Israelis no. 2 foreign buyers of US real estate

A skyscraper here, a shopping center there, one acre after another: the Israelis are again buying US real estate. A survey by Bregman Baraz Real Estate commissioned by "Globes" found that Israelis were the second largest foreign buyers of US income-producing real estate in the period from July 2010-June 2011, after Canadians.

Foreign investment accounted for 7.5% of total investment in US income-producing real estate in this period, with Israelis accounting for one tenth of the foreign investment, or 0.75% of total investment in the sector. Israelis invested $1.15 billion to buy 36 income-producing properties in the US over the past 12 months, after the $4.22 billion invested by Canadians, and ahead of the $1.14 billion invested by the Swiss. Total foreign investment was $12.15 billion.

Israel, with a GDP of 1.5% of the GDP of the US, accounts for just a sliver of foreign direct investment in the US, outside real estate. To put it another way, Israel is a small country with a large shadow - proportionally a very large shadow - in the US income-producing real estate market.

Israelis are not the only buyers of US income-producing real estate. According to Real Capital Analytics (which Bregman Baraz Real Estate represents in Israel), transactions in the sector more than doubled in the first half of 2011 over the first half of 2010 - the largest growth in any country except for Singapore. The volume of the global income-producing real estate market rose 25% to $235 billion in the first half, mostly due to the increase in transactions in the US. Asian and European markets (except for Germany) were flat.

Foreign investment in the US rose by 33% in the first half over the corresponding half. Bregman Baraz Real Estate partner Dr. Daniel Baraz says that the biggest investors, which he defines as investing hundreds of millions of dollars in the past three months, are UBS AG (NYSE; SWX: UBS), and Canadian companies and real estate investment trusts (REITs), including Artis REIT (TSX: AX) and Westmont Hospitality Group Inc. While no Israelis made the grade in the second quarter, they did in April 2010, when Nochi Dankner bought the US headquarters of HSBC in Manhattan for $330 million through IDB Holding Corp. Ltd. (TASE:IDBH) units Property and Building Ltd. (TASE: PTBL) and Koor Industries Ltd. (TASE:KOR).

Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) real estate investments manager Gadi Ben-Haim said, "There is no doubt that it's better to buy in Manhattan than in remote locations, but the current 4% return there is illogical and much lower than a year ago, although there are still opportunities. We bought property in Boston because it's a large metropolis of six million people. We try to focus on key markets because they are less risky. We won't go to tier-3 towns of 300,000 residents, but to locations with liquid properties."

A breakdown by subsector shows that office towers and shopping centers attracted the most investment - 38% and 36%, respectively. Almost all of the balance was invested in residential properties, especially rental projects, but also in homes for sale. In practice, however, the proportion of residential real estate is larger because transaction also involves additional investment in renovations for rent or resale.

There were several large deals by Israelis in July 2010-June 2011. Harel bought several properties for $152 million. It was followed by Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) and Menorah Mivtachim Holdings Ltd. (TASE: MORA), which jointly invested $150 million to buy a property in Manhattan. Azrieli Group Ltd. (TASE: AZRG) bought a Houston office building for $176 million and a return on investment of almost 8%, and Big Shopping Centers (2004) Ltd. (TASE:BIG) made a number of small purchases for $143 million through its joint REIT venture with Kimco Realty Corporation (NYSE: KIM).

Property and Building, which bought Barney's New York flagship store in Chicago for $121.5 million in January, bought another Chicago building in mid-July (so it is not included in this survey) for $187 million.

Other deals include the purchase of a Chicago building by Ziel Feldman, Acro Real Estate Ltd., and Property and Building; and the purchases of several Manhattan properties and lots by Fishman Holdings units Industrial Buildings Corp. (TASE: IBLD) and Darban Investments Ltd. for over $100 million, not including construction costs.

Bregman Baraz Real Estate partner Nilit Bregman said, "For investment institutions with a high home bias, heading abroad with proper expertise and caution, could help diversify their investment portfolios."

Most of the large transactions were made through joint ventures between foreign investors and local partners familiar with the market - a common practice in the industry. "Two aspects come into play," says Baraz. "One aspect is to spread the risk, but on the other hand, there is increased risk due to the limited control, or even absence of control of a property, which can cause problems if conditions change in the market or in one of the partners."

Disputes between partners is not a theoretical issue, and the survey for the past 12 months found one: the liquidated partnership between Lev Leviev and Shaya Boymelgreen. In January, Optibase Ltd. (Nasdaq: OBAS) unit Optibase Real Estate Miami LLC bought 21 condominiums in Miami from Leviev Boymelgreen Marquis Developers LLC for just $8.6 million.

Leviev-controlled Africa-Israel Investments Ltd. (TASE:AFIL) has been selling at a loss properties in Manhattan which were purchased at the top of the market. He is not the only one; real estate is not a one-way ticket to financial success.

There is no question that Israelis have again fallen in love with Manhattan. Almost 40% of deals (in dollar terms) in the past year were in Manhattan, and 46% were in the metropolitan New York area. The figure only refers to large deals, and there were probably many small ones as well.

90% of residential transactions in the first half of 2011, amounting to $236 million altogether, were in Manhattan. The rest were in south Florida. Total deals in Manhattan in the first half were $6.2 billion.

Israelis' absence from Washington DC stands out, as it attracted one third of foreign investors in US real estate in the first half of the year.

Israelis look farther afield when it comes to non-residential real estate. Houston tops the list, accounting for 60% of Israelis' investment in office space in the US in the first half, thanks to two purchases by Harel and Azrieli.

In contrast to residential and office property, the name of the game in commercial real estate is dispersal. A review of Israelis' investment shows up right across the US. Aviv Arlon Global Ltd. (TASE: AVLN) bought a shopping center outside Indianapolis, Big Shopping Centers and Kimco bought properties across California, and Dizengoff Group Ltd. bought properties in south Florida.

The Bregman Baraz Real Estate survey only included transactions larger than $2.5 million made in the second half of 2010 and the first half of 2011. The data was provided by Real Capital Analytics. The survey did not include transactions made by US subsidiaries of Israelis companies, such as Gazit-Globe Ltd. (TASE: GLOB) unit Equity One Inc. (NYSE: EQY), or investments made by US private equity funds that manage money from sovereign funds or private individuals.

Published by Globes [online], Israel business news - www.globes-online.com - on July 21, 2011