Real Estate Investment: Key Factors for Success in a Shifting Market

Idan Shapira, head of the construction and real estate sector at Bank Leumi, has outlined crucial considerations for novice real estate investors. Speaking at the Israel Real Estate Conference, Shapira emphasized three primary areas: local supply and demand, potential housing price volatility, and the significant impact of interest rates on profitability. He noted that high inventory levels, exceeding 80,000 unsold apartments nationwide, could lead to prolonged absorption periods.

Shapira cautioned that housing prices are not guaranteed to rise, citing instances where developers assumed price increases that did not materialize, impacting project profitability. He also highlighted the critical role of interest rates in financing and real estate investments, stating that the era of near-zero interest rates is over, requiring market participants to adapt to a new financial reality.

Bank Leumi, as a leading financier of the housing market, analyzes project business plans, scrutinizing expenses against potential revenue. Shapira advised investors to perform similar due diligence, comparing project costs to similar ventures. A key metric he introduced is 'absorption capacity,' which measures a project's resilience to unexpected costs and deviations, indicating how much unsold inventory can be absorbed before reaching the break-even point.

The Israeli housing market is currently in an unusual state, with record-high unsold inventory and significantly slower sales compared to previous years. Shapira indicated that it could take 25-30 months to absorb the current stock, nearly double the typical period. He anticipates a gradual return to market equilibrium as accumulated demand meets the substantial supply built over recent years.

Shapira also discussed the relationship between housing prices, rent, and interest rates, noting that low rates from 2014-2023 fueled price increases, while rising rates in late 2023 led to a sharp rent hike. Despite recent interest rate cuts by the Bank of Israel to 3.25%, he does not foresee a return to zero rates. While not predicting price surges, he acknowledged the inherent unpredictability of the Middle East. He also pointed out that limited rental supply and an underdeveloped market contribute to rising rents, which may eventually prompt families to reconsider purchasing property.