Avi Wertheim was the chairman of Mizrahi Bank, and he also headed Inspire Investments which reached a debt settlement and is now the chairman of the yielding real estate company Aloni Hatz. Therefore, when he says that the yielding real estate companies are expected to take a hit – you should listen to him.
Wertheim believes that the increase in the discount rate for the yielding real estate companies is not yet embodied in the market – that is, the discount rate will increase and the companies will be harmed and will have to write off assets from the yielding real estate property. In his opinion, the appraisers react more slowly than the capital market – that is, the market already embodies what the appraisers will say later. He said these things in response to Prof. Amir Barnea’s questions at the “Fair Value Forum” at the Herzliya Interdisciplinary Center.
According to Wertheim, “We will see a lag in the discount rates, the discount rates as we expect them have not yet reached the market. What happened is that for years there was a decrease in the discount rates. This did not happen only in Israel. We have seen it all over the world that during such decreases or increases, appraisers take a lot Time to respond to these changes. For the past four years they have lagged behind the market. We have always, and I will also say Ofir (Sherid, CEO of Melisron. NA), were willing to pay for properties, unfortunately there were not enough, for lower returns. Therefore, when there is a change, you see them enter the buffer. They do not receive an indication from the market, and therefore they remain where they remain. This is not because the interest rates in the market have not changed, but because there is a safety cushion in the reports at the moment that have not brought the market to a state it will yet reach.
“In the end, we did not say that the properties of Aloni Hatz are only linked to the index (when in the previous years the rental prices for offices enjoyed a ‘hype’ and the rental prices rose from NIS 100 to NIS 150 per square meter. We did not say “No , no it should only go up by 2%”. The same when it goes down – it’s not just about inflation. The market is going into a conditional period and the question is not what will happen in the center of Tel Aviv. I’m not sure that the markets in general or the nearby periphery like Petah Tikva and cities like that – will know how to pay for high rates.”
In other words, says Wertheim, the change in the discount rate will affect the value of the assets of the yielding real estate companies. This means that the companies will generate less return – and therefore the share prices will also be affected.
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The one who disagreed with him is, as mentioned, Ofir Sharid, CEO of Melisron, who said “The rent is linked to the index and will continue to be linked to the index as long as inflation is reasonable. Other entities are entering this market. Roof needs to be sold. I think that institutional bodies can be the purchasing power of apartments, today it does not exist yet, to allow the public to rent them. In this situation, there is no effect of the yields on the rent, since the increase in price in the long term will be due to the increase in value and not to the yields.”
Avi Wertheim responded: “But it’s mainly because of the demand” – that is, Reid is right as long as there is demand that increases the price, otherwise, it will be difficult to keep the rent linked to the index.
As you remember, Aloni Hatz stock lost height last week following the bad reports. The company lost 178 million shekels in the third quarter and expects continued damage as the interest rate rises, or more precisely – the discount rate will rise. The other yielding real estate companies also collapsed last week, the reason: an expected increase in the discount rates means a dramatic decrease in the value of the assets = a decrease in the ability of these companies to generate a return.
In practice, Aloni Hatz anticipates continued harm when for every 0.25% increase in the company’s discount rate (as a result of the increase in interest rates this is expected to happen) the value of its assets is expected to be significantly damaged, by NIS 720 million. From the beginning, the discount rate was relatively high so that there would not be a 3% increase like the interest rate increase, but it is expected that there will be another hit.
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