Bank Leumi has announced that it is selling Beit Mani in Tel Aviv, which is part of a complex that includes the bank’s main management buildings, for a sum of NIS 623 million to Sela Real Estate’s Sela Real Estate. .
Tel Aviv’s boiling real estate market is breaking records, and the transaction of Bank Leumi’s management complex is another unprecedented deal. Because they made sure to make a reservation that “any price is possible”, especially in light of the inclusion of the historic “Money House” in the deal. A conservation structure can be an asset and can also be a burden, as its owner may not find a purpose for it.
The property itself is in an area of about 13,000 square meters over 13 floors, in a 20-year-old tower, to which are added about 200 underground parking spaces. This is a relatively rare property, as it is located in the heart of the city of Tel Aviv. Significantly larger than the areas sold in this area, which has almost no new construction, hence its uniqueness. Even its relative remoteness from the same modern tower center, and estimated that the location may not enchant many companies.
From here to the assessment that the property will not be able to reach the current rental price levels in the new towers (NIS 150 per square meter or more) – the road was short.
“The heart of the demand area, and what are the returns in it”
But it turns out that the companies that participated in the tender saw things differently: its price started at NIS 550 million, and ended with Sela winning NIS 623 million, NIS 3 million above the next bid. Keren Sela chairman Shmuel Selvin rejects the skeptical analyzes and sees the property being acquired as a place with a future, which he compares to the upheaval that Jaffa Street in Jerusalem underwent when the light rail began operating there.
“The property is located in the heart of the central demand of the City area in Tel Aviv, which is characterized by a high level of transportation and infrastructure development. Next to it is Migdal Shalom, Migdal Psagot, Discount Tower, and next to it there will be a light rail station in Tel Aviv. According to Selvin, in order to turn the building into one that a high-tech company will want to rent, Sela will invest another NIS 35 million.
In contrast to the skeptical real estate people we spoke to about two months ago, the fund believes that they will reach rents of about NIS 180 per square meter, in light of the rapid price increases, when in various places the price has already crossed the NIS 200 per square meter threshold. NOI (rental income less expenses) of NIS 32 million per year.
“Today yields of 6% every income-producing property in the heart of Tel Aviv are urban legends”
“The purchase of Beit Mani by Sela Real Estate is the kind of transaction that one of the two: either the company knows something we do not know, or it was done for internal reasons of the fund. One way or another, this deal raised Tel Aviv real estate to hysterical levels.” Jackie Mukamel, who until a few months ago served as CEO of the Israeli branch of the global management and brokerage firm CBRE. Makmal may be more aggressive than other real estate people, but he faithfully looks at the prevailing opinion among real estate people for the sale of a house I by Leumi to the Harit Sela Real Estate Fund for NIS 623 million.
However, Sela Real Estate Chairman Shmuel Selvin believes that this view is incorrect. He looks at Yehuda Halevi Street, where the property is located, which in recent years has been used for the RKL route, and as a Jerusalemite he sees it just like Jaffa Street 15 years ago, when he was excavated to build the light rail route there. To also reach Yehuda Halevi, which will bounce the values of the properties in the place, including the building that Sela purchased.
It is possible that Jerusalemism was Selvin’s great advantage, since the other bidders in a tender held by Leumi on the way to selling the executive house did not reach its price level. Although the company that came in second place offered only NIS 3 million less, there were those who had already stopped at a threshold of half a billion shekels and even less. A real estate man familiar with the tender said that in his opinion the price received was about NIS 150 million higher than the real value of the property.
According to Sela Real Estate, the total net income expected for the property (NOI) is expected to reach NIS 32 million; however, the tower is about 20 years old and does not meet the standards of new office buildings. Therefore, the company will have to invest a lot of money in renovating the property. Selvin estimates that this is NIS 2,500-2,800 per square meter and the total dog is NIS 35 million; The real estate man responded by saying that “in renovations you know where you start – but not where you end up, and the 35 million shekels can easily be doubled.”
The return that the deal is supposed to yield to the rock reaches 5.1%. When we remarked to Selvin that this was a significantly lower return than usual, he laughed. “Today yields of 6% in places like this are urban legends,” he said. “True. We buy properties even at 6.5% yield, but they are not in demand areas. In this place 5% is a nice yield.”
This does not convince realtors. If you add the renovation costs, the yield drops from 5%, and if you also add the taxation costs to calculate the yield (which is a step that is not acceptable in the method of calculating the yield in Israel), the yield will drop to 4.6%.
One of the components of the yield is the rent, which in Sela is estimated to range from NIS 175 to NIS 185 per square meter. “What we invest in this building, we can reach NIS 180 per square meter,” he says. “Today, such prices are paid in much less good places.”
Sela is building on the idea of renting the entire building to a high-tech company. Is it possible to bring the old-fashioned tower to a situation where a high-tech company would like to rent space in it? Selvin is convinced so. “We are experienced in working with high-tech companies,” he says.
Others, as mentioned, are less likely to accept the approach. “I’m not saying it’s a puzzling deal. I’m saying it’s a gamble,” says Mukamel. “In general, it is difficult for me to get the explanation, why rental prices in offices in Tel Aviv reach NIS 200, and areas in neighborhoods such as Bnei Brak, Holon and the Alef complex in Rishon Lezion receive a third of the price. It may be that these alternatives are not yet developed enough, because I do not “See the big deals being made there. But if you’re in a situation of such big price differentials at such small distances – something’s wrong, and things could explode in the future, when neighboring cities start developing their employment areas in a way that speaks better to high – tech workers.” .
Another thesis raised by real estate agents and appraisers is that Sela has reached an agreement with the Tel Aviv Municipality regarding the uses of the building for preservation, or future increase of building rights, and in any case the company will have to wait until the end of next year. Which will also last a long time.
What will happen to the income-producing real estate in Tel Aviv and the high-tech industry during the years of waiting and work on the building? This is another risk that Sela took on in this transaction.
This is an annual yield of 5.1%, which is one of the lowest in the industry, and here too Selvin sees things differently: “This is the heart of Tel Aviv’s demand area, and these are the yields that are customary in the area,” he says.