Beyond Emotion – The Financial Wisdom of Israeli Real Estate Investment.

Owning a stake in the land of Israel is something that has long appealed to Jewish people the world over. While emotional connection has fuelled a steady stream of buyers over the years, it is now clear that investing in Israeli real estate is also a smart move financially.

Current events in Israel have done nothing to quell the thirst for Israeli real estate from buyers around the world – if anything, they have fanned the flames. Consider this alongside the fact that Israel is among the fastest growing nations in the world with an unprecedented population growth of 2%, and you’ll have no difficulty understanding why demand for housing in Israel has been rising steeply with no signs of abating.

Consistently high levels of demand, coupled with difficulty keeping up the supply, is the magic combination that has kept the Israeli residential real estate market an exciting investment opportunity despite war, turmoil, and economic crises.
Whether you’re considering buying a family home in Israel or want to enter the market for investment purposes, this article will help you understand what makes the Israeli market a secure investment choice. It will share tips and advice to help you make the right decisions.

The Land Where Demand Consistently Outpaces Supply

Like the population itself, the Israeli housing market is somewhat unique. From having a surplus of 50,000 housing units in 1995, the market shifted to showing a deficit of 80,000 housing units in just ten years (2008). At the last count (in 2022), that deficit reached an alarming 160,000.

Those searching for reasons need look no further than the 2008 global financial crisis where financial uncertainties made developers cautious about initiating new projects and construction activity dropped. At the same time, Israel saw a dramatic rise in housing demand due to an exceptional population growth rate (compared to most Western countries) and a continuous influx of aliyah.
The two phenomena placed tremendous pressure on the housing market, which struggled to keep up with rapidly-growing demand.

Contrary to what many may think, demand for housing has continued to grow since October 7th. Driven by global anti-Semitism and a desire for security, there has been a growing interest in Israeli real estate from foreign buyers who see Israel as a haven and are keen to invest in its real estate market. This influx of foreign capital adds another layer of demand and drives up property prices.

“Over the last eight months, foreign buyers have made much quicker decisions to buy property in Israel. In the past people were thinking about it, they were planning to do it but over the last six to eight months people are actually making the decision and are purchasing properties here in Israel.” Julian Nathan, Managing Director Hold Sales & Marketing, Hold Real Estate

While igniting demand, the war in Israel has presented significant hurdles to the construction industry. The closing of borders has disrupted the reliance on Palestinian workers, creating a labor shortage. Embargoes on materials, particularly those from Turkey, have exacerbated the situation, slowing construction projects and increasing costs. Throw high interest rates into the mix, and the financing of real estate projects is further complicated.

The result? The number of completed housing units can’t exceed the population growth line.

While the persistent demand for housing keeps pushing prices upward, Israel is proving to be a resilient market. The fundamental demand-supply imbalance is overriding the temporary setbacks caused by political and economic fluctuations.

“There is no inventory and a huge demand and the prices have gone up so much they have doubled over 15 years. So the problem in Israel is that even now when the interest rate is not so low – it is around 4.5% – it is still tough to stop the increase in prices.”– Daniela Paz-Erez, CEO & Founder of Paz Group.

The Land of Plenty – Boosting Supply At The Right Price

Once you’ve made the decision to invest in Israeli real estate, you are still faced with the dual problems of lack of supply and high prices. The good news is that the Israeli government is implementing a wave of initiatives addressing housing supply and affordability.

“The government, the municipalities, the developers – the whole ecosystem of residential real estate in Israel is doing everything to supply the demand.”Daniela Paz-Erez, CEO & Founder of Paz Group

Here is an overview of these initiatives:

Land Rezoning – With 93% of land owned by the state, the government can control zoning regulations. In 2010, the government set a target to zone 60,000 units annually, which was later increased to 120,000 units per year – a goal they are reaching. Special committees, like the National Committee for Residential Zoning, have reduced zoning approval times from five years to about one year, significantly accelerating the availability of land for construction.

Pinuy Binuy/Urban Renewal – Urban renewal, or Pinuy Binuy, focuses on redeveloping old, unsafe buildings. Many Israeli cities have buildings from the 1950s and 1960s that need more modern safety standards. The government offers incentives such as tax discounts and additional building rights to developers for these projects. Currently, around 800,000 buildings are potential candidates for redevelopment, increasing housing supply and enhancing safety and quality.

Rezoning Military Bases—Rezoning military bases is another key strategy.

Many IDF bases, originally located in now-central urban areas, are being relocated to the South and North, opening prime land for residential development. Public-private partnerships facilitate construction on these sites, boosting the housing supply and local economies. Projects in cities like Be’er Sheva illustrate the potential of this initiative, attracting residents and businesses to newly developed areas.

Fixed Land Price Tenders – The government has introduced fixed land price tenders to combat rising housing prices. Developers compete by offering the lowest apartment prices on fixed-price land. This approach reduces land cost inflation and keeps housing prices within reach. It is particularly beneficial for young couples and new families.

Buyer’s Price Plan and Lottery – The Buyer’s Price Plan involves a tender process where the government sets a fixed land price, and developers bid to offer the lowest apartment prices. This plan has provided discounts on about 35,000 housing units. These discounted units are allocated through a lottery system, ensuring fair distribution. The lottery is highly popular among young couples, offering them a chance to purchase affordable homes.

Top Tips For Foreign Buyers Thinking About Investing in Israeli Real Estate.

