The continuing rise in housing prices in the economy has created a new trend in the past year. After years of construction and construction of residential projects was considered a risky activity, with limited profitability, more and more investment bodies are recognizing the potential inherent in companies operating in the industry, given the high demand for apartments in Israel and the high prices they charge.
These have been reflected in the last two years in the record profits presented by the residential construction companies traded on the Tel Aviv Stock Exchange, and in the hundreds of percent return they generated during this period for investors (even if it has been damaged in recent weeks due to the market storm).
Contrary to the saying that “for a glass of milk you do not have to buy a whole cow”, the flow of investment transactions in companies engaged in residential construction is only growing. Thus, in recent weeks, as stock markets stormed and their flagship indices fell, the mall giant performed Melisron Controlled by Liora Ofer, a huge investment in the purchase of shares in the Aviv Initiative company of the Aviv family. A few days later the Open Commercial Centers Company reported Rani Zim On the acquisition of the old construction company Megiddo, and even the hotel chain Fatal Entered into an investment in the Wi-Box apartment developer.
The current wave of investment deals in residential construction companies comes after large insurance companies and hedge funds have already “discovered” the field, and in the past year have made a series of massive acquisitions in the shares of entrepreneurial companies, with an emphasis on urban renewal. This is in view of the recognition that the shortage of land available for construction, together with the large demand for apartments, have made urban renewal an attractive investment channel that can yield a high return for members and savers.
This is a dramatic change in the approach of those entities, because apartment construction has previously been considered “out of bounds” for solid investment entities (and certainly for companies that traditionally operate in the field of income-producing real estate).
A capital-rich field with high levels of leverage
The risks of initiating residential construction have accompanied the industry for years. Quite a few entrepreneurs and local execution companies have in the past become entangled in huge debts of hundreds of millions of shekels, and have seen their businesses come to a standstill under court-sponsored proceedings or debt settlements with creditors. This is a capital-intensive area, with leverage levels that sometimes reach as much as 100% financing for the purchase of the land, so a delay in the sale of apartments or an increase in construction expenses is enough to endanger contractors and developers.
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The risks in residential construction are diverse, and include, among other things, sensitivity to rising interest rates, which reduces the demand for apartments due to the rise in mortgage prices on the part of buyers and increases the financing costs of construction companies. At the same time, developers often pay huge amounts of capital for the land, and it will often take years for them to mature into the sale of apartments that will allow them to start repaying the same debts.
Moreover, the companies operating in the field are currently facing a sharp increase in raw materials in the face of disruptions in the global supply chain, which is eroding their profitability. In addition, projects in the field sometimes tend to “get involved” during execution, as a result of unforeseen factors and require additional capital inflows from the owner.
“Income-producing real estate companies have nowhere to develop”
So what do the real estate and insurance giants identify when they purchase significant shares from these companies, in amounts of up to hundreds of millions of shekels? A look at the housing price graph of the Central Bureau of Statistics can provide part of the explanation for this onslaught. The shortage in the market and the boom in high-tech that significantly increased the number of capitalists in Israel. Of nearly 30 years.
Residential real estate is more profitable than malls and offices / Photo: Shlomi Yosef
“Profitable real estate companies, especially those operating in the trading field, such as Melisron and Rani Zim, have realized that they have nowhere to develop in Israel,” says a senior market analyst. “After all, it’s not that they’re going to set up more huge malls here. At most, small shopping centers in the residential neighborhoods, which are less interesting to the big bodies.
“In the office market, there seems to be a great demand in Tel Aviv, but many question marks are now emerging around the high-tech industry regarding what is expected in the future, in light of the collapse of the Nasdaq. “These companies have always talked about portfolio diversity, so the housing sector has become very attractive for them.”
