Will the U.S. Embassy's move to Jerusalem affect the real estate market?

Savvy investors have already started buying small apartments that are suitable for singles or couples and have begun renovating them in preparation for the demand.

By ALYSSA FRIEDLAND
September 23, 2018 09:30
3 minute read.
Will the U.S. Embassy's move to Jerusalem affect the real estate market?

A worker hangs a road sign directing to the US embassy, in the area of the US consulate in Jerusalem, May 7, 2018. . (photo credit: REUTERS/Ronen Zvulun)

 
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The recent move of the US Embassy to Jerusalem made waves throughout the political sphere, but what will the ramifications be? How will the move of the US Embassy and many others that will follow affect housing and rental prices in Jerusalem? Firstly, the 500 or more employees that will require housing over the next three years will definitely create a demand for high-end rentals in the areas surrounding the US Embassy, such as Baka, Arnona and Armon Hanatziv. Employees will need furnished properties and will have a high budget to enable them to rent luxuriously appointed premises. Savvy investors have already started buying small apartments that are suitable for singles or couples and have begun renovating them in preparation for the demand, wanting to cash in on high return on investments (ROI). Here are some examples:

Armon Hanatziv:  Three-room apartments selling for NIS 1,350,000 to NIS 1,380,000 can be renovated and furnished for approximately NIS 200,000. Instead of renting to an average Israeli family for NIS 4,000 per month, investors can receive as much as NIS 7,000 when renting to diplomats or embassy employees. That’s a 5.4% return instead of a 3.4% ROI.

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Arnona: Four-room apartments (with elevators and parking spaces) sell for NIS 2,400,000 and can rent for as much as NIS 8,500 to NIS 10,000 a month if furnished nicely. These properties are within walking distance of the embassy. These properties are already in good condition and only need to be furnished for about NIS 80,000. So a total of NIS 2,480,000 yields an ROI of 4.2% to 4.8% instead of 3.2%

Baka:
The ROI will be slightly lower because purchase prices are still very expensive. But the desire of embassy employees to rent in Baka and the German Colony will still be high.

Rehavia/Talbeih:
neighborhoods will be desirable areas for theses high- end renters. However, they are not as attractive for investors (as purchases) due to the high property costs, creating a relatively lower ROI. People who own properties in Rehavia/Talbieh, especially ones on church land which cannot be sold due to the current turmoil over the church land issue, will benefit from the needs of the embassy personnel. For a relatively small cost of furnishing and renovating, they will be able to rent out their property and receive high rental income.

What will all this do to the cost of properties overall in the Jerusalem market? I don’t see a huge change, as the embassy employees won’t be purchasing but renting. However, what will increase are the sale prices of smaller apartments, since investors will still be looking to purchase (in order to rent them out), and demand will remain high.

Another phenomenon that our RE/ MAX Vision office has been seeing in the past 12 months is an influx of inventors who have benefited from the hi-tech exits, such as Mobileye, Argus Cyber Security, Gigya, NeurDerm, Valtech, R2NET, Skycure and Fireglass. The former CEOs and employees of these companies are looking for profitable ways to invest the large sums that they have been paid. They are turning to real estate as a safe and long-term investment option, and we have helped many of them find secure and profitable apartments that can easily be rented out to the embassy population in all areas of Jerusalem. The appreciation potential in these areas is also a key factor for these savvy investors, so they prefer buying in the peripheral neighborhoods, where prices are relatively low but have tremendous appreciation potential in the future.

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For more than 20 years, I have seen the real estate market fluctuate in Jerusalem for many reasons. Rental prices skyrocketed when the mass wave of Russian immigrants came to Israel in the 1990s. Sale prices took a nosedive during 2000 -- 2002 when the second intifada and the bus bombings began. The Jerusalem real estate market responds to extremes and not to daily events, unless they are momentous ones. The housing shortage and increase in the Jerusalem population over the last 10 years is cause for concern, and sale prices have risen accordingly.

Waiting for the market to take a downturn in Jerusalem is like waiting for technology to slow down. You can’t stop progress, and you can’t stop the growth and increasing desirability of the City of Gold!

The writer is the broker/owner of RE/MAX Vision, Jerusalem.

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