Real Estate Investment In Israel 2024: Opportunities In A Post-Conflict Economy.

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Where is this going?

Real Estate Investment in Israel 2024: Opportunities in a Post-Conflict Economy.

Foreign investors eyeing the Israeli real estate market need a nuanced understanding of the local economic and geopolitical context to make informed decisions. Drawing insights from the Bank of Israel’s April 2024 macroeconomic staff forecast, this article provides a targeted analysis of the triggers and considerations that should guide real estate investments in Israel during these turbulent times.

Economic Growth and Recovery Trajectory

The Bank of Israel projects GDP growth rates of 2% for 2024 and an optimistic 5% for 2025, signalling a post-conflict economic recovery. For real estate investors, this points to a gradual increase in demand for both residential and commercial properties as the economy strengthens.

Key triggers include:

Completion of Conflict: As the intensity of the regional conflict decreases, areas previously affected might see a resurgence in real estate demand and value appreciation.
Economic Stabilization: The return to pre-war economic activities, especially in 2025, will likely boost consumer confidence and spending, directly benefiting the real estate sector.

Department Staff Forecast for 2023–2025 (rates of change, percent^a, unless stated otherwise)
	2023 Actual	Forecast for 2024	Change from the January forecast	Forecast for 2025	Change from the January forecast
GDP	2.0	2.0	–	5.0	–
Private consumption	-0.8	4.5	1.5	5.5	-0.5
Fixed capital formation (excl. ships and aircraft)	-3.1	-3.5	-0.5	10.5	4.0
Public consumption (excl. defense imports)	7.2	4.5	-2.0	-2.0	-2.5
Exports (excl. diamonds and startups)	0.3	-1.0	-1.5	4.0	-1.0
Civilian imports (excl. diamonds, ships, and aircraft)	-7.2	-4.0	–	8.0	-1.5
Broad unemployment rate (average for the year, ages 25–64)^b	4.4	3.7	-1.6	3.3	0.1
Adjusted employment rate (average for the year, ages 25–64)^b	77.8	77.3	0.6	78.2	-0.5
Government deficit (percent of GDP)	4.1	6.6	0.9	4.6	0.8
Debt to GDP ratio (percent)	62	67	1	67	1
Inflation (percent)^c	3.3	2.7	0.3	2.3	0.3
^aIn the forecast of National Accounts components, the rate of change is rounded to the nearest half percentage point. ^b According to the Central Bureau of Statistics definition, the broad unemployment rate includes the unemployed under the normal definition (someone who has not worked, wanted to work, was available to work, and searched for work), as well as employees who were temporarily absent from their jobs for economic reasons (including furloughed workers). Accordingly, the adjusted employment rate does not include those temporarily absent from their jobs for economic reasons. ^c The average of the Consumer Price Index in the last quarter of the year compared with the average in the last quarter of the previous year.

Source: Bank of Israel

Inflation and Interest Rates: Timing Your Investments

With inflation expected to stabilise around 2.7% in 2024 and decrease slightly to 2.3% in 2025, and interest rates projected to be around 3.75% by early 2025, investors should consider the following:

Fixed-Rate Borrowing: Locking in mortgages at current low rates could be advantageous before any potential rate hikes as economic conditions improve.
Inflation Hedge: Real estate traditionally serves as a hedge against inflation. The expected steady rates suggest that property investments will hold or increase in value without the eroding effects of high inflation.

Inflation forecast for the coming year and interest rate forecast for one year from now
(percent)
	Bank of Israel Research Department	Capital markets^a	Private forecasters^b
Inflation rate^c	2.8	3.0	2.8 (2.3–3.2)
(range of forecasts)
Interest rate^d	3.75	3.8	3.6
(range of forecasts)			(3.30–4.00)
a) Inflation expectations are seasonally adjusted (as of April 7, 2024). b) The average of forecasts published following the publication of the Consumer Price Index for February 2024. c) Research Department: the inflation rate during the four quarters ending in the first quarter of 2025.
d) Research Department: the average interest rate in the first quarter of 2025. Expectations derived from the capital market are based on the Telbor market (as of April 7, 2024). SOURCE: Bank of Israel.

Source: Bank of Israel

Impact of the War on the Real Estate Market
The ongoing conflict has had a dual impact on the real estate market—disrupting construction due to labor shortages, especially in the construction industry, and affecting the supply side by reducing the availability of Palestinian laborers. The recovery in this sector is expected to be slower than anticipated, which could lead to delays in new developments but may also result in an increase in prices due to reduced supply.

Government Fiscal Policy: Potential Impacts on Real Estate

The government’s increased spending, particularly on defense, and the rise in the VAT rate could influence real estate prices and rental yields. Investors should monitor:

Tax Changes: Any further increases in taxes or significant fiscal policy changes could alter the cost of holding and transacting in real estate, affecting overall investment returns.
Public Spending: Areas benefiting from government spending might see enhanced infrastructure and public services, boosting local real estate markets.

Sector-Specific Impacts and Opportunities

The conflict has disproportionately impacted sectors like construction, primarily due to labor shortages. This disruption presents specific triggers for investment:

Residential Development: Delays in construction projects could lead to a shortage in supply, driving up prices and rental rates, particularly in high-demand areas less affected by the conflict.
Commercial Real Estate: As businesses rebound, demand for commercial spaces will increase. Investors should focus on areas with significant business activities and those likely to benefit from economic normalization.

Risk Considerations

Investing in a market affected by geopolitical tensions involves risks that must be carefully managed:

Geopolitical Developments: Escalation of conflict or unexpected geopolitical shifts could negatively impact market stability. Diversifying investments across different regions and real estate sectors may mitigate these risks.
Economic Fluctuations: Global economic changes, particularly in major economies, could influence Israel’s economic performance and, by extension, its real estate market.

Conclusion

The real estate market in Israel offers considerable opportunities, particularly as the region moves towards stabilization and recovery. By understanding and acting on the economic triggers outlined by the Bank of Israel’s forecasts, foreign investors can strategically position themselves to capitalize on upcoming growth phases. Careful analysis and strategic entry points are essential to navigating the complexities of the Israeli real estate market successfully.

This strategic approach will allow investors not only to mitigate risks associated with current uncertainties but also to benefit from the expected upswing in the post-conflict economic environment.

Published April 20, 2024