israel and its development. Many beautiful buildings that should have been preserved were demolished. One striking example of this is the demolition of the beautiful “Gymnasia Herzliya” in order to construct “Migdal Shalom”, the first Israeli skyscraper in Tel Aviv. In the 1980’s, 1990’s and later new laws dealing with the preservation of historical buildings have been enacted. The authorities have also looked for ways to finance these types of projects. In the past twenty years many of these historical buildings have been bought and renovated while preserving the original architecture of the building. One only needs to walk through Neve Tzedek, and historical Tel Aviv (Herzl, Rothschild, Nachalat Binaymin, Allenby, Yehuda Halevi streets and more) to see all the preservation work that has been done and that is still under way. There is a huge trend of urban renewal going on that when completed brings with it tourism, new businesses, an enhancement of the quality of life in those neighborhoods and a rise in the worth of the apartments in those places. Examples of this is, Nachlaot and the German Colony in Jerusalem, historical Zichron Yaakov, Jaffa, Neve Tzedek, historical Tel Aviv, Sarona (the German Colony of Tel Aviv) the American Colony in Jaffa and more. This has brought with it the new trend of boutique hotels housed in many of these historical buildings. In 2003, Unesco declared Tel Aviv (the White City) a national heritage site due to the fact that it has the highest number of buildings built in the Bauhaus style than any other place in the world. Many of these buildings are located along Shederot Rothschild and the vicinity (in Tel Aviv) and they add to the feel and style of the city. Last year, the Israeli Land Authority sold part of Sarona (the German Colony across from the Azrieli towers) to a group of investors. About 34 small houses that made up the German Colony built in the second half of the nineteenth century by German Templars are being renovated. When the site opens up next year these houses will be galleries, stores museums and restaurants and will be another place for tourists and Israelis to enjoy.
- From Government Owned Land To Privately Owned Land. As I wrote in my article “The Powers That Be in Israeli Real Estate” 90% of the land in Israel is owned by the government and administered by a government agency called the Israeli Land Authority. Anyone buying apartments built on this type of land would get a long term lease for 49 years. In recent policy and law changes it has been decided to give over the private ownership in the apartments to the holders of these long term lease rights. This process has already begun and many apartment owners have been given direct ownership in their apartments by the Israeli Land Authority.
- Changes in the Laws Governing Purchases of New Apartments from Construction Companies. Although there were already laws in place to protect purchasers in these types of projects several changes to the law were enacted to add to this protection. This is due to the fall of a large construction company several years ago. All money paid to the construction company building and selling the project is paid with a pay slip directly into the special account set up for the project. The purchaser’s money is protected as soon as this deposit is made even if the bank guarantee has not yet been issued. In addition to this, construction companies are now obligated to give more details in the specs of the apartment as to what materials are used in the construction of the apartment where as before the construction companies were allowed to be vague on this issue.
- Purchasing Groups. I can’t write an article about issues that concern Israeli real estate investors without mentioning the purchasing groups that have arisen left and right. A purchasing group is basically a group of people who get together, purchase a plot of land and hire professionals to build the building for them. The original idea was to save money on construction costs by cutting out the middle man (the construction company). Indeed, the purchasing group in its purest form could do just that but this did not always turn out to be the case as my article called “The Pros and Cons of Purchasing Groups” points out. In addition to this, new decisions by the Ministry of Finance vis a vis purchase tax and value added tax (probably instigated by the construction companies) have diminished some of the “pros” of purchasing through a purchasing group.
- The Falling Dollar Rate. In the past all second hand real estate transactions were linked to the U.S. dollar. After 2006, when the U.S. dollar began to fall against the Israeli shekel the linkage of prices of second hand real estate transactions more or less ceased. Now prices are quoted in shekels and Israeli sellers no longer heed the dollar rate of exchange. This has made life very difficult for foreign purchasers who have to convert foreign currency into shekels in order to pay for their apartments purchased in Israel.
Above I endeavored to give a few examples of the some of the hot items concerning Israeli real estate professionals in recent years. Although not all the above may affect you it is a good idea to know what is going on. Knowledge is power they say.
Any previous articles that I referred to in this article can be found on the articles page of my website.