In his most recent visit to Israel in April, Saydam Salaheddin, head of the real estate in the international division for wealth management of Credit Suisse Bank, met an old Israeli acquaintance. "I spoke to one of the biggest real estate guys today," he told "Globes." "We were talking about… 2006/2007.
"He said, 'We knew that it wasn't the best building; the fact is that there were some issues, because the tenant called us to say they're going to leave in a few years' time, but the leverage being offered to us by an unnamed bank was 93%. And we worked out that until the end of the lease, just taking the rental payments, we were making three times our money with that leverage in place.'… So again, leverage makes people take risks because, they see, they're sharing the risk with the bank… It has to be carefully managed. If you look at Germany today, it's a good example, the banks are sitting on enormous liquidity. They're able to finance and refinance very cheaply… However, they're not going significantly above 65-70% LTV, unlike before the 2008 crisis."
"Globes": Do you think that only an interest rate hike can cool the market off?
Salaheddin: "Not necessarily. I think, if you look at the UK it's a great example. A couple of years ago, the housing market in the UK was growing 10-15% per year for 5-6 years... The average person can never buy their own flat unless it's 15 miles from the center… Money was flowing into London from China, from Russia, from Iran, from Israel, from the Netherlands, from the Europeans, from the US… What did they do? They raised the stamp tax, which was traditionally 1% of the value of the deal, to 15% on properties over £2 million. Raising the interest rate is a blunt tool that affects the entire economy. Raising the interest rate would have destroyed the UK economy, because the economy there was growing at less than 2% a year. So they try to use targeted measures which affect only real estate, as opposed to the whole economy."
Salaheddin developed his insights over his 20 years of work in banking, including 10-12 years in real estate, mainly in Russia, where he also invested his own money.
"I think you should take risks where you understand. For me it's easy to be able to say, I've been an investor in Moscow and I've lived there for nine years. You understand the language of the culture, you've lived in the place, you feel it, as opposed to a person who's never lived there and buys a fat property. So stick to places you know.
"If I were looking at Europe today, as I said, there are three beacons which are attracting capital: London, Germany and Spain. Those are the three…"
Which parts of Spain?
"Madrid and Barcelona. I would say Barcelona is a very popular place because it's a nice place, people want to be there. It has a slight Tel Aviv feel to it."
"Germany is really focused on commercial real estate. The thing about Germany is that it is very spread out… if you look at the top 10 cities, people are happy to take risks in Stuttgart, in Berlin, in Munich. "
"Sharks don't hunt where the other sharks are"
And do you see a rise in curiosity about Tel Aviv? People get to hear more about it? Possibly non-Israelis?
"No. I think it's Israelis with Israeli links more out of emotional, personal reasons. Let's put it is this way- Israel is known to have many real estate specialists. If I'm a shark and I want to go hunting in somebody else's pool, I won't go to where most of the sharks are."
A word about the Israeli market – is it a bubble?
"We (Credit Suisse, A.B.) are not active in the Israeli market. First of all, though, it's wrong to look at a market as a stand-alone market and decide whether or not it's a bubble, because it's all relative to other markets. The foreign investors who bought housing in Israel had other options: Paris, London, and New York. Secondly, part of the price rises in Israel in recent years resulted from the desire of people with an affinity for Israel (Jews, A.B.) to have a home here. At times of uncertainty and threats, Jews in France tell themselves, 'We don't know what will happen here, we can move to Tel Aviv.' That is to say that the financial consideration of making a profit is not the only consideration in the demand for housing in Tel Aviv, and the market is therefore less sensitive to price fluctuations.
"On the other hand, the market here is not large. There are many new high-rises, because people are trying to maximize every square meter. For big investors looking to buy 50 or 100 housing units, however, there's not much here. Is Tel Aviv expensive? Obviously, it's expensive, but real estate is expensive everywhere in Europe today, other than in Eastern Europe: in the UK, France, Germany, and Switzerland. This is a wave of price increases that has been taking place since 2008. Investors have shied away from stocks and bonds, and have decided to put their money in something safe. I don't see the end of these rises now. The cost of money is still very low. The interest rate in the US is going up very slowly. In the UK now, after Brexit, the interest rate won't rise, nor is expected to go up in Europe. On the other hand, there are still bonds traded at negative yields. So when you come to real estate with 2.5-4% returns and 5-7% with leverage, it's still very attractive."
What about investment institutions?
"Over half of the assets in the world are real estate properties. If you add private homes, the value of real estate dwarfs the stock and bond markets. What is the volume of real estate investments by institutions? Less than 5% of the total properties over the past 30 years."
