Since Minister of Finance Moshe Kahlon entered office, he has been acting to reduce the activity of investors in the real estate market, taking a particularly aggressive stance towards foreign investors. Of all of the Ministry of Finance's various attempts to lower housing prices, or at least stop them from rising, at least one seems to be succeeding: the proportion of non-resident investors is dropping. In 2015, non-residents invested $918 million, a 24% drop from 2014, when real estate deals made by non-residents in Israel totaled $1.132 billion.
The volume of deals is 2015 is the lowest in the last decade, excluding 2012, when a similar decline in real estate investments was noted and they totaled only $902 million. Foreign investment in Israeli real estate reached a peak in the years 2006-2007, when purchases by overseas residents totaled $1.224 billion and $1.564 billion, respectively.
"Globes" obtained these figures from the Lagur website, owned by B.M.B.Y. Software Systems, which monitors market transactions based on data provided by the Bank of Israel, the Ministry of Finance and the Ministry of Construction and Housing. "It is hard to find one large or significant real estate deal made by a non-resident in the past year," says B.M.B.Y CEO Kobi Langleiv. He adds that five years ago the media frequently reported huge deals made by non-residents, who were often described as "real estate vacuumers" coming with suitcases full of money and buying apartments without seeing them, or purchasing homes wholesale - but this trend is now a thing of the past. "Today, most non-residents seeking to make real estate deals are more suspicious, and most of them will choose safe deals at realistic prices. More than once a deal was not completed because of taxation restrictions and the bank's requirements."
Real estate appraiser and economist Yaron Spector explains the procedure a non-resident has to undergo to buy an apartment in Israel: "A non-resident seeking to open a bank account or a trust account in Israel is required to sign papers in which he or she has to declare that the deposited funds are legitimate, and were duly reported."
Spector says non-residents are required to provide a document from a lawyer in their country of origin verifying that the funds they intend to deposit in Israel are legitimate, that taxes were paid on them and that everything is above board. "This is a mandatory requirement for opening a trust account. In fact, the lawyers responsible for this do not know how the funds have been handled and whether tax has been paid on them, and therefore many of them refuse to sign the papers.
"In the past year, the Israel Money Laundering and Terror Financing Prohibition Authority has stepped up its monitoring of funds deposited in the banking system. Any sum that is not reported and suspected of money laundering is immediately stopped. There are new requirements all of the time and the rope is getting tighter. Making deals in Israel has turned into a complicated and intolerable affair," he says.
Higher taxes
The decline in real estate investments made by non-residents in Israel is also due to stricter taxation rules. The measures undertaken by the Ministry of Finance also include revoking the purchase tax exemption for non-residents, even if they buy only a single apartment. The status of non-residents as far as purchase tax is concerned is identical to that of Israeli investors, and so they pay tax at 8% on a property valued at up to NIS 4.89 million, and at 10% on the value exceeding NIS 4.89 million.
Spector says, "An 8% tax is a substantial extra burden. At present, it is difficult to make real estate deals is Israel. You need to negotiate with the authorities in Israel, the authorities abroad, pay taxes and sometimes also fines, report revenue in Israel and abroad. It is not surprising that non-residents are thinking twice."
Moreover, in July 2016 the housing cabinet also made permanent the administrative order to collect double property rates on 'ghost apartments', an order that was to have expired at the end of 2016. It enables municipalities to classify apartments that are not used 9 months each year as 'ghost apartments' and charge owners double the property rates. The Tel Aviv, Jerusalem and Haifa municipalities have already started implementing this order, which was approved in 2013.
As for the new tax that will be imposed on owners of three apartments and up, a source at the Ministry of Finance told "Globes" that it intends to impose a tax on non-residents with three apartments or more in Israel, without taking into account any property that they may own abroad, as done with the purchase tax.
Not only is the amount of money entering Israel through real estate deals made by foreign investors diminishing, but their proportion of overall transactions is falling as well. In the first half of 2015, investments made by non-residents were only 2.4% of all real estate deals in Israel, compared with 2.9% in 2014, 3% in 2013 and 4% in 2011.
For comparison, first apartment buyers made 34.5% of transactions in 2015, move-up home buyers 34.8%, and local investors 25.9%.
In addition, the data indicate that non-resident buyers have less cash at their disposal than they used to have, due to the economic conditions in many countries, the strengthening of the shekel, and the fact that the genuinely rich have already bought an apartment or two in Israel.
"The past two years have seen a sharp decline in the prices of apartments purchased by non-residents. These declines have led to a significant narrowing of the gap between the prices of apartments bought by non-residents and those bought by Israelis," Langleiv says.
Published by Globes [online], Israel business news - www.globes-online.com - on October 10, 2016
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