Could Israel’s periphery become more attractive for real estate investors?

A look at the Government’s latest proposals to encourage new construction and settlement in Israel’s peripheral regions. Could investment in these areas become more attractive?

The pronouncements by Minister of Construction and Housing Ya’acov Litzman in recent weeks regarding measures he is planning, which would spur construction of residential housing in Israel’s outlying regions, have led to increased interest in these areas among potential buyers. They also raise the question of whether, after decades of declarations followed by inaction, the State of Israel is finally going to invest in peripheral areas.

What is Israel’s periphery?

Periphery, as defined by Litzman’s plan, seems to imply anywhere outside of the Greater Tel Aviv area. But since almost every spot within Israel is less than a three-hour drive from Tel Aviv, the term “periphery” is still quite vague, yet powerful and significant. Although the borders of Israel’s periphery have never been officially defined, the two main areas that are considered to comprise Israel’s periphery are the Galilee in the north and the Negev in the south. The Golan Heights, the Arava, and the Jordan Valley are considered the “distant periphery.”

Cities in the periphery are characterized as low socio-economic areas with significantly underdeveloped services compared to communities in central Israel. Most were established as planned communities in the first years of the country’s existence in an effort to disperse the massive influx of new immigrants – which up until then had been concentrated along the coast and in Jerusalem – in the Galilee and the Negev. Since veteran Israelis could not be persuaded to move to these outlying areas, these new towns became populated almost exclusively by new immigrants who arrived in Israel in the 1950s with no assets, mainly from North Africa. For the most part, they were unaware of the challenging location they were sent to.

Social gaps in the peripheral regions

This policy laid the groundwork for social gaps that still characterize Israeli society to this day: a wealthy, well-established center, that contrasts with the weaker periphery. Data from the Israel Central Bureau of Statistics show, for example, that the average life expectancy in central Israel is 84 years, whereas, in outlying areas in northern and southern Israel, it is 81.5 years. Moreover, 47% of high school graduates in central Israel continue on to study in academic institutions, compared with only 37% of high school graduates in the periphery.

Because peripheral areas are also characterized by fewer employment opportunities, most residents in these areas have suffered throughout the years from negative immigration rates, with many of the younger generation moving to the greater Tel Aviv area. At the same time, due to relatively low housing prices, cities in the Israeli periphery became sought-after destinations for families with lower earning potential. For example, large Haredi communities were established in Beit Shemesh, Netivot and Tiberias, whereas Upper Nazareth, Afula and Karmiel became popular magnets among young couples from the Arab sector.

Previous attempts that have been made in the periphery

Over the years, the government has made countless attempts to promote the movement of families to outlying areas, with some being more successful than others. One of the most ambitious programs was Tama 35, the 2005 Integrated National Master Plan that aimed to transform Israel from a country with one large metropolis, to a country with four metropolitan cities: Tel Aviv, Jerusalem, Beersheba in the south and Haifa in the north. The goal was to stem the constant migration of residents from all the outlying areas to the center. To date, this goal has yet to be achieved. According to critics of the plan, it is not surprising that such a small country like Israel would have only one metropolis.

According to its proponents, the Government is responsible for the failure of the plan, since it did not take the necessary steps to make the north and south more attractive than central Israel, which would have made it a desirable alternative. Moreover, they say that the government did not invest enough in education options, health services and employment opportunities in these regions.

More recent proposals in the periphery

A popular program that has been promoted over the last decade is the construction of an IDF tech campus, which will consist of a number of army bases near Beersheba where tens of thousands of career officers will serve. The hope is that many of these families will end up relocating to southern Israel. Also, underway are plans for the establishment of an ultra-Orthodox city west of Kiryat Gat in the Negev region.

Most recently, the housing plan introduced in late June by Minister Litzman encourages settlement in Israel’s peripheral areas by lowering housing prices. According to this new plan, the government will cancel its current Buyer’s Price Program (Mechir Lemishtaken), which offered first-time buyers discounted housing prices throughout Israel. As a result, all apartments in central Israel will go back to being sold at full price, and only units in the periphery will continue to be sold at reduced prices. This measure comes following Litzman’s efforts to provide lower tax rates, favorable mortgage rates, and reduced bureaucracy at the Israel Land Authority for first-time buyers in the peripheral regions as well as tax exemption for buyers who purchase apartments for investment purposes in these areas.

These proposals have been received with mixed reactions in the real estate media. Most commentators do not seem to think that the main obstacle to increasing migration to the periphery is housing prices since housing prices in these areas are already much cheaper than in central Israel. The real problem, they say, is a lack of quality employment opportunities and high-level services. So long as these requirements are not met, outlying areas will continue to lure only people who cannot afford apartments in central Israel. In other words, only people with lower earning potential will move to these areas, which already have large populations in this category.

Could Corona make the periphery more attractive?

However, experts observe that as a result of the Corona crisis, the trend of working from home is expected to continue into the future, making it unnecessary for workers to live within physical proximity to their workplace – which could encourage a much wider population to relocate to the peripheral areas.

A further question that needs to be addressed is whether current public transportation capabilities will be able to handle such population growth in Israel’s periphery. A number of experts warn that increasing population centers in Israel’s periphery without expanding proper mass transit infrastructure will lead to increased use of private vehicles.

The contents of this article are designed to provide the reader with general information and not to serve as legal or other professional advice for a particular transaction. Readers are advised to obtain advice from qualified professionals prior to entering into any transaction.

© Copyright 2020.