What do you think about the wave of US real estate companies raising debt on the Israeli capital market?
"It started with the last crisis in 2008, which began in the real estate market. The regulators' response (in the US) was to supervise much more closely financial behavior and how the way the developer takes financing affects his risk. The conditions for taking financing were toughened, and financing costs rose. It's very rare now to take a bank loan for real estate development. So new sources of financing are naturally developing, such as hedge and private equity funds. Naturally, if you can't raise financing cheaply at home, you try to raise it in other capital markets. Investors in Israel have always liked real estate investments in the US. I assume that in the future, we'll see such capital investments also in other real estate markets, such as Eastern Europe."
Germany has grabbed the UK's place
In his job at Credit Suisse, Salaheddin is responsible for supervising investments in real estate markets all over the world, except for East Asia and Oceania. "Many of our clients have stocks of cash that cost them money, instead of earning a return. Real estate is something tangible that you can touch," he says.
Is Berlin also popular among non-Israeli investors?
"Yes. Berlin interests investors from the Middle East, Russia, and Europe. Germany is regarded as the core of Europe, especially after Brexit. It is has the strongest economy. If you check it out empirically, you will find that the turnovers in the real estate markets tend to following the macroeconomic cycles. For reasons of dispersal, stability, preservation of wealth, and long-term growth, Germany is today taking the place of the UK as the leading European market, after having been only in third place until recently, after the UK and France. In a range of 5, 10, 15 years, the German economy will grow. In the short term, the most interesting economy is Spain. In the next three-to-five years, it is projected to grow faster than Germany."
Is the devaluation of the pound arousing interest in the UK market?
"When people talk about the UK, they talk almost exclusively about London, It's still the most liquid, transparent, and stable market where regulation is concerned, not only in Europe, but in the entire world."
Online trading is already affecting the commercial real estate market.
"The expansion of online trading will definitely affect commercial real estate - the only question is how. As of now, we see no difference in movements of shoppers or in profits of shopping centers, but we are seeing an effect on rents. I wanted to see for myself, so I went to the most prime shopping centers in Israel."
"The Ramat Aviv shopping mall. It's full of people, because it provides a buyer experience when it's hot or raining outside. I'm not sure, though, that the need we adults have to touch and feel the merchandise exists in our children - it's a generation that sees things completely differently."
"Israelis' character is more like merchants"
How do Israeli investors differ from other investors?
"Israelis have the character of merchants. They look more for short-term returns. They're more willing to take risks, study the market, and buy properties in need of renovating, while other foreign investors are just looking for a place to park their money.
"You could say that they are more pioneering in new markets. At the beginning of the 21st century, during the boom, real estate was very expensive in the West. Capital migrated eastward, because it was necessary to increase the risk in order to obtain reasonable returns. The threshold began to reach Poland, Romania, and Hungary, and who were the pioneers of the wave? The Israelis."
I assume that the Eastern European background of some of the Israeli developers also played a role.
"Obviously. The fact that there was a historical connection to Russia, Ukraine, Budapest, and Bucharest made Israelis feel comfortable in these places. We played an important role in working with the Israeli clients, the Fishmans, Steinmatzes, and many others. But when it reversed, everything was lost. It didn't end in these regions with a correction, as it did in the US and the UK; it ended with a fall off the precipice."
Looking back, what were their mistakes?
"The Israeli capital market gave them a lot of cheap liquidity, and they took the money. The entire industry believed that the value in Eastern Europe would be linked to the dollar, that the value of the properties would be linked to the value of their liabilities, but something unprecedented happened. Should the developers have taken the currency risk? No. There is no way of hedging the ruble-dollar exchange rate five years ahead at a reasonable cost. The next time, we won't allow developers to take such large risks - it was too costly for everyone."
Do you believe that Fishman will return to Eastern Europe one day?
"I won't talk specifically about him, because the share of him and his family in the company has shrunk, but Mirland Development Corporation plc (AIM:MLD; TASE: MRLD.B1) - certainly. The Mirland project in St. Petersburg is probably the biggest and most successful in the city. We're selling 50 apartments a month, in other words, more than one a day. The company has a reliable foothold in Russia, but a full comeback will take more time."
Who are the company owners?
"The bondholders made a debt arrangement, and took over the ownership of the company. I was chairman, and the only independent director before that, and I left and joined Credit Suisse."
Published by Globes [online], Israel Business News - www.globes-online.com - on July 4, 2017
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