Tel Aviv Real Estate in 2023

It’s hard to talk about the Tel Aviv real estate as monolithic market. Every neighbourhood, every street has its own character, vibe and of course, price. One thing all of the center of Tel Aviv has in common is the lack of supply. The endemic dearth of new units is perhaps the most significant factor explaining the the stellar rise in the price of apartments.

The question is, will all the negative exogenous shocks that have disrupted the markets around the world be enough to dry out the accumulated pent-up and frustrated demand for new units of the last few years. Prices, at least for the more desirable locations, will only start giving in once the excess demand for those units reduces to below its supply.

The waiting game

The market participants, buyers, sellers, promoters and investors have entered a state of “waiting game”. Although the numbers of transactions has dramatically decreased, to a near halt, the enquiries from prospective buyers have not. Interestingly, sellers and promoters alike have not capitulated and refuse to entertain aggressive offers.

Why prices won’t collapse

You’d be right to assume that promoters are the most exposed. Borrowing rates have skyrocketed and building materials too. The one peculiarity of the Tel Aviv market however, is that most of the new constructions are TAMA 38 1/2. In other words, under the national plan to increase the number of units and reinforce the aging buildings’ foundations, current apartment owners strike deals with promoters to allow the construction of new units on top of their buildings in exchange for renewed and sometimes extended apartments.

In practice, the promoters do not buy the land or the buildings. That is to say that until the actually building works start, the financial exposure of the promoters is very limited, almost insignificantly. And in case of a market downturn, they retain the ability to delay the start of the project.

Further, most of the new buildings constructions you see around the new north, only started once the majority of the units to be built were already been pre-sold in accordance with the lending banks’ contractual terms. This is a radical difference between Tel Aviv and frankly, most of the world and to a large extent, it has shielded the promoters from the wrath of the markets.

Where we see risk

The story is somewhat different when it comes to sky-scraping towers. There, the financial burden is heavy and heavy reliance on outside capital is a necessity. On the board front for example, the mammoth Mandarin project is an example of a financially exposed endeavour. Enormous land costs, and even more enormous building costs are reflected in the dizzyingly high asking prices (starting at 150k ₪ per m²). With over 240 units at gravity defying prices, primarily geared towards the ultra high net worth individuals around the globe, the current environment is challenging, especially since we already see early buyers selling their options to the market, a “mere” 5 years before delivery.

Highest Price per m²

Highest Value Transactions

Where do prices go from here?

How did prices fare in previous crises?

Well, although past data is no guarantee for the future performance, we still haven’t found a better indicator of the what to expect than to look at what’s happened in the past. The closest crisis, albeit very different in nature and scope then the current current one, is the 2008 credit crunch. Prices around the world came down dramatically, especially in the low income, high debt neighborhoods in the US. Contagion was fast and furious into all spheres of the financial markets.

But, and there always is a but, this current crisis is somewhat different, as it is part 1970’s oil shock, part 2001 tech bubble burst, part 2008 Lehman collapse and part algorithmic flash crash, with an added twist of crypto skulduggery. Now the result of this explosive cocktail is that no one is immune, rich or poor, risk savvy or conservative, young or old: all asset classes have been reeling with pain, some more than others, but all in all, there is nowhere left to hide. So we have no choice but to look as far back as the data allows and see how the market we are interested in fared in the face of adversity.