“We haven’t seen transactions for the best quality buildings in Tel Aviv for two or three years now,” bemoans Dudi Daniel, head of real estate at Psagot, Israel’s largest investment house. “There is huge demand, the best properties are owned by pension and insurance companies and they don’t want to trade because opportunities are so rare.”
In Tel Aviv no-one is even sure where prime yields are. This is because there are so few comparables – “maybe 6% but who knows really”, one major investor speculates. In Israel’s economic capital there is also an intimidating speculative office development pipeline on the horizon that even the city’s booming tech sector may not be able to account for.
All this means that Israel’s biggest insurers and pension funds have far outgrown their domestic market and are searching for appropriate opportunities in the US, the UK and Europe, in particular in Germany and parts of eastern Europe.
Israeli institutions and UK real estate: unlocking the potential
Typically they are looking to provide higher yielding opportunities to otherwise low yielding pension pots and as a result are attracted not to risky out-and-out development, nor to ultra-prime assets, but to value-add opportunities.
Realising ambitions
Finding the right deals and realising their ambitions to match with ever increasing inflows is not easy though. They have to adhere to restrictive regulations, find the appropriate partner and buy into opportunities that match their return requirements at a time when the cycle is broadly considered towards its peak.
“UK Israel Business has seen a significant increase in Israeli institutional money flowing into UK real estate. Well-capitalised local insurers have a limited pool of domestic investment opportunities, which, when combined with a strong shekel and a weak pound makes quality UK investments a very attractive proposition for Israeli institutions,” says Hugo Bieber, chief executive of chamber of commerce, UK Israel Business.
Most of Israel’s major insurers began investing in real estate overseas from 2009, shortly after the Israeli government forced banks to sell off their fund management arms. Increased competition among new managers sent them searching for higher yielding investments. This also coincided with Israelis being forced by law to invest into a pension.
“Every month you can see the yields of the pension funds and performance in the newspaper – it is very transparent. The money coming in now is huge compared to 10 years ago and if you are not looking to invest your money in real estate your yields will be very low,” says Daniel.
When looking overseas, as with their domestic investments, regulation is an important factor dictating the structure of deals. Most notably, if Israeli funds are taking on any gearing for their transactions they are prevented from taking an equity stake of more than 49% in any transaction. As a result, aside from transactions undertaken purely with equity, more players need to be brought into a structure.
“What typically happens is they bring a friend with them from Israel to co-invest and find a local partner that they can trust with a good background and a little bit of equity of maybe 15% dependent on the business,” says Guy Vardi, head of real estate transactions at EY in Israel.
Local partners
Teaming up with someone they can trust is something that such investors typically spend a long time on and this can often lead to using a network of local partners with Israeli connections.
Amit Gal, head of real estate at Phoenix, is trying to take this to the next level by bringing together that network with global investment giants while co-investing in the deals itself; it has already teamed up with Blackstone Tactical Opportunities to invest in residential in Berlin.
As well as investing in debt, it is also targeting more operationally focused asset classes with demographic drivers such as logistics, healthcare, student housing, PRS and self-storage.
“I usually look to launch a jv, know the partner personally. We support the partner from the start and have enhanced returns as a result, but I can then look to bring in a mammoth like British Columbia. As ventures grow we can support the partner to prevent their share from being diluted. We are trying to be creative to get our extra notch of return and introduce deals to the GICs and Norges of the world,” he says.
The weight of inflows and need to chase returns has not prevented some from losing their discipline however. Taking cash off the table is an ongoing temptation for those already in the market and can return profit to their funds.
Insurer Harel has a property portfolio of around $2.2bn that represents close to 6.5% of its funds under management that are allowed to be invested in the asset class. The company has set a long-term target of 10% but getting there is no easy feat. At the end of 2015, alongside peer Clal, it sold Apollo and Lunar House in Croydon, south London, to Singapore-listed Ho Bee for £99m after being wooed by the price.
“We are trying not to just be a market player but invest with conviction, look at the fundamentals and be disciplined, so it is not easy and we need to keep spending just to keep at the level we are,” says Ron Kowalski, global head of real estate. “We are finding in London, Paris and Manhattan we are receiving particularly interesting offers from Asia.”
Teaming up with Israeli investors may not be the most straightforward move due to regulation and return requirements but with increasing inflows to the country’s pension funds Tel Aviv is becoming an ever more important destination on the fundraising trail.
Who to meet on the fundraising trail in Israel
There are seven major insurance groups or investment houses in Israel that invest in overseas property. EG rounds them up
Phoenix
Who to meet Amir Gal – head of real estate investments
Need to know Phoenix is an investor into debt fund manager DRC Capital and was an underbidder for serviced office specialist The Office Group earlier this year.
Harel
Who to meet Ron Kowalski – global head of real estate alternatives
Need to know Harel has a strong relationship with Schroders and also with Ares with which it owned 10 Fleet Place, EC4, in London’s Midtown until 2015 when it was sold for more than £175m to Crosby Investment Holdings and Wing Tai Properties. It still owns assets including 50 Broadway in Victoria, SW1.
Clal
Who to meet Gal Nadir – global head of real estate investments/Alon Waxman – head of real estate.
Need to know Clal owns a large portfolio of flats in US core cities alongside Allianz and Waterton Associates. It also has a track record buying offices in the UK regions, owning 150 Broomielaw in Glasgow and 115 Colmore Row in Birmingham.
Migdal
Who to meet Jonathan Ross – head of real estate
Need to know In July, Migdal made its debut in the San Francisco market, buying a 45% stake in 23-storey office building 353 Sacramento, which it bought from joint venture partner KBS.
Menora
Who to meet Ran Markman – head of real estate investment
Need to know In a joint venture with Harel, Menora owns Aviva’s UK headquarters in Norwich which was bought in 2009 for £134.4m in East Anglia’s largest investment deal yet.
Psagot
Who to meet Dudi Daniel – head of real estate
Need to know Psagot is owned by UK private equity fund Apax Partners and is reportedly being lined up for an IPO next year.
EG is media partner for UK Israel Business’s proptech delegation to Tel Aviv in January 2018. For more information and details on how to attend, visit www.israelproptech.co.uk
To send feedback, e-mail david.hatcher@egi.co.uk or tweet @hatcherdavid or @estatesgazette
