Amid the ongoing war, more and more buyers are suing for compensation due to delivery delays. Attorney Efrat Reshef explains the similarities between the emerging crisis in the sector and the one experienced during the COVID-19 pandemic, emphasizing that those at the most significant risk are not necessarily the developers but rather the buyers themselves.
The Iron Swords War has created a complex reality in Israel’s real estate market. Despite a significant recovery in demand and transaction volume in recent months, key players—developers, contractors, and buyers—may face significant cash flow risks in the coming years.
“We are witnessing a dual crisis in the sector, entirely a result of the war and the severe shortage of labor it has caused,” explains Attorney Efrat Reshef, co-founder of the law firm Farbman, Reshef & Co. “This has already manifested in courts, where dozens of lawsuits have been filed in recent months by buyers against contractors and developers for failing to meet schedules—both in advancing projects and in delivering keys.
“Given that the construction industry has not yet recovered, and all bilateral agreements to bring in workers from third countries have yet to materialize, this is only the beginning. I expect a significant increase in lawsuits against developers in the coming year—a trend that could leave them in dire straits.”
The Cases Are Piling Up
According to Reshef, the current situation bears some resemblance to the COVID-19 era, which does not bode well for real estate companies: “Back then, despite a global pandemic, which is a clear example of ‘force majeure,’ courts still chose to impose hefty penalties on developers and contractors for delivery delays.
“It’s important to understand that today’s situation is no less challenging: construction sites remained idle for months, and even now, they have not returned to full capacity. Project managers were called up for reserve duty, and construction companies did everything they could to advance projects and fulfill buyer agreements.”
Reshef warns that “if there is no consideration for these extraordinary circumstances, we may see many contractors collapse under the weight of lawsuits and fines, which will ultimately harm the entire market, including the buyers themselves.”
Threats to Buyers
Reshef notes that the risks in this new reality do not end with the contractors’ struggles but directly threaten the buyers as well: “The drop in market demand immediately following October 7 and throughout the first half of 2024 forced contractors to offer unprecedented incentives to potential buyers, including flexible payment terms, loans on favorable terms, cancellation of linkage to the Construction Inputs Index, and more.
“For example, the well-known 80-20 deals (where buyers pay 20% of the apartment’s value upon signing and the remainder upon key delivery) are made possible through balloon loans taken out by the buyers from the bank, while the contractor covers the interest and index-linked repayments.
“Given the current construction pace, and since these loans typically span three to four years at most, it is very likely that buyers will be required to repay their loan amount at the end of the period—before their new apartment is even completed and while they are still renting. One doesn’t need to be an economist to understand that such a scenario, especially in today’s interest rate environment, could push many households into a serious financial bind.”
Preventing a Market Collapse
Reshef emphasizes that the state and its institutions are the only entities capable of preventing the collapse of tens of thousands of households across the country: “A mechanism is needed to protect buyers in the current situation. This could take the form of freezing mortgage payments in cases of delivery delays or implementing special agreements with banks.
“Additionally, the free market must show understanding, with both parties attempting to find solutions before rushing to court. For instance, developers should adjust rental compensation during the construction period where necessary, and buyers need to understand that disproportionate compensation claims could destabilize a project already facing difficulties.
“The complex situation in which the country—and specifically the local real estate market—finds itself requires creative solutions, flexibility, and maximum consideration for all stakeholders,” concludes Reshef. “The courts, regulators, and government ministries must all come together to understand that the systemic collapse of contractors, developers, and households is not just another isolated event that can be overcome but a genuine watershed moment. If we, as a nation, want to continue seeing a thriving local real estate market, we must act with full force to prevent the catastrophes now unfolding before us.”