According to him, the climbing interest rate also has a stimulating factor for them. “Yielding real estate companies are twice affected by the interest rate. Their financing expenses go up and the value of their assets goes down. Therefore, in the field of housing, where demand is very strong compared to the existing supply, no very significant impact is expected, such as in the field of offices. Where the interest rate will be in ten years, it’s something that less affects you if you sell the apartment you built in 3 years. What interests them is mainly the prices of the apartments, and as long as these climb, building apartments becomes another winking option. “
“This is the time to enter urban renewal”
“The entities that invest in construction companies mainly enter into companies operating in the field of urban renewal or companies that have a land portfolio in the periphery that were bought at cheap prices in the past,” says Yaakov Atrakchi, CEO and controlling shareholder of the company. Aura Real Estate .
Atrakchi is considered one of the most prominent activists in the field of urban renewal and the residential construction company he runs operates mainly in such projects. “The housing market in Israel is the strongest market there is. And this is exactly the time to enter urban renewal when land prices are rampant, and I think they are taking these steps after deep consideration. In the past year land prices have lost some proportion, developers bought land expecting tens of percent.” “I do not believe in doing business today on a forecast of what will happen in the future.”
Join a wave of deals initiated by insurance companies
The pace of investment in residential construction companies, it seems, is only increasing. As mentioned, after the wave of transactions in which insurance companies and investment funds acquired positions in residential construction companies, the baton passed into the hands of income-producing real estate companies. Last week, Melisron acquired half of the shares of Aviv Yizum for NIS 600 million.
Liora Ofer / Photo: Vardi Kahana
The company, managed by the brothers Doron Aviv and Dafna Harlev, comes with a portfolio for the construction of 3,500 housing units in the center of the country, and it planned to go public several times when the deal with Melisron spared her the “headache” in question. This move allows Melisron a significant foothold in building residential apartments and a new growth engine. Melisron currently has mainly malls around the country and it also operates to a lesser extent in the field of offices.
Following this, this week Rani Zim Shopping Centers, controlled by Rani Zim, announced that it will acquire Megiddo, a long-standing company founded 52 years ago and has a portfolio of 19 construction projects at various stages, mainly in the periphery, for the construction of 1,749 apartments, from founder Yigal Karni, for 307 NIS 1 million (in several stages).
Like Melisron, Rani Zim also operates mainly in the field of commerce, with its specialty being the establishment of open shopping centers in the periphery and in Arab society. The company recently began activities to establish residential projects in Arab society.
Two smaller deals brought back to the local investment arena businessman Jeremy Blank (formerly the York Fund) whose hedge fund Community Fund became a partner in the Yaz Urban Renewal Company. In the transaction, 49% of the shares of the private company were purchased at a value of about a quarter of a billion shekels.
This was joined by a deal by hotelier David Fattal, whose company Fattal Holdings acquired 10% of the small residential real estate company two weeks ago. Wi-Box Real Estate Of Yaakov Gorsed, for NIS 36 million. Following the same investment, the parties reported another transaction in which Fattal purchased office space from Wi-Fi in the Gat Rimon project for NIS 132 million.
David Fattal – Fattal Hotel chain / Photo: Tamar Mitzpi
These transactions join the wave of transactions initiated by the major insurance companies in the shares of construction entrepreneurs last year.
In October and November last year, the insurance companies Harel, Phoenix and Menora Mivtachim made significant transactions in which they acquired a share in residential construction companies and urban renewal. For example, the insurance company Harel Acquired 20% of the old construction company Almog (KDAI) for NIS 140 million and a similar rate in the shares of the entrepreneurial company Etz Hashaked for NIS 60 million. The Phoenix Acquired a quarter of the White City Building Company, which mainly builds urban renewal projects in Tel Aviv, for a huge sum of NIS 420 million (capital and debt).
“Insurance companies see the long-term trends in residential real estate and therefore want to invest in it,” says a senior investment manager at one of the insurance companies.
“We had two options: to go directly into investing in projects, when then we have to look at each of them, or to come in as equity partners with the developer. We talked to a lot of companies, while at the same time land prices went up a lot, which increased the entrepreneurs’ capital needs. “Because a real estate player who wants to go to those expensive auctions – it’s good for him to bring in a partner in his company.”