Real Estate Funds Buy Up Developer Apartments at Discount Amid Market Slump

Real estate investment trusts (REITs) are increasingly purchasing large blocks of apartments from struggling developers in Israel at significant discounts, as the residential market faces a substantial surplus of unsold homes. This trend is exemplified by a recent deal where Azorim Living, a REIT, acquired 80 apartments from Tzvi Tzarfati and Sons in the town of Azor for approximately 198 million shekels. An independent appraisal valued these apartments at 231 million shekels, meaning Azorim Living purchased them for about 33 million shekels less than their estimated worth, a discount of roughly 14.3%.

While this presents an opportunity for REITs to expand their portfolios at lower prices, it also allows developers like Tzvi Tzarfati and Sons to realize profits and generate much-needed cash flow. The developer estimates the sale will yield a pre-tax profit of 47.2 million shekels. This strategy reflects a shift for developers, prioritizing immediate cash and risk reduction over waiting for gradual sales.

This is not an isolated incident. In recent months, several REITs have engaged in similar bulk purchases. Abu Family Living, controlled by Zachi Abu, recently bought 50 apartments from Azorim in Netanya for about 120 million shekels. Almogim sold 54 apartments in Rehovot to Megurit for 117 million shekels, even incurring an expected accounting loss of 6-7 million shekels to reduce credit needs and financing costs. Aura, a major urban renewal company, sold 52 apartments in Hadera to Rent It for 108.5 million shekels.

The underlying issue is a massive inventory of unsold new apartments in Israel, estimated at nearly 86,000 units as of late August. At the current sales pace, it would take over two years to sell this stock. This surplus burdens developers, particularly those reliant on bank financing, as unsold units tie up capital and delay debt reduction. REITs, however, can purchase these bulk units, often using credit and investor funds, and hold them for long-term rental income and potential appreciation.

Azorim Living CEO Eran Anav described the recent acquisition as excellent, noting that most of the purchased apartments are already rented, ensuring immediate income. He anticipates this, along with other recent acquisitions, will increase the REIT's rental-yielding properties by 23% and its net operating income by 30%. Moshe Tzarfati, CEO of Tzvi Tzarfati and Sons, emphasized the deal's importance for sound business management during challenging real estate market conditions, highlighting its contribution to the company's results, cash generation, and financial exposure management.