The Israeli city of Tel Aviv is one of 12 cities that is likely to out-perform the prime world cities in terms of real estate value.
The prices in these 12 cities are much lower than those in the prime world cities. These are the words of Yolande Barnes, director of Savills World Research, in the Candy GPS Report. It’s a research conducted by Savills and Candy & Candy in partnership with Deutsche Asset & Wealth Management.
The Candy GPS Report talks about Tel Aviv as a city with positive prospects, stemming from a young and well-educated population.
It has a tech and research-based economy is situated at a coastal location and is assigned as a UNESCO world heritage site.
These are all factors that should contribute to making the city stand out as a rising second-tier world city, according to the report.
Explosive growth in Israel’s real estate market
Israel has seen explosive growth in terms of real estate prices for the past 8 years.
During this period, home prices have been increasing with a staggering 84 percent. In a world where profits in real estate investment are becoming harder to realize, Israel seems like a promising alternative.
Especially at a time when more and more investors are trying to look beyond the well-known prime world cities. There is, however, reason to act cautiously.
Another factor that’s contributed hugely to Israel’s real estate market growth, is the start-up culture.
In 2009, Israel was the only foreign country that had a total of 63 Israeli companies listed on NASDAQ.
Many of the world’s biggest companies, like Google and Facebook, for example, are interested in the developments here and trying to do business with successful start-up companies.
There is a strong correlation between the financial crisis in the western world and the increasing real estate prices in Israel.
As the economic crisis was hitting on one side of the world, Israel was undergoing the biggest real estate boom in the history of the country.
This effect can be explained by investors looking for new places to find economic success.
The money flowing into Israel due to real estate investments has gone up since the beginning of the crisis and hit an absolute high in the fourth quarter of 2013 of more than $7 billion.
This acute rise in demand for Israeli real estate is the reason that the prices have been going up the way they did.
Social justice protests
The rapidly increasing housing costs and living expenses led to mass protests in 2011.
These protests happened in many large Israeli cities and it led to the stabilization of property prices.
The Israeli government, however, didn’t do much to change the situation and the prices stayed on the same level.
In the end, people started buying again and the up-going trend in housing prices continued to go on.
The dreaded bubble effect
There is a lot of speculation about the Israeli economy and many people are of the opinion that it awaits the same fate as the US market after 2007.
Prices going up this fast is not natural and they will go down dramatically once the bubble bursts, according to these people.
It’s good to be careful about real estate investments but the comparison with the downfall of American’s economy is not entirely justified.
The crisis in the US was caused by high real estate prices which were unrealistic and didn’t reflect what’s going on in the market.
People were prepared to pay these higher prices because they were expecting estate prices to keep rising the way they did before.
This always happened in the past so why not in the future, was the common consensus.
The prices in Israel however, are based on a demand for real estate that’s so high that it can’t be satisfied with the current supply.
This drives the prices up. Unlike the situation in the US, there’s no factor of price speculation but the property prices are a result of price and demand.
The opinions about Israel’s real estate market are divided.
Professor Robert Shiller of Yale University, who has won the 2013 Noble Prize for Economics, has said that it’s likely for real estate prices in Israel to go down.
According to him, the prices will probably go up for a short term period but there will be a turning point somewhere in the future.
When the prices become so high that people can’t afford it anymore, there will be a point where more people start selling their property and prices will drop.
Best Israeli cities to invest in
The Israeli cities that saw the highest amount of real investments are Tel Aviv, Jerusalem, and Sharon.
These cities are the most expensive housing markets currently but more lucrative deals can often be found in less familiar places.
The real estate in outlying cities is often much cheaper and the returns that can be made here are higher.
In 2013, the largest price gains have been happening in these outlying areas of Israel and not in the big cities.
Return on investment
Israeli real estate investments can be quite tricky but when combined with more stable property investments, can be a good addition to a property portfolio.
It would be wise to go for real estate that provides high rent returns to reduce the risk.
Finding these kinds of investments could take some time because the rent prices haven’t yet caught up with the extremely fast-rising property prices.
This is especially true for the big cities like Tel Aviv and Jerusalem.
While a 3-room apartment located in the center of Tel Aviv, could have given a 5 percent ROI in rent a couple of years ago, nowadays it would only generate about 3 percent.
The Israeli website Yad2, which provides a price list for home prices, states that the average annual ROI from 2011 to 2013 was 8 percent. This is built up by 3.5 percent for the rental income and the increased property price makes up for 4.5 percent.
In general, there is not much money to be made on rent income but if real estate value keeps going up like it did recently, this can still give a very good profit.
It’s wise though to be cautious about such investments because a market that has been going through such drastic changes in the last years, can suddenly take a turn for the worst.