2021 was far from a normal year for anyone, with interesting new patterns in real estate returns on investment across Israel. Surprising trends in rental returns and property prices in different cities created some interesting anomalies in the profits that Israel property investors earned last year.
The Central Bureau of Statistics report on housing prices and rents in Israel’s 15 largest cities, and the results make fascinating reading. They reflect the returns on real estate investment by measuring two components: the rise in value of the property, and the rents received. They also take into account the transfer tax due on the profit when properties are sold, and the exemption from income tax on rents up to NIS 5,196 per month, which influences how much landlords charge. The national average profit for Israel real estate was 3% returns on rents and an 8% rise in the value of the property, yielding a cumulative return on investment of 11% during 2021.
The Rush to Buy
The fourth quarter of 2021 was the craziest quarter in Israel’s history for home purchases, with a record 42,000 transactions. Investors rushed to buy properties before the tax increase on investment properties took effect, and other home buyers also jumped to complete their transactions.
Rishon LeZion, Ashdod, Kfar Saba, Haifa, Ramat Gan, Rehovot, Haifa, Jerusalem, Netanya and Rehovot all saw a steep increase in real estate prices. However, the trend was most pronounced in Tel Aviv – the city in which the largest number of new homes were bought in 2021, and where average prices rose by 30%. This micro-economy is disproportionately influenced by the technology company exits, IPOs, and high salaries in the technology sector. Many of these ‘unicorn investors’ have been buying up prestige apartments in the city center, where the supply is small and demand can inflate prices very quickly.
Lower Rental Returns
The absence of tourists in 2020 and 2021 led many property owners in holiday destinations to switch from short-term holiday lets to longer term rental contracts, which impacted the supply of homes. This probably contributed to the reduction in rental prices in some cities, particularly Tel Aviv and Jerusalem. For example, apartments in Tel Aviv – from small 1-room apartments to larger 4-room homes – earned rental returns for their owners of just 2.5% in 2021.
Despite lower rental returns, Tel Aviv investors who sold their properties in 2021 received the highest rate of return of any city in Israel. In the year to December 2021, the average price of a 3-room apartment in Tel Aviv jumped in value by 25%, from NIS 2.28 million to NIS 3.36 million. Real estate investors in the White City saw combined returns (based on the increase in value and the reduced rental returns) of between 22% and 28%, depending on the size and location of their property.
Surprisingly, the best rental returns in the country were earned in Beer Sheva, where a 1-2 room apartment purchased for NIS 570,000 at the end of 2020 generated rental returns of 4.3%. However, owners may have to hold on to these apartments for a few more years in order to receive a good rate of return, because their value fell by 2% during 2021.
For overall returns, Ashkelon topped the table, with a 4.2% rental return and an average price rise of 20% during 2022 for small apartments. Larger apartments in Haifa and Kfar Saba also performed well – the average five-room apartment in Haifa cost NIS 1.86 million at the end of 2020, and increased in value to NIS 2.15 million at the end of 2021. In Kfar Saba a similar apartment rose in value from NIS 2.7 million to NIS 3.1 million over the same period. Rental returns during 2021 averaged 3% in Haifa and 2.6% in Kfar Saba.
The increased purchase tax for property investors that took effect in November 2021 has depressed demand, and rental prices are continuing to fall in 2022. We look forward to the return of tourism and continued interest from families who are considering making Aliyah. The expected rise in interest rates will make mortgages more expensive, but this may strengthen the rental market as potential local purchasers decide to continue to rent. All these facts make it all the more important for real estate investors to hire skilled property managers to help them maximize the returns on their investment through careful stewardship.
If you own a property in Israel and would like to see if it could earn you better returns on your investment in 2022 and beyond, book a no-commitment confidential conversation with Shaun Isaacson, CEO of Creative Estates Israel.