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Foreign Real Estate Israel Investment Guide

Author: Shlomi Ben Ishai

Background

Over the past year the commercial real estate market has begun to reawaken and the significant number of transactions leave one with the feeling that reference is not to a momentary phenomenon but rather to a real change in trend, which heralds the coming of a new period in the window of opportunities for executing transactions at attractive prices and with handsome returns.

Why should foreign residents invest in Israel?

When examining any type of investment and real estate in particular, one should check the essence and quality of the transaction on the one hand and the alternatives at the investors’ disposal on the other hand. The commercial real estate market in Israel, which suffered serious setbacks over the past 10 years of recession, has only began to reawaken over the past year. This phenomenon opens the window of investment opportunities to foreign investors, as real estate prices have not yet reached a peak.
For illustration purposes, if we are refer to a productive real estate transaction in the United States of America with AAA tenants, the returns that can be expected for the transaction stand at approx.5% - 7% in the event that the transaction was successful. In Israel, however a productive real estate transaction with AAA tenants would yield average returns of 7.5% - 10%.
It should also be noted that the prices at which properties are sold and the returns that are calculated in relation to the transactions have been determined according to “dated” leases that do not yet reflect the awakening that has taken place in the branch. Id est, there is further potential for profits latent in each transaction as a result of the improvement in the value of the real estate and increases in the value of leases in the future.

Financing real estate transaction in Israel differs from procedure abroad

Executing real estate transactions and productive real estate transactions particular is, for the most part, a financial transaction. We have often read that because of unsuitable loan conditions transactions do not eventuate, as the profitability of a transaction often relies on the financing ratio that the bank authorizes, the interest-rate and finally the method of repaying the loan which leads to examining the flow of cash that remains in the hands of the investor.. What is required and how is the financing ratio for foreign residents interested in acquiring real estate in Israel determined?
 
  • A financial affidavit - Because of the fact that foreign residents do not have a permanent income in the State of Israel, they are obligated to furnish a financial affidavit signed by an authority in their country of permanent residence. In the absence of this financial affidavit, it would be impossible to raise a loan. It is important to remember that the financial affidavit is used as a yardstick for determining the financing ratio to which the borrower would be entitled.
  • Personal guarantees -The vast majority of loans granted in Israel require personal guarantees. In contrast to the acceptable procedure abroad, the banks are not prepared to grant loans against a pledge on the property.
  • The financing ratio - the financing ratio is determined according to a number of major parameters. Firstly, an appraiser’s evaluation: Any loan acceptable to the bank will be determined subject to an appraisal received by the bank from a real estate appraiser. The financing ratio that the investor receives is derived from the appraiser's assessment and not from the price of the property. Secondly, the nature of the investment: in a productive transaction the financing ratio would be affected by the quality of the tenant and could reach a level of 85% financing. In venture transactions, the financing ratio could decrease significantly to an average of 50%-60% financing.
Of course, the quality of the financial affidavit assists in determining the financing ratio to which the investor would be entitled. Since any loan taken requires a personal guarantee, the more economically solid the investor the greater the chances of receiving a higher financing ratio.

The key to structuring a successful transaction

Because of the fact that foreign investors execute transactions at a great distance from their places of residence, they have to operate with extreme caution and make sure that they are working in pursuance of the following keys factors:
  • A commercial environment - Much time should be invested in an in-depth research into the business environment of the property for investment. Care must be taken to ensure that it has not been static from an aspect of price and percentage leasing in relation to other properties in the area, as a deviation of over 20% to what is acceptable in the region should be a warning light and why we were entitled to such a premium should be examined thoroughly.
  • Taxation programs - foreign investors pay tax on their profits according to the treaties existing between their countries of permanent residence and the State of Israel. The key to building a sound real estate transaction is formulating a taxation plan appropriate for the existing treaty between the country in which you reside and the State of Israel. Proper tax planning could save many tax payments and increase the profitability rate.
  • Fiduciaries - Prior to executing a transaction, assistance by a qualified realtor or attorney at law who specializes in real estate etc. is vital, as they are key factors in analyzing the transaction. They know the market and the existing trends and in most cases act as your contact people in the country.
A fiduciary assists both in analyzing and formulating the transaction and most important of all he/she takes care of the property for you once you return to your permanent country of residence.
A fiduciary should only be chosen after a personal meeting or by the recommendation of someone whom you know personally. In any event it is extremely important to ask him/her to furnish additional recommendations in order to get an impression from other bodies.

 

About the Author:
Shlomi Ben Ishai is the owner and general manager of Nadlan-Plus, a top Jerusalem real estate Israel firm, offering luxury apartments in Jerusalem and properties across Israel.