Israel’s housing market is committing suicide. This is the basic message of outgoing First American-Israel Real Estate (FAIRE) Fund CEO Avi Tenne, just before he throws up his hands and joins the Israeli developers building overseas. After five years as CEO, and two years before the fund is due to expire, it was clear to him that he could not invest in new long-term deals, which persuaded him to hand over the keys to his successor, Shay Braverman.
“I realized that the low supply of available projects in Israel and the growing competition among developers made it pointless to make deals now,” Tenne told “Globes”. “A look at the high land prices and construction costs versus the low sale price in the hundreds of deals I’ve been exposed to shows that the bottom line is either a loss or just to break even, even on paper. When I lost deals to large and reputable companies, I wondered how they could make deals at these prices. Later, I realized that they were intended solely for their arsenal or portfolio for an offering of one kind or another. It turns out that the companies don’t care if the project will make a profit or a loss; the main thing is to come to an offering with an impressive property portfolio.”
Tenne added, “It’s clear that this is a honey trap, and that Heftsiba is only the first sign. There are quite a few companies that made economically unviable deals, usually with other people’s money. They’ll have to repay the bonds or explain to the shareholders what happened to the money. Competition has driven everyone to make deals fast at unviable prices, and when you buy at any price, you ultimately pay the price.”
“Globes”: These companies saw prices in high-demand areas constantly rising in the past two years, so almost any price was worthwhile.
Tenne: “You’re not immune forever. In view of the dramatic rise in inputs, in bureaucracy, safety, standards, tenants’ claims, and a thousand and one other things, profit margins are very small. If you don’t get a building permit, and it drags on for another year, or if the shekel-dollar exchange rate falls from NIS 4.60 to NIS 4, things which have happened, you’ll lose a lot of the profit you thought you’d make. In my opinion, we’ll see a great many developers go bankrupt. You see this in the kind of deals in the market and in the distress among suppliers and contractors.
“Here is an example. A year ago, I bought a lot zoned for 86 apartments in Hod Hasharon. When the deal was closed, I opened negotiations with the adjacent rights holders for a combination deal. In view of the inherent advantages in building together, we were prepared to offer a combination proportion that would reflect a reasonable economic reality, which already included our advantages as a developer building a project next door. After negotiations and agreements, including the exchange of a draft contract, I was hit with an ultimatum for a new contract because of a new offer they had received, which in my view, despite the adjacent project, would incur a loss of $500,000. The company making the offer was Heftsiba, through its chairman and CEO, Boaz Yona.
“This was not an isolated incident in the industry. We encounter similar things with almost every deal we examine.”
As a result of the madness that Tenne says has taken hold in land prices in Israel, he decided that his next job would be to do what many of his peers have already done - work in real estate in Romania. The partnership that he is organizing will also redevelop land in Israel.
Isn't it risky working overseas?
“We’re seeing Israeli developers running amok there, too. We like to brag about our successes and keep silent about our failures, but we’re seeing Israeli Hefstibas overseas as well. The fact is that until now we’ve seen only paper profits from speculative deals overseas, and very few developments paid for, built, and sold in full. Unquestionably, the difference in mentality and policy is mean you can fall harder there than in Israel.”
Published by Globes [online], Israel business news - www.globes.co.il - on August 27, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007