Israel’s office market provides opportunities for small investors

With house prices in Israel rising rapidly, while the annual return for renting an apartment in an area of ​​high demand is less than 3%, “Globes” is investigating whether there are more attractive alternatives to real estate investments in office properties.

High returns but not always easy to rent out

During the Covid Pandemic, Israel’s high-rise office towers were empty. Although many employees now engage in hybrid work – partly from home and partly in the office – office rent in demand areas is increasing.

Advisers and Realtors of Commercial Real Estate Agents, Avison Young Israel, co-CEO Guy Amosi said: “At the end of 2021, owners of space in one of the class AAA office towers at Tel Aviv’s Derekh Menachem Begin decided it was time to realize The lease, which had been signed during the pandemic, was relatively low at NIS 120 per square meter per month with three years left on the first option agreement, we started by asking for a sale price of NIS 25,000 per square meter, return of 5.76%, and at each meeting with a potential buyer, bids increased by about NIS 1,000 per square meter. At NIS 29,000 per square meter (4.96% return), the owner decided not to sell. “

According to Amosi, rental prices in Tel Aviv’s central business district – between Yitzhak Sadeh Street and the Ramat Gan Diamond Exchange – have risen dramatically, so anyone who has bought high-tech offices and wants to rent them out can make ‘extraordinary’ returns. But he added: “It is difficult to talk today about a representative rental price in the central business district, or a representative sales price or consequently representative returns. There have been sales agreements in class AAA buildings at NIS 35,000 per square meter and outside. Of the central business district in class B and C buildings even for 30,000 NIS per square meter, with expectations of one day converting them into residential properties. “

Commercial real estate agent Yoram Kaner said: ‘In central Tel Aviv, office space is rented for 180 NIS and even 200 NIS per. square meters, and in Ramat Hahayal it is possible to find a lot of empty offices for 60 NIS, which is difficult to lease. “

The trend of small investors buying investment offices has been around for some years, even before Covid, said Anglo-Saxon National Commercial Real Estate Division Director Oren Glazer. He explained that this trend was a result of rising house prices and taxation, which discouraged investors.

He said: “Investors who have an equity of NIS 500,000 have a hard time buying an apartment, so they turn to the alternative income-producing real estate market. It started with the office market, and today developers produce products tailored for small investors. , as a room in and office building.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 investment segment.

“Today, any investor who wants to enter the market can invest in the commercial market, but that needs to be examined. The return on commercial real estate is three times higher than the return on apartments, and there are also tax breaks – recognition of expenses and financing deductions.”

Amosi mentions many benefits of leasing offices. “In leases, your initial commitment is low. Your first money is a guarantee worth several months’ rent. In addition, the rent is recognized as a tax expense and there is flexibility. The contract is for several years and when you want to go. The maintenance is also easy because the owner of the property is responsible for maintaining the building and the tenant only has to maintain the office. “

Glazer added, however, that a commercial property requires ongoing maintenance, and unlike an apartment, the disadvantage of this investment is contained in the maintenance. “As long as the unit is rented out, it’s fine, but when a commercial property is empty it’s expensive. There are high municipal taxes and administration fees that have to be paid and are the responsibility of the owner of the property.”

The time an office stays on the shelf must also be considered. It is easier to rent an apartment while an office can be left empty for a long time unless it is in an area of ​​high demand. “In the central business district, the amount of time an office remains on the shelf is zero. The number of vacant offices in Tel Aviv is 2% -3%, and in areas of high demand there are no vacancies. But in the rest of the country, by contrast, it can reach 20% and this reflects the value of the investment. “

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

Amosi stressed that outside the central business district, it is worth investing in an office, not for the returns from renting. “One of my clients consulted with me whether he 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 advised him to “that only if he thought that one day the building would be converted into apartments, then he should buy, but that if the building always remains for offices, then in my opinion there was no economic logic in buying it.”

Published by Globes, Israel business news – – on April 24, 2022.

© Copyright by Globes Publisher Itonut (1983) Ltd., 2022.

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