While for a long time, developers avoided building small homes, within just a few short years, the rate of new 2-room apartments being constructed has more than tripled. Today, the small apartment has become a sought-after product among investors. An analysis conducted by the Real Estate Appraisers Association in Israel found that the Return on Investment is significantly greater for a small 1-2 room apartment, as opposed to larger homes.
According to data presented by the Real Estate Appraisers Association in Israel, the rate of new small apartments being built has been on a steady rise for the past five years. In the first three quarters of 2020, building began on 2,368 2-room apartments, constituting 7% of all new residential construction starts during this period.
For comparison, in all of 2019, building began on 2,227 2-room apartments, which accounted for only 4% of all construction starts. In 2018, a similar rate was recorded, while in 2017 and 2016, 2-room apartments accounted for only 2% of all construction starts.
Apartments in Israel have grown larger throughout history – until now
From the establishment of the State through the 1950s and 1960s, small homes in Israel of 2-3 rooms were the standard. The new country was poor, and during an era that called for the rapid construction of tens of thousands of apartments to house massive waves of immigration, no one had time for luxury. Evidence of this form of construction can be found in the thousands of residential buildings spread throughout the country made up of small apartments of 50-60 square meters.
As the quality of life increased, so did the average construction area. Standards reached a peak in the first decade of the 2000’s when it became rare to build 3-room apartments of even 70-80 square meters, and 4-room apartments of 100-110 square meters were suddenly considered small. Among other things, this policy was fueled by various municipal planning committees that decided to force the poor out of their cities and attract populations of high socio-economic status by only building large, expensive homes.
Although effective, this policy was soon found to be damaging and misguided, as it left many people without appropriate housing options, including singles, young couples, and empty nesters. In recent years, developers and local authorities have begun to identify the shortage in the market, and the proportion of small apartments relative to total new construction has been steadily increasing.
A small apartment yields a greater return-on-investment
The demand for smaller homes is also evidenced by a recent study conducted by the Real Estate Appraisers Association, which reveals that 1-2 room apartments, bear the highest yields. Based on data from the Central Bureau of Statistics for the end of the third quarter of 2020, the analysis compared yields from rental apartments according to the number of rooms on both a national level and within major cities.
The numbers show that the average return for 1-2 room apartments is 3.83%, compared to 3.78% for 2.5-3 room apartments, 3.56% for 3.5-4 room apartments, and 3.66% for 4.5-5 room apartments. For example, in Tel Aviv, the average yield from a rental apartment is 2.36%, but apartments of 1-2 rooms will get a return of 2.69%. In Jerusalem, the difference is less significant — 2.65% return on the purchase of a 2-room apartment compared to 2.53% on an average apartment.
The city with the highest return rates for small apartments is Beersheba, bustling with student life. A 1-2 room apartment in this southern city will give its owner a return of 4.44%, compared to 3.05% for an average apartment. It is followed by Ashkelon, with a yield of 3.78% for a small apartment (compared to an average of 3%), Ramat Gan with 3.48% (2.55%), Petah Tikva with 3.43% (2.68%), and Haifa with 3.37% (2.67%).
According to Haim Mesilati, Chairman of the Real Estate Appraisers Association in Israel, “Ashkelon and Beersheba lead the way when it comes to rental yields in the big cities. This is not surprising, since, compared to other cities surveyed, these cities still have very attractive apartment prices. Both Ashkelon and Beersheba have the characteristics that investors are looking for – they are cities in the midst of a significant construction boom, with additional development plans and real estate potential that have not yet been fully realized. The best returns for investors usually come from smaller apartments. If buyers are patient and determined, they can find properties with attractive return rates.”