Conflict in Israel has brought terror, death and economic collapse. Noella Pio Kivlehan reports from Jerusalem on the desperate need for peace to spur the country’s markets
Wednesday, 11 June, seven days after the Jordanian peace summit to launch the Israeli-Palestinian road map. We had just turned off Jaffa Street, Jerusalem’s main thoroughfare. It was 5.27pm as we headed to a bar for a drink.
At 5.28pm an explosion ripped through the air. We froze, afraid to move. “It may not be a bomb,” said my friend tentatively, adding that sirens would be the confirmation.
A few seconds later the sound of sirens came wailing through the streets, while TV helicopters flew overhead.
The bar owner turned on the television, and passers-by stopped. Just 200 yards from were we stood, a nightmare was unfolding.
The bomb was in Jaffa Street, the scene of three previous suicide bombings. First reports talked about casualties, then five dead, then seven, until eventually 16 people were declared dead, and 105 wounded.
“Jerusalem will be dead tonight,” whispered my friend. No pun was intended. It was a simple statement.
“All the bars around us, all the clubs, restaurants, cinemas, will be empty. No-one will come into town for at least a couple of days.”
The bar owner shook his head. He says business has been tough, with practically no trade last year. This bombing will just make it worse.
Desertion from the leisure scene has affected all of Israel’s commercial property market since the start of the intifada – the 34-month-old uprising by Palestinian groups against Israeli occupation.
So far, Jerusalem-based AFP news agency says 3,376 have been killed – 2,545 Palestinians, 770 Israelis and the rest foreigners.
Despite the Jerusalem suicide bombing, the road map agreed between Israeli prime minister Ariel Sharon and Palestinian prime minister Mahmoud Abbas – better known as Abu Mazen – in Aqaba, Jordan, brought instant optimism.
This was reinforced by the announcement at the end of June of a six-month ceasefire by three of the main Palestinian militant organisations – Hamas, Islamic Jihad and the al-Aqsa Martyrs’ Brigade.
“There was an immediate positive impact following the road map,” says Stanley Finkelstein, managing director of NAI Stanley Finkelstein in Tel Aviv. “The shekel strengthened, and it made it cheaper for people to buy property.”
An Israeli finance spokesman, quoted in an AFPreport, said: “A lasting end to violence would allow us to no longer appear as a big risk country for foreign investment, which has been our reputation since the intifada.”
The prospect of peace and a pick-up in the economy could not have come at a better time. Suicide bombings have driven not only Israelis away from city centres, but also international business and tourists.
The tourist industry, Israel’s biggest money generator, has suffered badly. Only 862,000 tourists arrived in Israel last year, a drop of 30% on the previous year and a 70% slide from 2000.
“From January there was not one guest in the hotels, although this year it is becoming more positive. We now have around 20% occupancy,” says Pinni Cohen, general manager of the investment and development company Africa Israel, which owns nine hotels in Israel.
Vacant offices
The office sector has also been hit by lack of investment and rising vacancy levels. In greater Tel Aviv, vacancy levels have reached more than 20% for both prime and secondary buildings, while rents have dropped by 50% from a high for grade A space of $24 per m2 to $12-$14 per m2. Only the residential sector is bearing up.
“The intifada has caused many international firms that previously invested heavily in Israel to refrain from doing so out of political sympathy for the Palestinians,” says Gavin Gross, managing director of Gavin M Gross International, based in Tel Aviv.
“Many international companies have business contacts throughout the Arab world and are reluctant to do deals with Israel at this time. The market was on a stronger economic footing, but it could not prevail once the intifada began.”
However, the intifada is only one problem.
The collapse of Nasdaq only a few months before the Palestinian uprising in September 2000 also damaged the economy.
Israel had been building a reputation as a hi-tech haven, with around 6,000 businesses per year starting up at the height of the hi-tech boom – a rate second only to that of the US. Motorola had its largest R&D facility outside of the US in Israel.
Coping with the demand, construction firms rushed to put up office buildings in Tel Aviv and its suburbs such as Herzliya, where rents were lower than central Tel Aviv, and easily accessible to workers.
Ofer Ziv, head of entrepreneurial projects for Solel Boneh, one of Israel’s largest construction companies, says that in the heyday of the late 1990s, around 2.2m sq ft of office space a year was being built.
However, since the hi-tech bubble burst and the intifada began, many companies have shut down. Construction has dropped to 215,000 sq ft a year.
Compounding Israel’s economic downturn is the financial burden of the intifada. Last year the Israeli government spent $4.2bn – 3.8% of its GDP – fighting the uprising. This money is being taken out of a struggling economy.
But with the road map agreement and the Palestinian ceasefire, hope is on the horizon. Gross says: “The answer to Israel’s problems lies in getting peace.”
Construction is still going on in Israel, despite high vacancy levels, points out Jonathan Morris, a partner in corporate finance at Berwin Leighton Paisner, who deals with companies investing in Israel.
In the past year, City Gate in Ramat Gan, Solellim in Yigal Alon, and Europe-Israel House in the courthouse sub-market, have all been completed.
