Tough competition slows tide of Israeli capital into primary markets
Israel invested a record-breaking $2.4bn in US commercial real estate acquisitions in 2013. That figure was more than Germany, Norway, Japan or Hong Kong, all top US property buyers, invested, and more than 80% of the $2.9bn China spent that year, according to Real Capital Analytics.
However, in 2014, Israel largely disappointed expectations, investing just half that amount. The sharp fall was due largely to a flood of foreign investment that began to intensify early last year, making secondary US markets and a burgeoning Israeli bond market more attractive.
“The investment sizes are just too large for [Israelis] and prices have doubled in gateway cities in the past two or three years,” says Robert Ivanhoe, chair of global real estate practice at real estate firm Greenberg Traurig LLP, which has offices around the globe, including one in Israel.
Foreign US real estate purchases rose more than $6bn last year to $43.6bn, as gateway cities became saturated with investors that can throw in huge sums of money and close deals with lightning speed.
That strategy does not bode well for most Israeli firms, which often lack boots on the ground in the US. Much of their money is also tied to the nation’s pension funds, as they have sought to protect pensioners with safer investments offering immediate returns – the type of investments that are hard to come by in cities like New York, Los Angeles or Washington, D.C.
“Huge Asian capital flows are looking to park money with very little concern about immediacy of returns and prepared to put up a 10% deposit within five or 10 days of a bid,” Ivanhoe says. “[Israelis] want to go in and see a decent return on investment from day one. It’s a very different mindset.”
Institutions still in the game
Nevertheless, some of the largest Israeli institutions are still competing. Harel Insurance partnered with Paramount Group in the $395m purchase of a 23-storey office tower at 50 Beale Street in San Francisco, for example, while firms like HAP, Adam America, Elad Group, Izaki Group Investments and the Naftali Group have bought a fair amount of real estate in major US cities.
But last year Israeli acquisitions were largely in secondary markets offering more breathing room to complete deals. Among the top investments or joint ventures, Harel partnered with Accesso Partners on the $122m purchase of 200 West Monroe in Chicago, while Clal Insurance Enterprises bought the Harper Court building at the University of Chicago for $112m.
Aion Partners joined with Israeli insurer Aurec Capital to buy One South Broad Street in Philadelphia for $68m. Israeli firms are often limited to a 49% stake in such investments due to tax reasons, so they sometimes elude the headlines.
The focus has also shifted to bond investments. US developers have stormed Israel’s bond market, as Real Estate Capital reported in September, allowing them to tap eager Israeli investors and bypass more costly mezzanine loans or limited partners.
“Investors in the Israeli markets are very comfortable investing in debt,” says Shimon Skury, president of New York-based Ariel Property Advisors, whose affiliate Arlington Equity Group assists US companies to raise Israeli bonds. “It gives them exposure to the US and allows them to mitigate their risk.”
Close to $1bn in Israeli bonds were issued last year, offsetting some of the ground lost on the acquisitions side, says Skury, who adds: “We expect the Israeli bond market to continue to expand and produce new capital for US operators and developers.”
However, as the cycle progresses, and if gateway markets weaken, Israelis will be poised to refocus on acquisitions. “There are a lot of challenges to be dealt with, but they haven’t given up,” Ivanhoe says. “That’s just not their style.”