So you’re considering investing? These tips will help you decide on the right opportunity.

Flexible Loan Arrangements
For foreign buyers balking at the prices, it’s worth noting that most Israeli banks have set regulations that allow up to 50% loan-to-value for property purchases for foreign buyers and up to 75% for Israeli citizens, ensuring that investors bring substantial equity into the market. Make sure you take advantage of this regulation designed to maintain market stability and create a secure environment for investment.

High Demand Over the Next 10-20 Years
For all the reasons discussed here, the demand for housing in Israel will remain robust over the next 10 to 20 years. Additionally, the combination of a growing population and several supply constraints ensures that the housing market will continue to be dynamic and active, providing numerous opportunities for investors.

“Regarding the demand for residential units in Israel, I cannot see a solution in the next 10 or 20 years. We don’t have another place for Israelis and Jews, and [our population] is growing 2% every year. We have the demand.”
Daniela Paz-Erez, CEO & Founder of Paz Group

Focus on Long-Term Capital Appreciation

Although the rental market is highly buoyant, due in part to the high percentage of Israeli families unable to purchase homes until later in life, investment Return on Rental (RoR) in Israel is relatively low – typically between 2.5% to 3.5%. However, investors are more interested in the strong potential for long-term capital appreciation in residential real estate, rather than on short-term yields. Investors are equally attracted by Israel’s robust population growth and supply constraints, which offer the promise of substantial value increase over time.

“Unlike the American Market, where there are higher yields. In the Israeli Market -It’s all about capital appreciation – getting on the property ladder at the right time, in the right location with the right plan to manage the investment in place,” Julian Nathan, Managing Director, Hold Real Estate.

Many Hold clients have been delighted with high investment returns, even in the short to medium term. With a dynamic portfolio that has included projects in Hod Hasharon, Jaffa, Netanya, Tel Aviv, Raanana, Modi’in, Jerusalem, and Haifa, many of Hold’s clients have invested in several projects across Israel.

 Customer Testimonial:
“Having Hold as my partner in Israel, overseeing and regularly updating the status of my property, helped me relax while I was thousands of miles away from my investment. I would highly recommend them to any person looking for a team to trust and get things done on the ground” MW (South Africa)

Location, Location, Location!
Significant investment potential exists in areas undergoing urban renewal near new and upcoming transportation hubs. The government’s strategic initiative to rezone military bases for residential development is unlocking substantial land for housing projects. Additionally, the expansion of transportation infrastructure, including projects like the Tel Aviv Light Rail and the extension of Highway 6, will enhance connectivity and accessibility, making these areas attractive for both residents and investors.
These developments promise to open up new regions for investment, providing a range of opportunities for those looking to capitalize on future growth. The team at Hold is constantly finding and vetting new opportunities for investors abroad.

“ People are not necessarily buying where they intend to live, which is the way to go if you don’t have a finite plan for making Aliyah. Most people we deal with want to know they’ve got something in Israel as an investment and security for the future. Then they can sleep easier at night.”Ari Shapiro, CEO Hold Real Estate

Get on the Ladder
Investors should also take advantage of government programs aimed at redeveloping and modernizing housing, often referred to as “urban renewal.” These initiatives can provide opportunities to invest in new, high-quality properties with potential for significant appreciation. The government’s efforts to modernize old housing through redevelopment projects provide opportunities to invest in newer, more desirable properties that comply with contemporary safety standards.

 Find your People – Trusted Partnerships To Guide You On Your Journey.

Successful investment in Israeli real estate hinges on forming trusted partnerships and having a dedicated team to navigate the complexities of the market. Working with reliable partners can ensure a smooth purchase process. These partnerships provide valuable insights, local knowledge, and professional management, crucial for mitigating risks and maximizing returns.

“The most important thing in business is the people you’re dealing with. You must know and trust the people – it’s a long process. It’s not a simple commodity you buy and forget about afterward, so it’s all about the team, the people, and the after-service.”Ari Shapiro, CEO Hold Real Estate

The Future Is Bright…
Despite the current challenges, the government’s proactive measures and the country’s continuous growth suggest substantial investment opportunities in the Israeli residential market.

“If we look at Israel today compared to 1948, we can see how much we’ve grown. Our population has increased tenfold to 9 million people, and we have a high birth rate.Daniela Paz-Erez, CEO & Founder of Paz Group.

Hold Real Estate: Your Partner In Residential Real Estate Investment

Explore the unique opportunities within the Israeli residential housing market with Hold Real Estate. With a comprehensive understanding of market dynamics and a strategic investment approach, for close to 30 years, Hold Real Estate has offered consultations and detailed market analysis to guide investors through the process.

Why Choose Hold Real Estate?

Reputation—With over 25 years of experience assisting foreign buyers invest in Israel, we understand the industry’s pain points.
Full-Service Investment: We handle everything from finding pre-sale development projects to providing Commercial, Legal, and operational services to complete property management.
Diverse Projects: Engage in urban renewal projects, residential developments, and the burgeoning student accommodation sector.
Seamless Experience: We focus on providing a comprehensive, professional, and seamless investment experience tailored to foreign investors.

Whether you are a first-time investor or looking to expand your portfolio, now is the perfect time to consider investing in Israel’s vibrant and resilient residential property market.

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**The contents of this article are designed to provide the reader with general information and not to serve as legal or professional advice for a particular transaction. Readers are advised to obtain advice from qualified professionals before entering any transaction.