"The decline in construction will lead to a supply crisis as early as 2024"
"The decline in construction will lead to a supply crisis as early as 2024"
Ron Avidan, CEO of Azorim Properties, spoke during a real estate panel at Calcalist’s Economy of Tomorrow event along with Zvi Shif, Partner and Head of the Financial Cluster at BDO, about how the labor supply shortage will lead to an increase in real estate prices
"The sales pace is returning to normal in the last month because we are seeing a return to activity amid the war, but the real story is about supply," said Ron Avidan, CEO of Azorim Properties during a real estate panel at Calcalist’s Economy of Tomorrow event. "On October 7, the residential construction sector was already in crisis after a sharp interest rate hike and drop in demand, due to many factors such as the judicial reform and diluted supply after very strong years of sales. The war added immense difficulty due to 80,000 Palestinian workers being withdrawn in one day. The supply problem is a real issue, and unfortunately, so far, for almost 4 months in the midst of the war, not a single new foreign worker has been brought in," he said.
Avidan explained that in the residential real estate sector, the story is not of the big companies. "Azorim is a very large company, but all the major construction companies together cannot provide more than 20% of the housing supply in the market. There are contractors who are not pulling additional building permits, stopping activity. The declining trend in construction will lead to a crisis in supply, in my estimation, already in 2024," he said.
According to Zvi Shif, Partner and Head of the Financial Cluster at BDO, people typically associate importing products with importing produce from Turkey, but the more significant part – 50% - is related to the construction sector. Turkey has blacklisted Israel, which will undoubtedly complicate matters further.
The decrease in housing prices according to the Central Bureau of Statistics was 1.8% last year, but in reality, the decrease was even greater due to financing models offered by contractors and also due to discounts. Even the issue of workers is expressed in the rising labor costs, which will ultimately translate into price increases.
Regarding the yielding real estate sector, Shimon Abudraham, CEO of Amot, said that a substantial price drop is not expected due to layoffs and the economic slowdown. "The yielding real estate sector operates over longer periods, both for contracts and loans, and therefore, it is less affected by short-term crises. What we do know is that workplaces are now characterized by low physical activity, and we see a reluctance of clients to make changes. Companies that are finishing contracts are requesting extensions, perhaps for a shorter period, because they are waiting for increased certainty. There is almost no movement of businesses in and out, and we see fewer new business openings."
When asked if the fact that banks see small businesses as high risk changes their plans, he replied that “the yielding real estate sector is for the long term. It is a difficult process just to get construction permits. TOHA, for example, took 10 years just to get a permit. When talking about such time frames, it is impossible to look at the short term. When starting to build an 80-story tower, it is impossible to stop halfway,” he said.
Regarding the rental housing market, where the country has failed in its attempts to encourage entrepreneurs to enter, Avidan said, "This is a national problem. The problem is that the supply of rental apartments is double that of apartments for sale.”
“The rental housing index constitutes 25% of the consumer price index. No actions are being taken to manage the crisis, and rental prices rise, and this year there will be an even higher increase, so it is no wonder that the Bank of Israel cannot lower interest rates. If actions are not taken, there will be a major crisis here. There is also a social aspect. If a person cannot afford to buy an apartment, he looks for a rental solution. But when a solution within reach is not found, what will they do? Move to Berlin?"
The rental housing model has failed, said Shif. "The model has a relatively low return. If you look at private individuals in Israel, they prefer to purchase apartments as an investment, because they enjoy the appreciation in value and also have future security. A private individual’s rate of return over the years stands at about 2.5%-3%, and investors entered because the interest was zero, and yields of 7-9% could be achieved. Today, returns are much lower. Private investors will not buy an apartment to rent out that they’ll be tied to for 20 years."
