The long-term rental market is exploding: high interest rates, war and government powerlessness have brought the field that was supposed to save the national housing shortage – by depreciation.
Tzachi Abu, one of the main players in the real estate industry today, stepped into all this, out of a belief in long-term rental housing, even in these difficult times.
"We have 1,200 rental housing units," Abu says confidently, "We have seen dramatic increases in rental prices – 20% in the past year alone. Contract renewals are all up in price, even in wartime. In Ashdod, for example, a 5-room apartment was rented a few months ago for 7,000 shekels. Today I rent it out for 9,000 shekels in the city center. People demand apartments with a safe room and are willing to pay for it. Most tenants are used to living in an apartment without a safe room, but now there is an increase in demand for apartments with a safe room. All our apartments have a safe room. The market is very short of rental apartments, and this is the future."
Chaya Kind CEO of Abu Family Reit,
Behind the Abu Yehiel Group's long-term rental activity is an energetic CEO. Chaya Kind, 38, married to Elad and mother of four, lives in Nir Galim, a community near Ashdod, holds three academic degrees and served as CFO, until she was appointed CEO of the REIT and also serves as a director of Ari Real Estate, which is owned by the same group.
She currently serves as CEO of Abu Family REIT of the Group.
This company was incorporated and founded as a residential REIT in August 2021 by the fund's chairman and owner, Tzachi Abu. The company has properties nationwide, the southernmost in Eilat and the northernmost in Haifa.
The fund has about 1,200 housing units in 13 projects at various stages of maturity at a value of over NIS 210 billion, about <> of which are populated and yielding. Most of the assets are on the free market. The purchase of properties in the fund was made with a focus on high-demand areas, the purchase of entire buildings or significant housing clusters in order to control the management of the properties and influence the residential environment and community life of the tenants.
The fund doubled its scope of activity within two years of its establishment in order to create an extensive portfolio in a variety of geographical regions that cater to different populations.
Tzachi Abu,
In recent years, Yehiel Abu (75) retired from his position and became chairman of the group. The Group's current leader is his son, Tzachi Abu, who stepped into his father's shoes in 2019 and serves as the Group's CEO, specializing in identifying attractive opportunities and improving real estate complexes, from development to delivery, leading local and regional planning processes, licensing and land rezoning, initiating residential projects, urban renewal complexes, employment zones, hotels, businesses and commerce.
Don't leave the city
In addition to managing a large number of real estate projects, the company holds an extensive inventory of land in central locations, intended for the future construction of residential, industrial, commercial and hotel projects. This includes assisted living clusters, student dormitories, logistics centers, office towers and hotels. It is currently promoting the construction of a high-tech park that will cover 133 dunams in Ashdod. During the war, the Abu Group mobilized for the people of Israel by employing volunteers to prepare and distribute hot meals to soldiers in the assembly areas, purchase of equipment for soldiers, bathing goods, mattresses and more.
New Quarter Ashdod Imaging Snapshot& cohen, photo: (simulation) : snapshot&cohen
Chaya Kind, Ashdod suffered quite a few missiles. Your home base, including the large stock of land, is there. How does it feel to live in the line of fire?
"Despite the difficult days that the city and the south are going through, the company and its employees are demonstrating admirable resilience. Everyone is recruited both to work with evacuees and to fight, and of course – they don't leave the city!"
Where is the rental market in Israel going?
"From a macro perspective, this market is mainly characterized by a situation in which demand exceeds supply. As a result, rental prices are constantly on the rise along a clear and continuous linear line. In recent years, there has been an increase in demand in the rental market due to population growth and immigration campaigns to Israel. As a result, rental prices have risen and are rising steadily."
And about REITs?
"From a micro perspective, with a spotlight on REITs, we have to take into account that their economic viability is mainly affected by the interest rate factor. In a low to zero interest rate environment, as we experienced until two years ago, profitability met us with good results. On the other hand, in a very high interest rate environment, as we are experiencing today, it has become much more challenging for us as a REIT, and has made us look for more creative ways to generate returns and economic viability."
Long-term rentals are the ultimate solution to the housing crisis. Why doesn't it work?
"The housing crisis in Israel is serious and ongoing. There is no doubt that in view of the crisis and the war, with the slowdown in the pace of building starts, long-term rental is definitely an appropriate solution, since it creates an immediate and stable residential solution for young couples and for any family unit, in view of the uncertainty and question marks hovering over housing prices and the great difficulty in bringing equity to purchase an apartment, especially at such interest conditions. All the reasons put a spotlight on the advantage of renting, it's a win-win situation."
