Rush to real estate triggers risk warnings

It has become practically routine. Week after week, a new deal to invest in or acquire a residential real estate construction company is closed. From financial institutions to shopping malls and income-producing real estate companies, everyone wants a piece of the housing market.

Last week, More Investment House bought a 13% stake in veteran construction company Matzlawi for NIS 35 million. Al-Matzlawi, headed by Sami Al-Mutzlawi, is a long-established and experienced company, and is currently building more than 4,000 housing units. Incidentally, Moore resolved a long-standing dispute with one of the company’s investors.

However, More is not alone. Last Thursday, insurance company Magdal Insurance and Financial Holding (TASE: MGDL) and real estate development finance company Bareket Capital (TASE: BRKT) (founded by Gil Deutsch and Ronnie Biram and headed by Adi Gazit) entered into a financing agreement with a group of landowners who are building two residential towers (156 Apartment) in Bat Yam with an investment of 640 million shekels. Bareket and Migdal replace peer-to-peer lending company Tarya, lending the group NIS 340 million.

Meanwhile, two major players in the mall and income-generating real estate space, Azrieli Group (TASE: AZRG) and Melisron (TASE: MLSR), announced the acquisition of building contractors. The Azrieli Group, controlled by Danna Azrieli, announced last week that it would buy control of ZMH Hammerman (TASE: ZMH) for NIS 635 million. At the end of June this year, ZMH Hammerman had projects in the planning, development, construction and marketing stages totaling 4,780 residential units, of which 1,970 were for sale. In addition, it is building commercial spaces, and has urban renewal initiatives in the early planning stage.

The previous week, Melisron, controlled by the Ofer family, completed the acquisition of real estate developer Aviv Real Estate Development and Management from Aviv & Partners. 1963 Estate Group, owned by brother and sister Doron Aviv and Daphna Harlev. Aviv Real Estate Development and Management is another respected company, part of the Aviv Group founded by the late Moshe Aviv. Office giant Gav-Yam Lands Corp. announced (TASE: GVYM) also announced further expansion into housing construction, buying from its parent Property & Building Corp., building contractor Neve Gad, which is promoting the construction of thousands of them. Residential units all over Israel.

Clal Insurance Company was one of the first financial institutions to identify this trend. (TASE: CLIS), which invested approximately NIS 770 million last year in Africa Israel Residences (TASE: AFRE) and its urban renewal activity. In August last year, it also invested up to NIS 76 million (including an option) in the urban renewal company Aura (TASE: AURA), controlled by Yaakov Atrakshi, and invested in Kvotzat Akro (TASE: ACRO) rental projects, which Builds luxury housing in Tel Aviv. Furthermore, it entered into a partnership in a subsidiary of Israel Canada (TASE: ISCN) called ICR. Last week, it was reported that former senior Bank Hapoalim director Dalit Raviv had been appointed to head the ICR.

Yitzhak Tshuva has also invested in companies in this sector: NIS 55 million with David Zvida in Cielo Blu (TASE: CILO) (formerly Hanan Mor), with an option for further investment; And NIS 30 million in the Tel Aviv-based construction company Ybox. This is in addition to the acquisition of the agricultural company Mehadrin (TASE:MEDN), which owns huge reserves of land that Tshuva hopes will become housing projects in the future.

The relevant Bank of Israel

The timing of the rush into real estate can be considered a matter of concern. Last year, residential builders bombarded homebuyers with 20/80 offers, where the buyer pays 20% of the home’s value and the rest several years later when they pick it up. These offers have been a great success, generating a wave of sales since the beginning of the year. However, they have also turned on warning lights with regulators. The Bank of Israel is concerned about the high risks borne by contractors, and that in the not-too-distant future, when buyers will have to find 80%, in the form of a mortgage, they are vulnerable to encountering difficulties, thus in turn making it difficult for the contractor to complete the project.

Superintendent of Banks Daniil Hahiashvili held a meeting of heads of corporate credit departments of banks, which addressed, among other things, cumulative risks in the real estate sector. Globes learned from conversations with bankers that what was discussed at the meeting were these financing offers. The supervisor sent them away to do their homework, as each bank is required to check the relevant credit risks. At this time, no guidance is expected to establish a general provision, but the message was clear.

Organizers are trying to understand the extent to which these shows have become a real danger. After all, Bank of Israel interest rates are still high, and are not expected to fall anytime soon, despite interest rate cuts in the United States. In addition, there is a severe shortage of construction workers due to the war, and materials are becoming more expensive. All this lengthens the construction time and leads to a higher cost of apartments, which means that large mortgage loans will be needed in the future. However, 20/80 offers actually neutralize the correlation with the index, allowing buyers to lock in the price of the apartment, which is one of their main advantages.

A senior manager at a construction company familiar with the matter told Globes: “I don’t think that 20/80 sales schemes create additional risks. Therefore, people are buying some kind of options on the price of the apartment.” Fixed for three years (until handover). I estimate that the overall situation will improve in the next three years, meaning that wages will rise and economic conditions will improve. So anyone who buys a condo has jumped on the bandwagon. “

What if it doesn’t happen? “Demand for homes remains inelastic. There have always been marginal cases of people whose condition deteriorated after three years and they were unable to buy the apartment. They usually have a cancellation fee in the contract, and they will lose approximately 10% of the contract value.” The price of the apartment is of course a large and painful amount for them, but the contractor will be able to try to sell the apartment at a reduced price and will likely be snapped up.

Financial institutions view their investments in contractors very differently. They paint the opposite picture. They are interested in buying better quality construction companies, and generally take stakes in the most stable companies in the market, those whose financials are publicly available and which have good potential to raise debt on the stock exchange if the need arises.

Meanwhile, on the Tel Aviv Stock Exchange, the Tel Aviv Construction Index, which covers major contractors, rose 42% in the past year, making it one of the best-performing indices on the stock exchange. For comparison, the main Tel Aviv 35 index rose 29%. This is an indication that investors believe that major construction companies are on their way to recovery, despite difficult conditions in construction, high interest rates, and the economic situation in Israel amid a bitter and protracted war.

A special report by the rating company Medrog on the ability of listed companies that have raised debt warns of the risks facing the sector. “Rising house prices represent a continuing threat to demand and resilience in this sector. Continued high prices make it difficult to purchase an apartment, especially against the backdrop of fears of austerity measures and an economic slowdown due to the war.”

Madrouj also warns that the continuation of the war increases the risks of inflation, and in a negative scenario in which inflation rises further, “fear arises of higher interest rates, which would lead to a shock in the residential real estate sector.” On the other hand, Madrouj positively pointed to the stability of the banking system and its readiness to support the construction industry, as well as the relative stability in the housing sector.

Market pricing at the end of the war

Another motivation for these deals is that the market is starting to position itself for an end to the war. “The general assessment is that things will start to stabilize next year,” says Alon Sanofsky, head of Israeli equities at Migdal Group. “In terms of residential real estate companies, there is an expectation that people who are still sitting on the fence will get out and buy apartments. This is coupled with the hope that workers will come back and contractors who lack the workforce will be able to do so.” Keep building apartments, because in the end, if you sell apartments, you will have to build them, otherwise sales will be up in the air. But first and foremost, there is an expectation that house prices will not decline, and may even continue to rise.”

Published by Globes, Israel Business News – en.globes.co.il – on November 10, 2024.

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