Israeli Banks Optimistic on Real Estate Despite Market Slowdown

Israel's real estate market, encompassing both residential construction and income-generating properties like malls and office towers, has experienced a slowdown over the past year. This is largely attributed to high interest rates, which, despite a recent 1% decrease to 3.5%, remain significantly higher than the near-zero rates seen before 2022. This environment has benefited banks, which have reported record profits, with the five largest banks collectively earning NIS 8.5 billion in the second quarter, similar to the previous year. Conversely, contractors are struggling, requiring more credit to stay afloat while awaiting a recovery in apartment sales and a return of tenants to offices.

However, signs of a potential turnaround emerged in August. Real estate companies noted increased interest from high-tech firms in leasing office space, and a renewed optimism is visible in the pace of new apartment sales. Data from the Central Bureau of Statistics shows a significant recovery in Tel Aviv, with 1,236 new apartment sales in the second quarter, a five-year high. Across the country, quarterly sales reached levels not seen since the beginning of the decade. Tel Aviv led sales in the first half of the year with 2,056 units, followed by Jerusalem (987), Ofakim (845), and Haifa (791). In contrast, second-hand apartment sales saw a sharp quarterly decline, with Jerusalem experiencing a 23% drop.

Despite these positive sales indicators, the Tel Aviv Stock Exchange's construction index (TA-Construction) has underperformed. Since the start of the year, it has fallen by 15% as of August 20, while major indices like the TA-35 have risen by 22%. Other sector indices also showed gains, with TA-Banks up 8% and TA-Technology up 13%. The TA-Income Producing Real Estate index has declined by 6% year-to-date. Bank executives, however, express optimism about the sector's future, citing Israel's positive population growth trend as a long-term driver for demand, despite current oversupply and weakness in luxury segments.

Analysts note that banks are continuing to provide credit to contractors, enabling them to navigate the challenging period. This support, coupled with the banks' substantial profits, allows for strategic management of their various sectors. A resurgence in real estate activity is seen as a significant economic engine, boosting demand for construction materials and consumer goods. Investors looking to enter the real estate market can consider direct stock purchases or exchange-traded funds tracking sector indices, though different indices (TA-Construction, TA-Income Producing Real Estate Israel, TA-Income Producing Real Estate Abroad) reflect varying risk levels and market dynamics.