"A large number of the Sale Law's guarantees are worthless," Professor Miguel Deutch, an expert on property law at Tel Aviv University, said last week, speaking at a real estate conference in Tel Aviv under the auspices of Netanya College and Ma'ariv Conventions.
(Housing shown is unrelated to article)
Photo: Ariel Jerozolimski
Prof. Deutch pointed to the provisions of the law, according to which a contractor must provide an apartment buyer with a bank guarantee, and not an automatic bank guarantee, as is accepted practice in the business world. The difference between the two is that someone possessing an automatic guarantee can present it at the bank, without offering explanations, and the bank will pay him the money after seven days. However, a regular bank guarantee, like the one generally given by contractors, may be exercised only after the apartment buyer proves that he did not receive the apartment and that the contractor became entangled in difficulties. To do so, he must see to the issuing of a permanent liquidation order against the contractor's company, a complex and expensive process. Prof. Deutch argued that some contractors exploit this wording to their advantage.
Prof. Deutch added that the bank requires that the buyer transfer to it his rights to the apartment, as a condition for paying the guarantee. The result is that the buyer receives his money after he has incurred many expenses, but does get the apartment he bought. Furthermore, it is unclear what the buyer's situation is, for example, if he received the apartment and found that its specification does not match what is stated in the contract. In such a case, could he exercise the guarantee?
Prof. Deutch read the conference participants Paragraph 3(b) of the Sale Law, which deals with the question of who pays the bank guarantee fee - the contractor or the buyer. He says it is a paragraph whose meaning a reader finds impossible to understand.
Foreign demand for upscale apartments
Uzi Levi, who heads Bank Leumi's Construction and Real Estate Division, said at the conference that his bank forecasts that brisk demand for apartments in the center of the country will continue in 2007.
There are four events, he said, that could bring an end to the high times in the market for apartments: Security or political instability; unstable economic policy; the collapse of the secondary mortgage market in the US; or a crisis in share markets in the emerging markets.
Levi revealed that Bank Leumi is poised to begin accompanying Israeli developers' projects, and perhaps even those in Romania. He said that is one of the reasons for the recent transaction in which Leumi acquired control of a Romanian bank. He also noted that the Israeli-Romanian bank is currently getting organized to provide financial accompaniment to real estate, and that Israeli development abroad has recently expanded to that country, as well as to Bulgaria, Russia and India. Levi added that Bank Leumi would continue in the coming year to accompany real estate projects in Israel, as well, but would give preference to closed accompaniment of projects in areas of demand, as well as to projects in the office sphere, on the condition that they are leased to tenants with a high level of reliability, and at reasonable rents.
According to Levi, foreign investors are currently the main factor in the high demand for upscale apartments and for the rise in their price. According to the bank's figures, last November foreign investors bought prestige apartments in Israel for $170 million. That compares with $20m. in January 2001 and about $60m. in August 2005. Foreign investors are purchasing apartments mainly in Tel Aviv, Jerusalem and Ashdod. This has created a precedent, whereby the price of a high-end apartment in Tel Aviv or Jerusalem can fetch up to $10,000 per sq.m.
In his remarks, Levi emphasized that in contrast to the growth in cities in central Israel, towns elsewhere in the country are still experiencing a slump, where construction and sale of new apartments has practically stopped. As an example, he noted the Har Yona area in Upper Nazareth, where during the great period of immigration in the 1990s thousands of apartments were built, and where today construction has been virtually halted.
"From the standpoint of the apartment market, there are two countries here!" Levi said.
Levi also spoke about the groups of investors in commercial properties that are competing with each other to buy the centers, a previously unknown phenomenon.
"The recovery seen over the past year in the property yield market is one the great economic stories of 2006," Levi says. "Within a year and a half, the office and commercial center market went from a low to a high. Supply is decreasing, rents are rising, and many transactions have taken place, both in properties and in acquiring real estate companies. The rise in prices led to a fall in return, and there is a new phenomenon of transferring most of the commercial centers to ownership by several groups."
In contrast to the high levels in the asset yielding market, Bank Leumi is warning of the atrophying of the PFI transactions market, in which a developer invests in a project at his own expense and leases it to the state for a long period. According to Levy, the tender for Highway 531, which is soon to be issued, is the last project of this type; there are no others on the horizon.
Rising rental fees
Contrary to Levi, the chairman of the Real Estate Appraisers Association in Israel, Dan Wernick, does not foresee great things for the high-end apartment market.
"The upscale apartment market has run its course, and it will not sustain the peak prices we are seeing today," Wernick said at he conference, adding that he does not see apartment prices reaching $10,000 per sq.m.
Demand for prestige apartments stems from two main source: Israelis' profits from the stock market and Israelis returning from abroad who seek to buy an apartment in Tel Aviv, he said, adding that the price of a three-room apartment in a non-upscale area of Tel Aviv currently fetches up to $350,000.