Why did the company decide to invest in a long-term rental market when everyone is trying to escape it due to rising interest rates?
"The increase in interest rates also directly affected the increase in rental and commodity prices. This can be seen in Israel and in other countries around the world. The effect of high financing expenses leads to an immediate reduction in building starts and a reduction in new home purchase transactions. As a result, the demand for rental apartments is increasing. We, as a REIT that is experiencing the increase in interest rates, like other funds and companies that have a backlog of long-term rental units, are adapting ourselves to the situation.
Emery Towers Ashdod, photo: Simulation Swirsky Oleg
"We are weighing our steps in raising debt against fluctuations in interest rates and inflation in the market, and against financing needs in various projects.
"We place high importance on cash flow profit and not only on profit derived from asset revaluation. Today, the company examines new deals only at high rates of return vis-à-vis financing costs and taking advantage of the opportunities that arise in the market in light of the situation.
"Over time, interest rates have fallen and the market today has already begun to embody this decline. We see that during the period of the last 3 interest rate announcements, the interest rate remained in place. As long-term market players, we believe that this investment will yield us much higher returns in the future."
But the housing world will change in the wake of the war.
"The evacuees can get a solution – instead of caravans, long-term rentals. Stable solutions may be central. Long-term rental apartments can provide a more stable solution and facilitate the reorganization of evacuees.
"At the same time, it is important to understand that there are challenges in finding a solution for the evacuees. Many of them lost quite a bit of their property and relatives. Finding a joint place of residence as a community or nucleus can be a very significant consideration in the decision. Access depends primarily on the specific needs of the evacuated audience.
"In our foundation, in the project in Beit Shemesh, we created cooperation with an association and with the Zionist Organization. Thus, some of the apartments will house evacuees at a reduced cost. These apartments were fully furnished in a short period of a few days for the convenience of the evacuees."
In 2021, the Knesset Finance Committee approved the Institutional Rental Law – Encouragement of Capital Investment, which was included in the Arrangements Law. In practice did not move much. How do you recruit institutional investors for the process?
"We are a REIT. We do not operate within the framework of the Encouragement of Capital Investments Law. We are guided by income tax regulation regarding REITs. The REIT is a lease for a term of at least 10 years. The benefits given to the REIT specifically are with the aim of creating stability in the long-term rental market. Those who benefit from this in the end are both investors and renters. About a year ago, Mizrahi Tefahot Bank entered our REIT as a partner, and this is a precedent that a bank entered as a partner in a REIT even before its public offering."
"I have no doubt that on the day of the public offering, other institutional investors will also show great interest in the Abu Family REIT, in light of the portfolio of assets and in light of the financial results we will present. And of course - in view of the performance and financial capabilities of the owner who operates in a wide range of real estate fields. In the field of commercial real estate: Ari Real Estate with impressive performance. In the world of urban renewal, Gefen raises large-scale projects, and a variety of other fields led by Tzachi Abu."
How did the long-term rental industry go from being one of the hottest areas in the industry, considered the future of housing solutions in Israel, to a situation in which tenders pass without any developer approaching them?
"Companies have approached rental housing tenders in the past, and made very high bids, in view of the zero interest rate environment that existed, and the price increases that we have seen in the past. With the intention of initiating the project, from the land acquisition process, execution of the project, to occupancy. Today, in a very high interest rate environment, with many question marks in the real estate market, companies are afraid to enter such a process and prefer to sit on the fence.
"Other factors are related to the costs of financing the land and bank accompaniment for carrying out the project. They are very tall. And unlike a routine residential project in which apartments are sold in Freesale and thus reduce financing costs, in the rental industry the developer will begin to meet with the money only after the property is rented and yielding. Therefore, this creates many difficulties in initiating rental projects. In the REIT, unlike them, in addition to the specific initiation in which we operate, we make purchases of attractive housing clusters, after a thorough examination, with the intention of controlling the event against the required return."
HIGH VIEW Eilat, Photo: (Simulation): HIGH STUDIO
What solutions does the state need to create to save the long-term rental market?
"First, interest hedging and financial support: granting loans with good terms at pre-hedged interest rates. 2. Direct government or municipal subsidies. 3. Amendment of the VAT Law: Meeting VAT refunds already halfway and not only when selling assets. 4. Shortening bureaucracy."
What's your message for young couples?
"Our main message for young couples is the receipt of affordable housing and the promise of a safe rental apartment in front of a strong, stable and reliable body, and especially for the long term. Full transparency in the rental contract on the timeline, and no surprises. Another clear advantage is our added value in managing many large assets. The residents receive a variety of services from the operator such as maintenance and additional services, availability and human response with an active company."
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