Investing in real estate through unstable times: risks and opportunities

There is no doubt that we are all currently going through a challenging period, the like of which we have not encountered for quite some time.

Previous crises were distinct in that their consequences were defined and their effects were limited by both time and place.

The local economy has been hit hard, with the damage estimated at tens of billions of shekels. The damage stems from the recent war and the loss of revenue to the state, as well as the payment of unemployment benefits to salaried employees who were placed on leave. Furthermore, compensation to businesses and the self-employed has also contributed to the damage. In addition, there has been a significant amount of redemptions in the capital market over the past month, as investors try to offset their losses on the stock exchange.

Recently, we have been inundated with enquiries and questions from investor clients. They are very interested in how the real estate market, and the real estate investment sector in particular, will be affected by the current crisis.

At a time when interest rates in the economy remain high and show no signs of falling in the foreseeable future, together with a considerable amount of redemptions in the capital market, there are those who argue that the main shelter for the investment community is in the real estate market. However, is that really the case?

The current state of the real estate market is a subject of much debate. Some see it as a threat, while others see it as an opportunity.

Over the coming months, we can expect a fall in prices for both residential real estate and commercial offices. This downward pressure is expected to be felt in the immediate future.

The current state of the market has created a sense of uncertainty, causing those looking to buy apartments for residence or investment to postpone their purchase decisions. The banks’ mortgage interest rates, which have also remained unchanged, contribute to this hesitation. On the other hand, many contractors are expected to face a surplus of vacant apartments, which will encourage them to lower their sale prices, even if this results in a reduction in profit.

Looking ahead about half a year from now, the market is expected to regain a sense of stability, with prices settling at levels similar to those of the recent past. In the centre of the country, demand for residential properties remains fairly inelastic, especially in high-demand areas. This, combined with an expected fall in construction starts and anticipated delays in the price tenders for residents, is expected to lead in the future to a shortage of apartments, which will ultimately lead to a rise in prices.

In the field of commercial real estate for office space, a fall in prices is expected to occur in the near future. This will require business owners who invested in this field to lower their prices in order to maintain their appeal, while owners of office-space units will be required to reduce their rental prices accordingly. The degree of this price erosion may be more pronounced in the Gush Dan area, due to a surplus of vacant office space, and less so in areas where there is a shortage of employment opportunities.

As of today, it may be worth considering whether searching for investments abroad is a wise decision. Investing in ventures abroad has gained enormous popularity recently, with many people having acquaintances who ventured to purchase profitable properties abroad. The principle of spreading and sharing risk is a crucial aspect of the investment market. However, it is generally advisable to concentrate on the local market, since it provides a sense of security – after all, there is no place like home.

There is no dispute that the situation has a significant effect on land prices. The value of land is greatly influenced by the circumstances surrounding it, including, but not limited to, the state of the local economy, zoning regulations and nearby infrastructure. These factors can drive the price of land up or down, making it a highly volatile commodity.

It is a well-known fact that the value of land is directly influenced by the value of the final product it yields, whether commercial or residential. However, it is also important to note that land transactions often result in considerable profits, with increases of hundreds of percentage points between the initial purchase and the final sale. As such, any fall in the value of the final product is not expected to significantly affect the overall profitability of a land transaction. Furthermore, these transactions usually take place over a medium-term time frame, during which the effects of the crisis are expected to dissipate. In fact, examining the results of the last great economic slump in 2008, we can expect that in the coming months opportunities will arise to purchase land at below-market prices, as landowners face increased pressure to liquidate their assets.

The impact of the ongoing war in Israel is undoubtedly severe, affecting many areas of life, including traditional investments in the capital market and in real estate. Many families feel the pressure to preserve the money and savings they have earned through hard work. However, there is a silver lining for those interested in alternative real estate investments, such as residential or commercial land transactions. Changes in the market have less effect on the profitability of these investments, and in fact, the crisis can present an opportunity to buy at lower prices. This is something that leading real estate agents around the world are skilled at doing in times of crisis.

The purpose of this article is not to offer advice or to propose a plan of action for any purchase. Our suggestion is to invest during this period only with surplus funds, and not with funds needed for the day-to-day living of the household, or with loans that could jeopardise the ability to make repayments on a monthly basis.