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14.06.20

The Effects of the Coronavirus Crisis on the Real Estate Industry – A Special Analysis

Dun & Bradstreet
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A Review of the Real Estate Industry Before the Coronavirus Crisis

The Real Estate Industry is one of the economy’s most vital industries. Its direct share of the GDP in 2019 was estimated to be about 6%, with the aggregate financial value of projects in this year estimated at about NIS 150 billion. There are currently about 15,000 projects under construction in various stages of execution, including more than 100,000 apartments in active construction. Over the past few years, it seems as if two real estate markets has been operating – the free market, which contributes about 75-80% of the industry’s operations, and Mehir LaMishtaken (government price capped projects) projects, which contribute about 20-25% of the industry’s operations.

The industry is currently experiencing a disruption in its operations in the shadow of the coronavirus crisis, after a challenging year by its own right in 2019, during which the industry stabilized in a level of a lower scope of operations compared with previous years, from both the construction starts aspect (about 51,000 construction starts in 2019, compared with the record of about 56,300 construction starts in 2016) and the number of new apartments that were sold in the free market, after neutralizing discounted Mehir LaMishtaken apartments (about 23,200 new apartments that were sold at market prices in 2019, compared with the record of about 36,000 apartments that were sold in 2015).

Residential Construction Starts in Israel

Source: Central Bureau of Statistics, Processed by D&B

  • 2015-2016 – The Mehir LaMishtaken program boosted the construction starts
  • 2018 – a decline in the Mehir LaMishtaken program and a general slowdown in the industry
  • 2019 – A stabilization in the levels of activity – in this year, construction starts of Mehir LaMishtaken projects constituted about 20% of the total number of construction starts, similar to their share in 2018.

 

Urban Renewal Construction Starts and their share of the Total Construction Starts

Source: Central Bureau of Statistics, Processed by D&B

 

  • In contrast to the decline in the total number of construction starts, the share of urban renewal construction starts increased over the past few years.

 

Urban Renewal Construction Starts and their share of the Total Construction Starts – By District

Source: Central Bureau of Statistics, Processed by D&B

  • The Tel Aviv and Central Israel Districts contributed together 44% of the construction starts in Israel in 2019
  • The increase in the Jerusalem District results from an increase in construction starts in the city of Beit Shemesh (Mehir LaMishtaken projects)

 

The Number of New Apartments that were sold in Israel

Source: Central Bureau of Statistics, Processed by D&B

  • 2016-2018 – A decline in the sales of new apartments at market prices, an increase in the sales of Mehir LaMishtaken apartments
  • 2019 – Further increase in the recorded transactions of Mehir LaMishtaken apartments sales (over the past year, construction permits were provided for earlier projects, and the transactions were officially recorded). Simultaneously – a certain increase in the sales of apartments at market prices, but the level is still lower than the 2015-16 record levels

 

The Effects of the Coronavirus on the Real Estate Industry

Like many other industries, the real estate industry is highly exposed to the effects of the coronavirus, despite the fact that is was excluded in early March 2020 from the Emergency Ordinances by the government and defined as a vital industry where works can, presumably, continue regularly.

On the supply side the industry has been suffering in March-April from a manpower shortage of 50,000 workers due to the lockdown in the territories of the Palestinian Authority, and also a shortage of construction inputs, both imported and locally produced, in a scope of 20-30%. As a result, the construction industry is currently at an output level of less than 50%, and therefore delays are expected in the deliveries of some of the projects. Following discussions on this topic in government agencies, it has been decided that the coronavirus would not be recognized as a Force Majeure.

On the demand side, there is a decline in the number of purchased apartments due to the lack of employment certainty in the labor market (at the peak of the crisis, the unemployment rate reached a level of about 27%, compared to an unemployment rate of only 3.4% before the crisis). The market uncertainty is accompanied by an increase in the risk levels across vast industries (tourism, events, catering, leisure and culture, restaurants, fashion and more), which materially affects business owners and employees, and also by lower international trade (estimates are for a 10% decline in international trade in 2020, which might negatively affect Israeli exports and lead to HR adjustments in exporting companies) and more. Despite the material decline in the number of transactions in the real estate industry in March-May, the industry entered the crisis in a situation where demands exceed supply, and we can assume that in a while, demands would increase back.

From the Regulatory Aspect, the coronavirus period also disrupted the operation of the Planning Administration, which in turn slowed the rate of plan approvals for new projects. According to publications, the new government decided that the Ministry of Finance’s Housing Headquarters would be closed and its authorities would be divided: The Israel Land Authority would return to the Ministry of Construction and Housing, while the Planning Administration would return to the Ministry of Justice. We think that this might result in asynchronization and longer proceedings in the industry, which is already burdened by heavy bureaucracy. In addition, under the new government there is an uncertainty whether the Mehir LaMishtaken program would be continued and what would be the future outline of urban renewal.

The Industry’s Risk Level: As a result of the industry’s trends, according to D&B’s indices, there was an uptick in the industry’s risk level. Accordingly, we witness a significant increase in the loan applications of construction companies. Senior executives indicate that there was an increase of several dozens of percentages in the applications for non-bank credit. In addition, a state-guaranteed loan fund was established in order to provide credit to businesses, including for the real estate industry. However, in light of the lower sales and the increase in the industry’s risk level, most of the credit applications for this industry were rejected. We estimate that the affects of the coronavirus crisis on the number of defaults in the economy would be seen in June and July. After defaults of more than 1,000 contractors in the construction, infrastructure and development segments in 2019, with a corresponding increase of about 8.4% in the industry’s risk level in that year, in case there would be no material improvement in sales, and if there would be no improvement in the credit conditions of the industry, we estimate that the risk level and the number of contractors at defaults would continue to increase in 2020.

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