Israeli Investors Weigh Real Estate Stocks Amid Interest Rate Cuts and Sector Variations
Israeli investors face a key question: is it better to invest directly in real estate or in real estate stocks? Market experts largely favor stocks, citing long-term data. Samuel Frankel, founder of Epsilon Investments, noted that over 36 years, stocks have outperformed other investment channels, including direct property ownership. Since the launch of the Tel Aviv Real Estate Index in 2005, it has yielded a 478% return, compared to a 235% rise in housing prices according to the Israeli Central Bureau of Statistics. While property ownership allows leverage, it also entails maintenance costs and tenant issues, making stocks historically more profitable.
However, not all real estate stocks perform equally. Yaniv Nir, head of trading at Bank of Jerusalem, warns investors against treating all real estate stocks as one group, highlighting differences among residential development, income-producing real estate, construction, infrastructure, and building materials sectors. Recent performance varies widely: over the past year, the TA-125 index rose 31%, the TA Real Estate Index increased 5.5%, TA Construction fell 4.5%, TA Income-Producing Israel rose 11%, and TA Income-Producing Abroad declined 12%.
The recent Bank of Israel interest rate cut to 3.5%, with expectations of further reductions, has boosted real estate stocks, which are sensitive to financing costs. Samuel Ben-Eriyeh of Pioneer Asset Management said all real estate stocks benefit from rate cuts, but the impact varies. It is future rate levels, not past cuts, that most influence stock prices, according to Itay Lipkowitz of Horizon Capital. Companies with low leverage and long debt maturities maintain stability, while highly leveraged firms face market skepticism.
Income-producing real estate companies in Israel, especially those in commercial centers, logistics, and data centers, are currently the biggest beneficiaries of falling rates. The tech sector's mixed impact affects office space demand negatively but boosts digital infrastructure needs. Experts expect asset revaluations to increase profits for companies like Azrieli, Mega Or, Melisron, and Amot. Construction and infrastructure firms also stand to gain from government post-war reconstruction budgets and lower financing costs, though they face risks from rising material costs and currency fluctuations. Leading contractors include Electra, Dania Sibbus, and Shikun & Binui.
Residential developers rank third in attractiveness due to weak demand, high construction costs, and labor shortages. Despite current challenges, some experts predict recovery within six months as lower rates reduce financing costs for both developers and buyers. Notable companies include Damari, Tadmor, Aura, and Africa Housing. Meanwhile, Israeli real estate firms with overseas assets face challenges from rising interest rates abroad and currency risks, making foreign investments less attractive currently. Strengthening shekel trends could further impact these companies' profitability.
Overall, the real estate sector in Israel shows varied prospects depending on sub-sector, leverage, and geographic exposure, with interest rate trends playing a pivotal role in shaping investment outcomes.
