A good time to buy by Daniel Ben-Tal In Jerusalem (The Jerusalem Post local paper) November 12, 2004 After a three-year drought, foreign buyers - mostly ultra-Orthodox - are storming the luxury-property market After years in the doldrums, Jerusalem's real-estate market is beginning to pick up as Diaspora Jews increasingly snap up properties around the city. Foreign investors are showing renewed interest in residential properties in the capital - especially in central Jerusalem within walking distance of the Old City. According to the Bank of Israel, overseas residents bought US$455 million worth of Israeli real estate in 2003, over twice the 2002 figure of $192m. Local realtors expect 2004 sales to be twice as much again. "There's been a significant increase in the number of foreign residents purchasing properties in Israel these past two years and particularly in Jerusalem," says Stuart Hershkowitz, head of the International Division and deputy general manager of the Bank of Jerusalem, one of the country's largest mortgage banks. Hershkowitz sees three primary reasons for this influx: "Prices are still relatively low, having dropped 20 to 30 percent in real terms over three bad years; low interest rates on U.S. dollar loans make it a much more attractive proposal; and people want to feel a closer affinity with Israel during the Intifada. "Jews from overseas purchase a few thousand units in Jerusalem every year. Americans still account for the majority of upper-end property buyers. The vast majority of American buyers are religious, both modern-Orthodox and haredi. A lot of the properties are standing empty because most of the foreign residents who purchase apartments in Jerusalem don't lease them out, which shows that they are less interested in the net return," says Hershkowitz. Hershkowitz notes that the phenomenon primarily affects relatively affluent neighborhoods such as Ramat Eshkol, Rehavia, Talbieh, Katamon, Baka, Yemin Moshe, David's Village and Sha'arei Hessed. "It hasn't really trickled down to the lower end of the market and nothing's changed in working-class neighborhoods like Kiryat Hayovel. In general, the Israeli real-estate market hasn't recovered yet." Bennie Loval, manager of the Anglo-Saxon real-estate agency, says that he is optimistic. "For three years, a lack of foreign buyers almost stopped the market. Now that they are returning, there's greater movement," says Loval. "The security situation has reached a level that people are familiar with - the Americans were the first to leave when the Intifada began, but now they understand that the threat of terrorism reaches every corner. In some areas where demand has overtaken supply in past years, prices are already starting to become unrealistic." "There's been an incredible turnaround over the past six to nine months. The market has gone haywire," says real-estate broker Davyd Tal, whose Jerusalem Homes agency specializes in the Ramat Eshkol-Givat Hamivtar area. "I can't put my finger on the reason. Overseas buyers and investors got wind that things are about to change and started to move in. They've heard the rumors that Israel's real-estate market is starting to emerge from the rut. "Prices are rising quicker in Ramat Eshkol than in other areas," he adds. "Four-bedroom semi-detached houses in Ramat Eshkol that would have cost $300,000 to $400,000 five years ago are now priced at up to $900,000. A three-bedroom apartment that sold for $180,000 two years ago can now fetch $280,000. I've just been offered $800,000 for a single-family house in Givat Hamivtar that went for $550,000 only 18 months ago. "My secretary has a small apartment in Ramat Eshkol - I advised her not to sell for a year," adds Tal. Ramat Eshkol - the first neighborhood to be erected in east Jerusalem after the 1967 War - is rapidly becoming an Orthodox community. Up to 50% of the once-secular neighborhood is now religious. Tal describes two principal reasons for what he terms the neighborhood's "haredization": the natural overflow from nearby ultra-Orthodox Sanhedria, where the families are large and children marry young; and religious American house buyers. According to Tal, most of his American clients wear the black skullcaps of haredim, rather than the knitted skullcaps of modern Orthodox Jews. "Many have sons in yeshiva and buy small apartments for their children to live in. They are not only buying out of Zionism, but also for religious and economic reasons, to get a foothold in Israel," explains Tal. "They are mainly from the Five Towns area of Long Island. It's important from them to be in a community and they are happy to live together. The pioneers have already moved in and others are eager to join them." In Jerusalem was unable to confirm rumors that East Coast Jews are buying properties in Jerusalem at their rabbis' behest. "The American buyers are almost entirely professionals. They will use a licensed real-estate broker; they demand and value professional service. "These are not people who knock on doors. They send their children to see the house, then fly over for a weekend and buy," says Tal, who lists the three essential elements in a real-estate team: a professional agent, a reputable lawyer who understands both American and local laws and a reliable mortgage bank. "Israeli mortgage banks are bending over backwards right now to help overseas clients with good rates on dollar loans," he adds. Hershkowitz notes that local banks are currently offering the lowest interest rates in over 40 years, partially due to a drop in the LIBOR, the British Bankers' Association's primary international benchmark, used by banks, securities houses and investors to fix the cost of borrowing in money, derivatives and capital markets around the world. "The LIBOR reached just over 1% a year ago and now stands at over 2%," says Hershkowitz. "This means that our clients pay only about 4.25%, including premiums to the bank." "A year ago, the dollar was far stronger and almost crossed the five-shekel line. Now the euro and pound are strong, which helps to bring the French and British back into the picture. Rehavia and Old Katamon have always been a hit with the British," adds Tal, who is originally from Wales. Hershkowitz also reports an increase in both French and British clients. "The French are buying because of their problems in France. They're reading the writing on the wall and are hedging their bets by getting one foot in Israel. "The Brits are starting to buy because of the strength of sterling and there's an element of anti-Semitism, although nothing like in France," he says. "The majority of French immigrants - or prospective immigrants - are buying properties in coastal towns like Ra'anana or Herzliya. Central Jerusalem is too expensive for many of the French buyers, who are more likely to buy in Baka or Har Homa, where there is already a nucleus of French-speaking residents," notes Loval. Few