Who needs to buy an investment property when there's real estate on the stock exchange? And who needs bank credit, when stock exchange investors are so generous towards real estate companies?
In the first half of 2017, the Tel Aviv Stock Exchange Real Estate Index gave the highest return among the local stock indices. It climbed 15% (after rising 17% in 2016), which compares with a 2% decline in the Tel Aviv 35 Index (which was mainly due to weakness in the pharmaceuticals sector) and a rise of 14% in the Tel Aviv 90 Index.
Thanks to the positive trend in stocks, the real estate debt market is also flourishing. In a study carried out for "Globes", S&P Maalot finds that the market value of the bonds issued by real estate companies on the Tel Aviv Stock Exchange represents about one third of the total marketable bond market. "This compares with a relatively low proportion of this sector on world markets," S&P Maalot points out.
According to S&P Maalot's figures, in the first half of 2017, offerings by real estate companies accounted for half the total of offerings on the Tel Aviv Stock Exchange. This compares with 34% in 2016. Real estate companies issued bonds in the first half of 2017 to the tune of NIS 18 billion, which compares with NIS 21 billion in all of 2016, which itself was a peak year for bond offerings in the real estate sector since the crisis of 2008.
More than 60 real estate companies made offerings in the first half of 2017, which compares with a total of 70 for all of 2016. The average offering was NIS 300 million, although the five largest accounted for 30% of the total. 95% of the offerings by real estate companies in the first half of 2017 were rated, a similar proportion to that seen in 2016, and slightly lower than in 2015.
Much of the growth in offerings by real estate companies can of course be explained by lively activity on the part of North American companies. Since the beginning of 2017, they have held fourteen offerings, accounting for close to one third of the total value of offerings in the real estate sector, double the proportion for 2016.
S&P Maalot CEO Ronit Harel Ben-Zeev says, "The negative gap in the risk-free interest rate between Israel and the US will continued to encourage real estate companies from the US to raise capital on the Israeli market in the coming quarters, and so low credit-quality companies could be attracted to come here.
"In the short to medium term, US interest rates will continue to be low in comparison with the years before the economic crisis," she adds. "A moderate rise in interest rates in the US could lead to some rise in the financing costs of the US real estate companies rated in Israel. If, however, US interest rates rise more sharply than expected, while net operating income from existing assets rises only moderately, we could see a significant slowing in the companies' activity and growth."
S&P Maalot notes that in the first half of 2017 the level of collateral-backed offerings among real estate companies was stable, accounting for about half the offerings of new bond series, as in 2016. The firm stresses, however, that only about 20% of the new series were issued with what they describe as "class A" collateral, compared with 26% in 2016. About half the new series offering were made with a "negative lien", which prevents the companies mortgaging their assets to others, but does not provide a secure source for the bondholders.
"A substantial proportion of the offerings were made in order to replace expensive debt with cheap debt, and most of the companies maintain a suitable margin in relation to the rating targets at all rating levels, so that even in a higher interest rate or inflation environment, most of them will meet the target ratios. In the past year we have not seen a rise in the leverage level of the income-producing real estate companies, that is to say, there have not been opportunistic investments or aggressive dividend distributions," Ben-Zeev says.
Published by Globes [online], Israel business news - www.globes-online.com - on July 25, 2017
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