As most commentators agree, the rebuilding of confidence in Israel will take time. But it is on the right track. GDP is expected to grow by 1% this year, and Israel will benefit from a three-year $9bn loan recently issued by the US Treasury.
Signalling the start of a turnaround in the country’s fortunes are Israel’s Twin Towers. The 48-floor circular skyscraper, 43-floor triangular tower and shopping centre in downtown Tel Aviv, totalling 1.3m sq ft, indicated Israel’s economic strength when built by David Azrieli in the late 1980s.
The towers became a magnet for the hi-tech businesses that took space during the 1990s boom, paying rents of $24 per m2.
Such is Azrieli’s confidence in the future of the Israeli market that, in six months’ time, he will start work on a 46-storey, $50m tower, due for completion in 2005.
This is despite the recession that has seen companies such as Terayon, which took 130,000 sq ft in the first tower at $22 per m2, try to sublet its excess space at $12 per m2.
The third tower has been planned since 1999, but problems with the Tel Aviv municipality delayed construction.
When completed, Azrieli is in no doubt that he will attract tenants that, he hopes, will pay $20 per m2. He is, however, looking for a different tenant mix.
“When the political situation is better, and I believe we are at the beginning of that, it won’t be as big a problem to bring in the tenants,” says Azrieli.
“One of the efforts has been to attract big anchor tenants. They will not be hi-tech. Our goal is to bring in investment companies and accountancy firms.”
Just before the intifada started in September 2000, an estimated 40,000 Palestinians were employed in Israel’s construction industry. But the number has dropped to around 10,000 since the intifada and the recession began.
Since Israelis do not want to work in the construction industry, and construction companies cannot employ Palestinians, firms are hiring foreigners. This is increasing costs at a time when the construction industry has contracted by 10% in the past two years, with debts totalling $30bn.
Construction industry
Some believe things may not improve for the Palestinians, even if peace does come.
Roger Mark of Jones Lang LaSalle inTel Aviv believes: “If we get peace, the whole economy of the region will improve dramatically and quickly. But those who will benefit the least will be the Palestinians.
“Property in Palestinian areas is not really an issue because the road map calls for a separation of the two states. That’s probably the best way, to let each start building its own life.”
With unemployment among Palestinians at 34% and Israeli unemployment set to hit 12%, peace can only benefit both sides.
Government cuts capital gains taxby 50%
With a 20% vacancy rate around greater Tel Aviv, Ra’anana, and Ramat Gan, and yields topping 9%, it is, says Jonathan Morris, partner in corporate finance at London-based Berwin Leighton Paisner, “a good time to invest”.
“There’s obviously surplus space around and the yields are higher than in the UK,” says Morris, although he points out that leases are shorter than in Britain, with an average duration of eight years.
A number of economic measures proposed by the Israeli government will make the country more attractive.
Capital gains tax is to fall to 25% from 50% and the 2.5% sales tax on commercial property is to be dropped entirely.
The acquisition tax for property buyers will also drop from 5% to 4.5%.
Morris’s colleague Michael Shebson says the UK has been slow to see the opportunities that Israel has offered, although that is beginning to change.
Israelis, however, have not been quite as slow.
According to Lior Rosenman, president of Gemolab Group in Tel Aviv, while most foreign investors look for both grade A buildings in the heart of Tel Aviv and shopping centres, Israeli investors are happy to acquire secondary buildings.
“Israelis will go for B buildings because they will know what they are buying,” says Rosenman.
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Tel Aviv and Ramat Gan: offices |
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While occupancy fluctuated in most parts of Tel Aviv and Ramat Gan, levels remained stable in the city centre |
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Area |
Expected occupancy winter 2003 (%) |
Occupancy summer 2002 (%) |
Price range ($ per m2/month) |
|
|
Centre |
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|
City |
78.0 |
78.0 |
10-12 |
|
|
Derech Petach Tikva Street |
86.4 |
84.0 |
9-12 |
|
|
Tel Aviv Center |
93.4 |
88.0 |
12-15 |
|
|
North Tel Aviv |
87.8 |
89.8 |
12-15 |
|
|
Ighal Alon Street |
92.7 |
95.3 |
9-12 |
|
|
Ramat Gan-Stock area |
86.4 |
89.6 |
9-12 |
|
|
Periphery I |
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|
Or Yehuda |
82.7 |
88.1 |
8.50-11.00 |
|
|
Herzelia Pituach |
67.8 |
90.4 |
12-14 |
|
|
Petach Tikva |
75.5 |
92.6 |
9-12 |
|
|
Ramat Hachail/Atidim |
86.4 |
88.0 |
9-12 |
|
|
Periphery II |
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|
Ra’anana |
66.5 |
82.5 |
10-12 |
|
|
Kfar Sabah |
88.5 |
88.1 |
9-11 |
|
|
Netanya-Poleg |
93.7 |
86.8 |
6-9 |
|
|
Rosh Ha’ain |
80.2 |
87.1 |
6-9 |
|
|
Nes Ziyona/Rehovot |
93.9 |
95.7 |
9-12 |
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