The goal: to significantly expand construction for long-term rental. The tools: increasing the building rights by hundreds of percent, allocating land for permanent rent, and making the projects for rent more attractive to REIT companies, and this through tax benefits that are greater than those that exist today. However, some of the measures are based on sources that are not clear, and for others, it seems that they do not answer the main problems that this market suffers from.
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The great drama of the changes lies in changing the principles of planning and construction in Israel in a way that will allow for a very large jump in construction dimensions in projects intended for long-term rental.
In the draft of the Arrangements Law, it is proposed to allow the district committees for planning and construction to allow the expansion of long-term rental projects at a rate of at least 2 times the construction rights and at least 3 times what was approved for normal apartment projects, and this on the condition that the ownership of the project be by one person, and this in order to be able to manage the The building according to its purpose.
Where do these numbers come from? In the past, it was possible for such projects to grow by 25% compared to normal projects; In August 2021, the government decided to allow the construction area to be increased by up to 200%, and the number of housing units will be increased by up to 200%. The current proposal makes it possible to further increase the rights, and talks about “the rate of building rights in the plan is at least twice the rate of building rights that would have been given to a plan that is not for rent under common ownership in accordance with the outline plan that applies to that complex.” As mentioned, the number of apartments will be increased at least threefold.
And this is the explanation for the floating construction rights: “The nature of living in a rental makes it possible to plan housing projects with a more diverse mix, which includes high density. Accordingly, it is possible to include a higher proportion of small apartments intended for young couples, senior citizens or individuals, and it is even possible to create shared complexes in the building that will save space in the apartments,” the explanation for the bill reads. “Furthermore, small apartments do not require many public institutions because they are suitable for young couples and individuals, thus making it possible to add more housing units without significant consequences for the public space. In addition, in light of the location of these projects near high-passenger transportation systems, it is possible to reduce construction costs in rental projects Through reducing the parking standard, as well as through the construction of multi-story protected spaces, shared warehouses, uniform construction and more.”
The numbers can still change
And the question still remains, how did the government arrive at these numbers? We were unable to reach a clear answer. It is possible that the government, and following it also the Treasury, made a mathematical calculation, according to which the area of an apartment with a warehouse, balconies, parking and part of the common areas (lobby, tenants’ room, etc.) is equivalent to three apartments.
In the draft law, the Ministry of Finance explains that the government company “Dirah Leshkahir”, in cooperation with the planning director, prepared a dedicated planning briefing for rental projects which detailed the unique characteristics of these projects and how they are implemented. However, “Apartment for Rent” informed us that the briefing has not yet been published, while the Planning Administration stated that the bill was drafted by the Treasury and that the Planning Administration has not yet submitted its comments.
It is likely, therefore, that the draft is still very far from being perfect, and it is difficult to assume that the numbers mentioned in it will remain as they are.
Another matter that is mentioned in the proposal is to change the designation of land for permanent rent, meaning that the apartments will not be sold on the free market. This arrangement may harm the economic feasibility of rental projects, since companies that engage in long-term rentals receive returns of approximately 3% on the apartments they rent. These are returns that in themselves are not worthwhile, but what makes the projects more worthwhile is the long-term returns that result from the increase in the value of the apartments, which may double the returns from rentals. Eliminating the ability to sell the apartments at any stage may make the project unprofitable, even if the state subsidizes a significant part of the land price.
Amending the Income Tax Ordinance to expand the activity
The proposal also includes an attempt to encourage REIT companies to enter the industry in the form of an amendment to the Income Tax Ordinance, so that the definition of “real estate for rental housing” will also be extended to situations where 20 apartments have been established by an investment fund (REIT) up to seven years from the date of the purchase of the land as part of a tender from the state. In the Negev And in the Galilee, the number of these apartments was reduced to 15. Today, these projects are required to be inhabited by tenants and to be considered profitable within five years from the date of purchase, but since the REIT funds have no control over when building permits are issued, they cannot always meet this condition.
It is also proposed to exempt the REIT funds from VAT on their income from the rental of the projects and their sale. These matters can help, but especially these days, when the interest rates are high and the returns from renting the apartments are low, they will not solve the biggest problem that exists in this market, which is the financing costs.