The Israeli office market offers opportunities for small investors

With housing prices in Israel rising rapidly as annual returns from renting an apartment in a high-demand area fall below 3%, ‘Globes’ investigates whether there are more attractive alternatives to investing real estate in office real estate.

High returns but not always easy to rent

During the Covid pandemic, Israel’s office towers were empty. Even though many employees are now engaged in hybrid working – part home and part office – office rents in in-demand areas are on the rise.

Avison Young Israel Commercial Real Estate Advisors and Brokers, Co-CEO Guy Amosi, said: “In late 2021, owners of space in one of Derekh Menachem Begin’s AAA-class office towers in Tel Aviv decided it was time to make their investment. The rental agreement that was signed during the pandemic was relatively low at NIS 120 per square meter per month with three years remaining on the agreement on the first option. We started by asking for a sale price of 25,000 NIS per square meter, yields of 5.76%, and with each meeting with a potential buyer, the offers increased by around 1,000 NIS per square meter. At NIS 29,000 per square meter (4.96% yield), the owner decided not to sell.

According to Amosi, in Tel Aviv’s central business district – between Yitzhak Sadeh Street and the Ramat Gan Diamond Exchange – rental prices have risen dramatically, so anyone who has bought high-tech offices and wants to rent them can make ‘ Back. However, he added, “it is difficult to speak today of a representative rental price in the central business district, or of a representative sale price or, therefore, of representative yields. It There have been sales deals in class AAA buildings for NIS 35,000 per square meter and outside the central business district in class B and C buildings even for NIS 30,000 per square meter, with the hope to one day convert them into residential buildings.

Commercial real estate agent Yoram Kaner said: “In central Tel Aviv, offices are rented for NIS 180 and even NIS 200 per square meter and in Ramat Hahayal it is possible to find a lot of empty offices for NIS 60. that it is difficult to rent.”

The trend of retail investors buying office space to invest has been around for a few years, even before Covid, said Oren Glazer, director of the Anglo-Saxon National Commercial Property Division. He explained that this trend was the result of rising residential property prices and taxation, which discouraged investors.

He said: “Investors who have capital of NIS 500,000 find it difficult to buy an apartment, so they turn to the alternative income-generating real estate market. It started with the office market and today, developers are producing products suitable for small investors, such as a room in The idea behind this approach is mainly to attract investors from the private sector and to attract people who have not been part of this segment of investment.

“Today any investor willing to enter the market can invest in the commercial market but this needs to be investigated. Commercial property yields are three times higher than apartment yields and there are also tax breaks – acknowledging expenses and funding deductions.”

Amosi cites many advantages in office rental. “In leases, your initial commitment is low. Your first money is a guarantee that is worth several months’ rent. In addition, the rental expense is recognized as a tax charge and there is flexibility. The contract is for several years and when you can leave. Maintenance is also easy because the owner of the property is responsible for the maintenance of the building and the tenant only has to maintain the office.”

However, Glazer added that a commercial property requires ongoing maintenance and unlike an apartment, the downside of this investment is contained in the upkeep. “As long as the unit is rented it is fine, but when a commercial property is empty it is expensive. There are high municipal taxes and management fees that must be paid and are the responsibility of the property owner .”

The length of time a desk sits on the shelf should also be a consideration. It is easier to rent an apartment while an office can sit empty for a long time unless it is in a high demand area. “In the central business district, the time an office stays on the shelf is zero. The office vacancy rate in Tel Aviv is 2% to 3% and in high demand areas, there is no has no offices available. But in the rest of the country, on the other hand, it can reach 20% and this reflects the profitability of the investment.”

According to Kaner, “If you want to buy a property that has already been rented, it is possible that in the future the tenant will leave and you will have to find a replacement. But if you’re buying a property that’s empty or under development, you have to take into account that it will take time to rent it out and that you’re in competition with many other landlords.”

Amosi pointed out that outside of the central business district, it is worth investing in an office and not for rental income. “One of my clients asked me if they should buy an office in South Tel Aviv in a 25 year old building for NIS 30,000 per square meter. The decision to buy or not was based on several factors I told him that only if he believed that one day the building would be converted into apartments then he should buy but that if the building still remained for offices then in my opinion there was no financial logic to it. ‘to buy.”

Published by Globes, Israel business news – en.globes.co.il – on April 24, 2022.

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