other foreigners appear interested. Last month, Tal traveled to Moscow in a vain attempt to market Jerusalem-based projects to post-Soviet nouveaux riches. "They laughed at me when I told them to expect about 5% annual return on their investment. They can get over 40% per annum in Eastern Europe," he says. Just before the assassination of prime minister Yitzhak Rabin in November 1995, the local real-estate market peaked. Ever since then, it has been on a steady decline. "The whole economy went down after Rabin's murder. The buyers faded away and the supply dried up. There were a few sellers, who usually sold at a loss. It was difficult to get anything like a decent price for an apartment. Foreign investors stopped buying in Jerusalem. Cities like Ra'anana, Netanya or Tel Aviv suffered far less than Jerusalem. We're just now getting out of this rut," says Tal. While properties near the city center almost maintained their value, the worst-affected neighborhoods were Musrara, near the Old City Walls - which was becoming gentrified as mainly American and French religious immigrants bought up and renovated old houses - and outlying areas like Pisgat Ze'ev, Gilo and the French Hill. "Anyone who bought in the mid-1990s and sold in early 2000, probably lost about 25% on his investment. Then, the Intifada hit Jerusalem hard and the local market spiraled downwards for three years. We saw a 25% to 30% reduction in prices throughout the city," estimates Tal. Those gray days appear to be behind him. "Clients ask me if it's a good time to buy. I tell them that they should have bought a year ago and if they buy in a year's time, the price will be even higher. Prices are rising. Now is a good time to buy," says Tal. "The Israeli real-estate market has a life of its own," comments Hershkowitz. Local realtors appear to agree that the luxury apartment market effectively functions irrespective of the rest of the city's real-estate market, because most of its players are Jews from abroad who have not suffered from Israel's long recession. Brokers recount that, in effect, there are two separate real-estate markets in Israel: Foreigners dominate the top end where upscale properties are selling like hot cakes, while Israeli buyers of mid- and low-range properties, largely sit on the fence until the economy shows clear signs of recovery from the recession. A luxury property is defined as one valued at over $1 million, costing over $6,000 per square meter of construction. Prices of luxury residential properties in Jerusalem have remained relatively steady, since the market hit its heyday about six years ago; that is, until a steep rise in demand for low-density construction pushed prices up this past year. For now, Jerusalem is still a buyer's market. The number of purchases by overseas residents is not enough to kick-start the whole market. Brokers note that with local housing prices still at late-'90s levels, it could be a favorable time to buy. It may however, take several more years before buyers take up the slack. "Contractors are still having trouble selling their apartments and many lie empty. Until five years ago, the only construction was limited to new neighborhoods. Now, areas like Ramat Beit Hakerem and Ramat Rachel are being expanded for the upper middle classes and young couples are moving in," says Loval. Yet a lack of affordable new apartments in Jerusalem, is forcing people to leave for the suburbs. "Almost all those selling in Ramat Eshkol are secular Jerusalemites, most of whom relocate to Mevaseret, Modi'in or Gush Dan," explains Tal. "Few stay in the city." The continuing westward shift of Jerusalem's young, secular population is draining the city's economic bloodline. "Not every Jerusalemite can leave the city, because of their deep roots and obligations such as family, schools and work. There is still enough space in mixed neighborhoods in Jerusalem - no-one talks about secular neighborhoods any more," adds Loval. Some anticipate that if Prime Minister Ariel Sharon's disengagement plan is realized, some of the evacuated settlers will probably use their compensation money to purchase a home in Jerusalem next summer, kick-starting further transactions. "The balance has been tipped and good properties are getting snapped up quickly, but there aren't enough houses on the market," says Tal. "I now see brokers with smiles on their faces - something I haven't seen for many years." Guardian agents There was a time when anyone could be a real-estate agent in Israel and demand commission. Many a barber or taxi driver ran a lucrative sideline by matchmaking his clients with potential house buyers or sellers. The only criterion was "who you know". The situation has improved greatly since January 1996, when the Knesset passed legislation requiring brokers to be licensed. Since it became illegal to practice without a license, the disreputable fly-by-night operators have all but disappeared. "The market is more organized, especially in Jerusalem," says Yael Blankstein, chairperson of the Real-Estate Agents Chamber in Jerusalem, an umbrella of some 160 agencies and individual brokers. The chamber sponsors Shiran, a computerized inter-agent Multiple Listing Service (MLS) that facilitates cooperation between agents. "I'm proud to say that Jerusalem is the only city in Israel with such an MLS service. The chamber is the agents' anchor. It organizes training courses, holds regular conferences and updates agents about legal changes. Our ethics committee deals with complaints from the public and we have an ethics code binding for all members," says Blankstein. According to Blankstein, there are currently about 10,000 licensed real-estate brokers in Israel. Justice Ministry licensing exams are held twice a year. "About 1,000 people applied for the last exam, including many pensioners who think that it's an easy way to make money. I assume that about 900 passed." In Israel, both the buying and selling party are required to pay commission (usually 2%) to a broker, if used. The broker must provide complete technical and legal information about the property, while remaining balanced between both parties. It is worth noting that by law, if the same property is viewed via two or more real-estate agents, two or more fees may be due. From December 19 this year, agents will no longer be allowed to sign clients on exclusivity agreements beyond six months. So, is the public to assume that every licensed real-estate agent is reputable? "There's still a chance that you can get burned - like you can with your doctor or car mechanic," says Bennie Loval, who represents the Real-Estate Agents Chamber in discussions with the Ministry of Justice. "The law has stopped some people from entering the business. It's designed to protect the consumer, but is not perfect," says Loval. "The situation has improved, but there's a long way to go before we reach the levels of other countries".