Neighborhood Watch: Precious Capital

Israel different from most Western countries in that there is no long-term residential rental market.

A savy investor can earn solid returns (photo credit: Adi Benzaquen)
A savy investor can earn solid returns
(photo credit: Adi Benzaquen)
Israel is different from most Western countries in that there is no long-term residential rental market. In most countries, entrepreneurs build apartment buildings for rental purposes, and tenants can live in them for many years.
There is a vibrant rental real-estate market here, but it is a short-term market. Entrepreneurs build apartments for commercial, office and industrial rental, but not residential.
There are both practical and psychological reasons for this situation.
When new immigrants with capital came to Israel from Eastern and Central Europe, they invested in bricks and mortar, as they had in their countries of origin. They built apartment buildings and rented out the apartments.
In Europe, this was considered a safe, solid investment, generally yielding higher returns than a bank deposit.
But this investment principle was upended in 1940.
That year, the British Parliament passed the Residential Tenancies Act, which froze rents. This was the beginning of the second year of World War II; bombs were raining on London, and the government was rightfully worried that the diminution of housing stocks would diminish supply and push up rentals.
All parts of the British Empire, including Mandatory Palestine, adopted this parliamentary act, and rental prices froze.
The act had a ruinous effect on landlords in Israel. The new state kept the act in place, but inflation in this country was high, and the real value of rentals dropped sharply. The government adjusted rentals, but they never returned to pre-1940 levels.
Being a landlord did not make economic sense any more. Consequently people with ready capital stopped investing in residential rental projects.
The other reason rental housing did not take off in this country was the makeup of the population. The vast majority consisted of new immigrants. Owning an apartment enhanced one’s sense of belonging.
CURRENTLY THE residential rental real estate market is on the supply side – individuals who own an apartment and for one reason or other are not using it, or small investors who have bought a single apartment as a shortterm investment.
These “landowners” rent these apartments on an annual basis. The contract can be renewed, but there is no security of tenure. The owner can decide from one day to the next to sell, and the tenant has to look for alternative accommodation.
The tenants are mostly singles who have flown the parental nest, young couples renting before they buy, and older people who may not have the money to buy.
The rental market in Jerusalem suffers from all the ailments of the national market, but the capital has certain special characteristics.
As Elly Kenner, head of the rental department in the Anglo-Saxon real-estate brokerage in Jerusalem, explains, “Jerusalem is a university city, and consequently it is influenced by student demand during the months of July through October, with an emphasis on the months of August and September.”
Besides this, says Kenner, “Jerusalem, being Jerusalem, is also much in demand by overseas residents – [by] news media from TV, radio and print, by executives of religious organizations and by Jews from the Diaspora.”
For all these reasons, the Jerusalem rental market is strong and active. The rental season starts in May, with families wanting short-term rentals for the summer, and it continues with demand from the student body until the start of the academic year in the beginning of October.
Many families in the capital live in rented apartments, though they struggle to keep up with rising rental prices.
In 2009, prices shot up compared to previous years, and they have continued to rise through 2011.
The average rent for a three-room apartment in the city in 2009 was NIS 3,000. In today’s market, the same threeroom apartment can cost the renter approximately NIS 3,800 – a rise of over 25 percent.
Without exception, the entire country has felt the upsurge in the rental market. The price hike coincided with the upsurge in the prices of properties for sale. This change has negatively impacted the number of potential buyers who can actually afford to buy a home in Israel, and consequently demand for rentals has risen.
Rental prices in Jerusalem can vary from NIS 3,500 to NIS 3,800 for a three-room apartment in the peripheral neighborhoods like French Hill, Pisgat Ze’ev, Armon Hanatziv and Gilo, and up to NIS 4,500 to NIS 6,000 for more central areas such as Rehavia, Baka and the German Colony.
For young couples and new immigrants, the cost of buying a home in Jerusalem is prohibitive, so most start out by renting apartments. This creates more demand, which, when coupled with an inadequate supply of properties, allows landlords to demand higher prices when renting out their properties. Many Jerusalem homeowners who want to sell their properties have resorted to renting them out until they are able to get the high sales prices they are asking for.
Short-term rentals are also in high demand in Jerusalem as a result of the large number of tourists in the city. Many tourists today prefer to stay in furnished apartments rather than hotels. A small three-room (twobedroom), furnished rental in the heart of Jerusalem costs approximately $800 (NIS 3,000) a week, which is much less than the cost of a standard hotel room in the city.
And this is one of the reasons investors are still finding Jerusalem real estate an attractive investment opportunity.
Property and rental management companies are able to maintain a 70% to 85% occupancy rate in most of these properties. While purchase prices have remained relatively high in today’s market, a savvy investor can still earn a 6% to 10% return by renting out short-term.
Capital appreciation over the next three to five years could yield the investor at least another 10% to 15%.
Another key component in the demand for rental housing is the religious community. Since religious couples have a tradition of marrying young, they are unable to afford the purchase of a starter home. Although mortgage rates are very attractive today, first-time buyers still need to provide at least 30% of the capital for a purchase, and this is beyond the means of many of them. As a result, many couples decide to rent for a few years and wait to see how their finances and/or market conditions improve.