Israeli real estate developers stop purchasing land for new construction

Not only is the demand for apartments declining but so is the demand for land for construction. During the first half of 2023, there has been a 45% drop in the amount of land purchased by developers from the Israel Land Authority, and this may lead to a shortage of homes in the future. But the most concerning issue is the failure of long-term rental tenders, which lost their viability due to high rates of interest.

Anyone interested in the real estate market in Israel, even superficially, knows that since the beginning of 2023, the number of purchases in the Israeli housing market has dropped dramatically, due to a variety of reasons, most significantly the increase in interest rates in the economy, which makes it difficult for mortgage borrowers. According to the prevailing assumption in the market, this decline in demand – by tens of percentage points compared to last year – is expected to eventually lead to a decline in prices (which we are just starting to see).


However, alongside the sharp decline in the number of transactions, there was also a decline in another parameter, namely the volume of land purchases by developers, as indicated by data on land tenders released by the Israel Land Authority (ILA) – the body that manages all state land for residential construction.

An analysis recently published by the economic newspaper Calcalist shows that in the first half of 2023, the ILA publicized land tenders for a total of 13,087,000 apartments, but of these, developers purchased land for the construction of only 7,596 apartments – representing around 58% of the land marketed. In the first half of 2022, the ILA marketed land for a total of 15,738 apartments, of which developers purchased land for the construction of about 14,800 apartments. This represents a 45% drop in the volume of land sales by the ILA to developers for residential construction.

On the face of it, the reasons for the drop in land purchases are clear. With such a sharp decline in demand for apartments, developers see no point in acquiring additional land, on which it will be difficult to sell the apartments they build. Furthermore, just as the interest rate increase weighs on home buyers, it also weighs on developers. However, while the average household has to borrow about NIS 1 million, in the case of entrepreneurs, the volume of bank credit reaches tens or even hundreds of millions of shekels, and the increase in financing costs means spending millions of additional shekels a year.

There is no dispute about the facts nor about the reasons for the failure of many of the tenders. However regarding the significance of the current situation and its implications for the future of the housing market, there is a strong disagreement between the two main approaches.

Pessimistic outlook: a sharp rise in prices

According to one approach, the drop in land purchases now could lead to a sharp rise in prices down the road. As we know, the construction industry is an industry that operates and responds slowly. The level of demand, on the other hand, may change in an instant. A decision by the Bank of Israel on a reduction of half a percentage point in the interest rate, or a resolution on the judicial reform, is enough to create optimism among the public, which will be reflected in a mass return of buyers to the market. According to presenters of this approach, if such a situation does occur in the coming year, buyers will encounter a low level of supply, since land has not been purchased in recent months. Thus, the drop in land purchases will lead to a low supply of homes, and an uncontrolled spike in prices once the level of demand rises.

Optimistic outlook: natural conduct of a sophisticated market

On the other hand, some argue that the decline in the volume of purchases by contractors is only natural, given that the number of unsold apartments on the market is already enormous. According to data from the Central Bureau of Statistics (CBS), as of the end of June 2023, there are close to 59,000 apartments “on the shelf” in the residential construction market – that is, unsold apartments in projects that have already begun. This is an unprecedented number in Israel, and about 28% higher than the 46,000 unsold apartments registered at the end of June 22.

According to this analysis, which we will refer to as the “optimistic analysis”, the conduct of contractors now is not only completely understandable – since the market is saturated with tens of thousands of new unsold apartments, nor does it have the potential for damage, since such a large number of apartments that are already on the shelf will be able to absorb the waves of demand – if and when they arrive. According to this approach, the decline in the volume of purchases by contractors is nothing but the natural conduct of a sophisticated market, which knows how to regulate itself when necessary.

The long-term residential rental market

Everything said thus far relates to regular land tenders, to build apartments for purchase. However, there is one tender segment that has been particularly affected by the situation – the long-term residential rental segment, tenders for which almost all failed in 2023. The reason for this is completely understandable. The yield in the rental market in Israel is 3%, maybe 3.5%. In the current interest rate environment, interest payments are higher than the yield. In other words, until the day the developer can sell the apartments (only 20 years from the date of occupancy), he loses.

Unlike most Western countries, the institutionalized, long-term residential rental market in Israel is still in the very early stages of development, however, the state has a serious interest in this market expanding rapidly and serving as an alternative to the private rental market, which is characterized by a lack of stability for tenants. Therefore, in the case of long-term rental tenders, there are no two approaches; and everyone agrees that their outright failure is a problem.

It was recently reported that the state intends to change the purchasing model in these tenders in a way that will make them more attractive to developers and entrepreneurs. Thus, for example, the Israel Land Council (a body headed by the Minister of Housing, which sets ILA policy) is expected to soon approve a friendly payment spread, in which the developer will have to pay 30% of the cost of the land on the date of winning the tender and the remaining amount upon receiving the land – two or three years later.

The bottom line is that there is no doubt that in 2023-2024 we can expect to see fewer cranes in the skylines of Israel’s cities. After several years of a construction blitz and price increases, perhaps this is not necessarily a negative phenomenon. And as in any period of significant economic change, there will be those who are sharp enough to find opportunities. 

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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.

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