For more than a decade, the State of Israel has been declaring that it is promoting the long-term rental market. The intention is right, the need is clear, and defining it as a national mission is justified. But on the ground, the market is barely taking off. The gap between declarations and economic reality is not accidental, and it is not the result of a lack of demand. On the contrary. This is a market with strong demand, but one that repeatedly hits the same stumbling block: Financing.
This week, the company “Apartment for Rent” together with the Israel Land Authority announced the success of a tender for long-term rentals in Yavne. The tender includes 200 housing units, of which 142 are designated for long-term rental. The winner, out of three bidders, was Y.H. Dimri, which offered 67 million NIS including VAT and development costs.
“Developers who want to build rental-only projects find themselves between a rock and a hard place,” says Uri Paz, owner and CEO of Michlol Financing. “On the one hand, the state markets land and promotes programs like ‘Apartment for Rent.’ On the other hand, the financial model according to which these projects are supposed to operate simply does not hold water. The result is that approved projects do not get off the ground, land remains undeveloped, and the national goal stays on paper.”
The Finance Ministry’s Proposal Exposed an Uncomfortable Truth
Recently, the issue returned to center stage in light of the draft Arrangements Law, which suggested examining a reduction in the percentage of long-term rental apartments required in new residential complexes. At first glance, it seems like a move that could harm supply. But in practice, the proposal reflects a simple and uncomfortable truth: Under the current financing structure, most rental projects are not economically viable.
“Rental yields in Israel hover around three percent. During the stabilization period (the stage after construction is completed), such a yield is not enough to cover principal and interest payments on bank financing. The classic banking models, which work well for projects built for sale or for income-producing commercial real estate, are simply not suited to long-term residential rentals,” Paz adds.
The banks’ concern is clear: Low yields make repayments difficult. As a result, banks reduce financing and demand unusually high equity from developers, sometimes in the range of 50–60 percent. For most developers, this is an impossible requirement. Thus a closed loop is created: There is no financing for construction because there is no security during stabilization, and there is no stabilization because there is no financing for construction.
Good Intentions Aren’t Enough
The outcome of the past decade is clear: Despite the marketing of tens of thousands of units designated for rental, in practice only a few thousand have actually been built. Projects stalled, land was never developed, and the state failed to create a truly significant rental market. “In my view, this is not merely a planning or regulatory problem,” explains Paz. “It is a fundamental financing problem. And as long as we do not solve it, even the best policy will remain only an intention.”
Paz continues: “As someone operating at the heart of the real-estate financing market, we realized that the laws of economics cannot be changed - but solutions can be adapted to them. The solution is not to increase subsidies or temporary benefits, but to create a complementary financing layer - one that bridges between the banks’ equity requirements and the repayment constraints during the stabilization period. From this understanding, we established a dedicated fund for long-term rental housing - the first of its kind in Israel.”
The fund, totaling roughly 400 million NIS, was established by Michlol Financing in partnership with CPA Nodari Zizov, CPA Gil Tzik, and attorney Ariel Shimkewitz, who also manage it in practice. The investors in the fund, in equal shares, are Clal Insurance and Finance and Michlol Financing.
According to Paz, “The fund was created precisely for the failure point that prevents the market from advancing: The gap between the banks’ high equity requirements and the low yields that characterize Israel’s rental market. It enables developers to operate with equity levels similar to those used in classic development, thereby bringing back to the market projects that stalled only because suitable financing was unavailable.”
The Key to a Long-Term Rental Market: Enabling Financing
“Long-term rental housing is a national interest. It is meant to provide a solution for broad segments of Israeli society that cannot afford to buy a home,” says Paz. “If the state wants a market of tens of thousands of rental units, it must ensure a stable and sustainable financial infrastructure. The model that works abroad can and should work in Israel as well. The key to a real rental market is not just regulation - it is enabling financing. The new fund is an example of a different kind of partnership: one that connects developers, the banking system, and institutional bodies around a shared interest - both economic and social.”
Paz concludes: “If we truly want the rental market in Israel to develop, we will need not only incentives and declarations, but financing mechanisms that understand the economics of the sector - and do not try to force on it frameworks that simply do not fit.”