Given the persistence of negligible interest rates and a fall in the local growth rate, combined with an increase in the global growth rate in recent months, economists at rating agency S&P Maalot have published their twice-yearly review for the main sectors represented by rated companies on the Tel Aviv Stock Exchange (TASE), including summaries for January-June 2017 and forecasts for the rest of the year.
Among other things, forecasts by S&P Maalot indicate that the rise in housing prices will continue for the coming year, although in the medium term "the government's plans for easing the housing shortage, among other things by taxing investors, are likely to moderate the pace of price rises to some extent."
In banking, "The efforts at streamlining in the banks, clearly reflected in a reduction in the number of branches and employees, are expected to keep costs in check and compensate for a lower growth rate and a moderate increase in the provision for credit losses," S&P Maalot writes.
Income-producing real estate: A slower increase in rents
S&P Maalot states, "After years of continual rises, we are starting to see signs of moderation in rent, and even a decrease for some properties. On the other hand, occupancy rates have been maintained, proceeds in leading shopping centers have risen, and office construction is on the rise, accompanied by good advance leasing rates."
In the shopping centers sector, "We continue to see an increase in net operating income (NOI) of the rated companies, combined with a slower increase in rents than in previous years. The increase in rents in the sector averaged 0.5-1%. Older shopping centers, and those located in areas with strong competition, such as Haifa and its suburbs, are experiencing steep falls of 2-9% in rents."
S&P Maalot explains that the apparent contradiction between the rise in NOI and the slower rise in rents is possibly attributable to higher management fees, at the expense of rents, in some properties. This is only a partial explanation, however, since overhead costs also rose, and the allocation of space to movie houses and international chains, which pay lower rents, increased.
S&P Maalot believes that in the short term, we will continue to see an effect of a surplus in commercial space on rents in the sector. In the medium and long term, they believe that ecommerce will transform the sector, and expect more and more real estate companies to increase their investments in the development of ecommerce platforms in the coming years, with greater cooperation with retailers in the sector.
Similar trends are visible in the offices sector. In the short and medium term, "with their entry into marketing of additional office space, we will start seeing a substantial fall in occupancy rates for old office space and office space located outside of business areas, combined with a move by renters to the newer high-rises. As a result, rents on poorer properties will begin falling substantially, but it is possible that the strong demand emerging for modern and high-quality properties will enable the rated real estate companies to at least maintain their total amount of rent," S&P Maalot says.
Housing market: Price increases will continue, but at a slower pace
Commenting on the housing market, Maalot says that the low interest rate environment is meanwhile enabling the leading development companies to maintain the level of prices for their stock of housing. The first quarter reports of a large proportion of the leading development companies show no change in the average price and a decline in the volume of sales. At the same time, if the stagnation in sales persists, it can be expected to generate downward pressure on prices, including among the leading companies.
From a rating perspective, the development companies' profit margins are likely to slide somewhat in the next two or three years, given the fact that most of the land is being marketed under the buyer fixed price plan, in which the profit margin is relatively low. On the other hand, "Although demand for apartments in the plan is lively and selling rates are expected to be high, we still believe that sector risk has increased somewhat, given the stagnation in sales in recent months. We predict advantages for development companies with construction arms, and give weight to synergy in assessing the business profile," S&P Maalot writes.
Looking ahead, the S&P Maalot economists believe that the government programs for relieving the shortage, among other things by raising taxes on investors, are likely to moderate somewhat the rise in prices in the medium term. "A significant and sustained increase in the volume of marketing of apartments in the buyer fixed price framework will put negative pressure on housing prices. At the same time, due to the lengthy planning and licensing processes and the shortage of construction workers, which prolongs the time needed for construction, combined with the support provided for demand by low interest rates, we predict that prices will continue rising in the coming year, albeit at a lower rate than in past years," S&P Maalot concludes.
Published by Globes [online], Israel Business News - www.globes-online.com - on June 29, 2017
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