Real Estate Slowdown Creates Opportunity for REITs to Buy Unsold Apartments

Amidst a slowdown in the residential real estate market, a significant deal has been struck between a developer and a rental housing REIT. The real estate company Tzvi Tzarfati has agreed to sell 80 apartments to the Azorim Living REIT for NIS 198 million, including VAT. The project is located in the local council of Azor, central Israel.

For Azorim Living, this acquisition presents an opportunity to expand its portfolio of ready-to-occupy rental units, most of which are already leased. Eran Anav, CEO of Azorim Living, stated that acquiring income-generating properties offers the most efficient capital investment. This strategy allows the REIT to avoid the costs associated with construction and occupancy periods, during which it would incur financing expenses without rental income. The deal includes a 14% discount on the purchase price compared to market rates, which Anav expects will yield an additional 3.6% return from rentals. Azorim Living anticipates recognizing NIS 33 million in revaluation gains from the transaction.

Tzvi Tzarfati's co-CEO, Moshe Tzarfati, explained that the deal enables the company to sell a substantial portion of its remaining inventory at once, generating significant profit and immediate cash flow for reinvestment in other projects. Tzvi Tzarfati estimates a pre-tax profit of NIS 47 million from the sale, averaging approximately NIS 590,000 per apartment, with an estimated post-tax cash flow of NIS 156 million.

Tzarfati noted the slow sales pace in the market, particularly in Azor, with only one apartment sold per month recently. He highlighted that while the sale involved a discount, it provides immediate profit and cash flow, avoiding a prolonged wait for full sales. The project, a "Pinui-Binui" (evacuation-reconstruction) initiative, initially comprised 280 apartments, with 204 designated for marketing. By September, only 96 of the 141 available apartments had been sold, despite construction completion and occupancy commencement.

The sale to Azorim Living encompasses all 63 apartments initially designated for long-term rental, all four-room units, 60 of which are already rented. Additionally, the REIT will acquire 17 three-room apartments originally intended for sale. This transaction reduces Tzvi Tzarfati's unsold inventory by 38%, leaving 28 apartments for sale, with a commitment not to sell more than five to any single buyer.

Azorim Living projects annual rental income of NIS 7.1 million from the 80 acquired apartments, compared to Tzvi Tzarfati's earlier estimate of NIS 5.5 million for the 63 rental units. This is Azorim Living's third bulk apartment purchase this year, totaling 156 units. Other rental REITs, including Megurit, Rent It, and Abo Family, have also been actively acquiring apartments, capitalizing on the market slowdown and favorable pricing. This trend benefits both REITs seeking to expand their portfolios and developers looking to reduce unsold inventory and secure cash flow.