At the height of the Corona crisis, the value of income-producing real estate companies fell by 40%. The trend has changed, and the annual decline is only 20%.
No damage to stability is expected
Photography:
envato elements
Produced by the Department of Special Supplements
The fall in the value of income-producing real estate companies against the background of the corona crisis does not endanger the financial system and the economy - this is the reassuring message that comes out of the Bank of Israel.
At the height of the corona crisis, the aggregate value of income-producing real estate companies fell by about 40% compared to the end of 2019, and it did not recover from this sharp decline until the end of September. At a rate lower than 20%.
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According to world literature, this industry is a significant factor in the acceleration of financial crises, and therefore the question arises: Does the decline in the value of income-producing real estate companies endanger the stability of the financial system? The answer that emerges from the analysis is no.
In the first three quarters of the year the profitability of the income-producing real estate companies was indeed affected, and it is evident that this also led to an impairment of cash flows, but not solvency or liquidity. Serve current liabilities even when there is a shortage of cash.
Since the value of their income-producing assets has not been significantly harmed, and it allows them at this time to raise additional sources of financing, the income-producing real estate companies are not likely to run into a liquidity crisis, which will impair their stability and financial system stability.
Prior to the crisis the pricing of income-producing assets in the market was higher than their book value, probably due to optimistic growth forecasts.
The decrease in value during the crisis mainly reflects a correction in the pricing of income-producing assets, but not a decrease beyond that.
A more focused look at income-producing real estate companies by the nature of their activity (in terms of asset mix) shows that the market prices income-producing real estate for commerce and offices more negatively than other real estate uses (residential and industrial).
An examination of the yielding real estate companies according to their main investment shows that the market estimates that the value of the companies biased towards the trading industry is lower than that of companies with a wider asset distribution. Although these results are not unequivocal,
The income-producing real estate companies traded on the stock exchange have a financial debt of about NIS 160 billion (as of the third quarter of 2020) - about 17% of the debt of the non-financial business sector.
Produced by the Department of Special Supplements