A new era begins in Israel — the long-term rental market

The rental market in Israel, which until recently was characterized by chaos and a lack of regulation, and ruled by private investors, is finally maturing. In the last few years, the market has become far more sophisticated, with the establishment of a government company to promote long-term rentals and three real estate investment trusts (REITs) that focus on this field. Today, thousands of apartments across the country are managed on a long-term rental basis under this model – and this is just the beginning.

In mid-July 2011, a 60-day notice period ended for the evacuation of a two-room apartment in central Tel Aviv. At the time, the apartment was being rented by a 25-year-old woman and her partner. The apartment owner decided to evacuate the tenants in order to renovate, but when the young woman asked to return upon completion, the landlord refused, stating that his son would be moving in long-term. When the tenant discovered that she could not afford another rental in the area, she decided, out of desperation, to pitch a tent and make her new home on Rothschild Boulevard. She created a Facebook event and invited her friends to join her. 

Little did she know that this would spark the largest and most tumultuous social protest movement in the history of Israel – known as the Tent Protest or the Israeli Social Justice Protest. Hundreds of thousands of people participated, living in tents for months on end. The name of the tenant, Daphni Leef, will forever be remembered in Israel’s history. 


Tenants have limited rights in short-term rental contracts

This protest movement brought to the surface one of the major failures in the Israeli housing market: the chaos of the rental sector. In most Western countries, the rental market relies on privately or publicly-owned corporations that own large complexes with thousands of apartments. Tenants can rent an apartment for long-term periods without any issues. In Israel, however, the market functions completely differently.

The Israeli rental market relies almost entirely on individual investors who each own one or a small number of apartments, which they are free to rent out in any way they see fit. With a limited supply of apartments, especially in the center of the country, rental prices are constantly rising. Landlords tend to offer short-term one-year contracts, at the end of which they can either increase the rent for the existing tenant or raise it for a new one. The unequal relationship between the parties allows the landlords to include additional draconian clauses into the contracts, such as evicting the tenant at short notice.

The social justice protests sparked the beginning of the long-term rental market

For the first time, the 2011 protests caused many parties in the country to take notice of the chaos of the residential rental market and come up with solutions – starting with the development of a corporate-owned, long-term rental industry. A decade after the protests, thousands of apartments are already being rented based on this model, and tens of thousands more are in various stages of planning and construction.

According to data from the Central Bureau of Statistics in Israel today there are about 750,000 households living in rental apartments, occupying about 29% of all homes in the country. The two most prominent sectors living in these rental apartments are the 20-40 year-olds, including students and young families, as well as those with low incomes who are unable to accumulate the capital required to purchase an apartment.

Yair Lapid established a government company to advance the rental industry

Former Finance Minister, Yair Lapid, is largely responsible for laying the foundations for the development of the long-term rental market in Israel. In 2013, he was elected to the position based on his promise to ensure the construction of 150,000 apartments in this model. In 2014, he founded the “Apartment for Rent” company, which promotes the building of large-scale residential projects for long-term rent, with tenants being offered a minimum contract of at least five years, with the possibility to extend up to ten years. Through this initiative, construction tenders are bid on by investment companies interested in developing a hold in the Israel real estate market through residential rentals alongside apartment sales. 

In such projects, tenants are offered a minimum contract of at least 5 years, with the possibility of extension up to 10 years. During the contract period, the management company may not raise the rent but only link it to the consumer price index.

To date, the company has marketed land for the construction of more than 10,000 apartments intended for long-term rental, of which about 1,000 have already been occupied, with another 1,000 expected this summer. Among the projects that already have tenants living in them or will in the near future are: 333 apartments in the Arnona neighborhood in Jerusalem, 370 apartments in the Neve Ofer neighborhood in south Tel Aviv, almost 300 apartments in two projects in Haifa, 273 apartments in the Galil Yam neighborhood in Herzliya, 281 apartments in the Morasha neighborhood in Ramat Hasharon, and more.

Private companies have joined the rental revolution 

Alongside Lapid’s government company, more entities in the private sector are interested in taking part in the emerging industry, bringing Israel into a new era in the field of residential rentals over the past few years. Several real estate investment trusts (REITs) have been established, referring to private corporations that invest in income-producing real estate for residential purposes. The first fund of this kind in Israel, Megureit, which was listed on the stock exchange in 2016 and currently owns approximately 1,600 rental apartments, of which about 500 are currently occupied. 

Following Megureit, about three years ago, REIT Azorim was also established by the veteran construction entrepreneur Azorim. According to the fund’s reporting, it is currently in the process of establishing and planning about 1,500 units throughout Israel. A new player in the industry recently set up a third REIT – the Acuna Fund. The establishment of these three funds, together with the decision of the largest residential companies in Israel to enter the field of long-term rentals, shows that Israel is truly entering a new era in the field of long-term rental housing.

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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