What is the State doing to curb rapidly rising rent prices?

The long-term rental market began to develop over the past decade through a new state-owned company, through real estate investment trusts (REITs), and through tax benefits and incentives for developers. But so far, a systematized long-term rental market is operating on a very small scale and will not help solve the crisis of rising rent prices, which is quickly intensifying.

While the public’s attention is currently directed mainly to rising Israel real estate prices (which have risen by approximately 16% over the past year), a serious problem of price increases is occurring in the rental market too. Unlike home prices, rent prices do not receive their own index that monitors them regularly, however, they are included as part of the CPI.

The Central Bureau of Statistics recently began to publish the monthly rate of rent increase for apartments taken over by a new tenant, and the results are concerning: in the past month, the price increase in apartments entered by a new tenant was 6.5 percent, and in the previous month by 5 percent. A study of average rental prices in cities — a figure currently published by the Central Bureau of Statistics on a quarterly basis, shows that during the past two years, rent increased in the range of 4% to 5% in many cities, including Rehovot, Ramat Gan, Haifa, and others.

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Just as with the home purchase prices, in the case of apartment rental prices, the state does not have a solution, certainly not in the immediate future. Unlike most developed economies, where there is an established long-term rental market, in which it is possible to rent an apartment at a fixed price for many years, or even for decades without drastic changes in the rent, the rental market in Israel is significantly different.

About 800,000 apartments are currently rented in Israel today. Most of these are rented out by private individuals who own the apartments as a means of investment and seek to maximize their profits. The accepted term of the contract is one year, at the end of which the landlord can raise the rent or decide that he is not interested in continuing to rent it. This is a mechanism that makes the tenant community vulnerable and does not allow it to live a stable life. The problem becomes especially difficult when the tenants are low-income, and the increase in rent for them means abandoning the apartment, and sometimes even the city, in favor of a cheaper residential area.

This problem was at the heart of the huge social protests that broke out 11 years ago, in the summer of 2011. At that time, the streets of the cities were filled with tents in protest against housing prices in general, and rental prices in particular. The same protest spawned a number of initiatives to improve the situation. The most significant of these was the establishment of a state-owned company for the development of a long-term rental market, which would allow stable housing for tenanted households. The establishment of the company, “Apartment for Rent”, was initiated by the Prime Minister today, and then Minister of Finance Yair Lapid. The goal he set was the construction of 150,000 long-term rental apartments within a decade. However, Lapid finished his term almost immediately after the establishment of the company,  which had difficulty growing. Since its establishment in 2014, the company has published 60 land tenders totaling 17,000 apartments – just over 10% of the target set by Lapid for the decade. Of these, only 2,500 are currently populated.

According to the model offered by the company, 25% of the apartments in each project will be rented to those eligible for the Ministry of Construction and Housing at a discounted price of 20% below the market price, and the rest of the apartments will be offered at market prices but under long-term contracts of at least 5 years. These are, of course, better rental conditions than in the unregulated market, however, these are small numbers that have no chance of affecting the market.

Another step that was born in the wake of the protest was the “Fair Rental” law, initiated by one of the protest leaders, former Knesset member Stav Shafir. The proposed law sought to change the relationship between tenants and landlords in the field of private rentals, by requiring landlords to offer rental contracts of at least 3 years, while limiting the ability to raise rents during this period. Although the law was supported by the two finance ministers who served during the period of attempts to promote it – Yair Lapid and Moshe Kahlon, strong opposition from former Justice Minister Ayelet Shaked, who saw it as a violation of “market conditions”, led to its condemnation.

In parallel with the establishment of “Apartment for Rent”, Megureit, a  real estate investment trust fund was established in the capital market for investments in residential real estate for rental purposes. In the Israeli capital market, REITs intended for the income-producing real estate market – offices and commerce only, and Megureit was the first company to operate in the residential real estate sector.

In recent years, the state has begun to promote a no-frills initiative aimed at encouraging developers to enter the field of long-term rentals, through tax benefits. A recent amendment to the Encouragement of Capital Investments Law stipulates that these benefits can be credited to construction companies that have designated residential complexes built by them for rent for a period of no less than 15 years, and while tenants in these complexes will be offered rental contracts of at least 5 years.

In the past year, a number of the largest construction companies in Israel have decided to establish rental departments in order to take advantage of this benefit. Among them are Gindi Holdings, Ampa Real Estate, Azorim, and more.

In conclusion, it seems that over the past decade, the buds of the long-term rental market have begun to sprout. However, all of these are still in the initial stages and are far from meeting the needs of Israeli tenants today, and certainly will not be able to help them cope with the severe crisis of rising rent prices. It is to be hoped that a government that will be formed after the upcoming elections will be able to deal with this issue more successfully than what has been done so far, otherwise, it could have severe social costs.

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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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