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Israel’s Commercial Property Market – Mogul Domination Suppressing Scope For Retail Investment?

Real Estate Investment Trusts Yet To Make Meaningful Impression But Times Perhaps Changing

by Xavier Basil

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Introduction

In contrast to the case with residential property, Israel’s commercial real estate inventory is very much the domain of tightly-held conglomerates and listed entities firmly under the control of their founders or key investors. While the widespread Israeli penchant for apartment ownership as an investment is seen, by regulators and commentators, as a contributing factor in the continuing rise in house prices, mainstream ‘retail’ investment in housing is not mirrored in the commercial sector. In this piece, we look at the existing state of investment in commercial property in Israel, specifically the publicly-traded sector, and at the role played, or which could be played, by the REIT - real estate investment trust. In Israel, REITs have been possible since enabling legislation back in 2006. To date though, just two have been brought to the market for commercial property. Israel in this respect lags well behind other countries which have facilitated real estate investment trusts and we look at why that might be.

Inordinate Wealth Concentration in Commercial Property

According to charts usefully supplied by Daniel Baraz and Nirit Bregman, proprietors of property consultancy B-BRE, in a December 2011 commentary for the US-REIT website reit.com, 24 percent by value of Israeli retail property held by listed companies, and 17 percent of office space so held, is owned by Azrieli Group (TLV: AZRG). Azrieli was floated in 2010 but remains under the effective control of interests connected with its namesake, nonagenarian entrepreneur and philanthropist David Azrieli, who made his reputed $3 billion fortune in Canadian real estate development. An even bigger slug – some 29 percent by value – of the listed retail market is held by Melisron (TLV: MLSR), which last year acquired listed developer British-Israel Ltd and took it private. Melisron is controlled by Ofer Brothers Group, an investment holding for Israel’s richest family, the offspring of shipping magnate siblings Sammy and Yuli Ofer who died in their eighties within several months of each other in2011, leaving a combined fortune of around $10.3 billion.

Melisron has, according to the B-BRE chart, seven percent of the office property market by value, courtesy of its British-Israel takeover. This puts it in company with IBC – Industrial Buildings Corporation (TLV: IBLD) – a former state-owned construction company privatised in 1993 and now listed on the Tel Aviv stock exchange (TASE) though 85 percent is held by the Jerusalem Economic Corporation, in turn owned by the Fishman Group, in turn controlled by real estate baron and habitual Israeli rich-lister Eliezer Fishman.

Another listed player, also with around an eight percent market share, can be mentioned. This is Bayside Land, so named in the B-BRE chart and listed on the TASE as TLV: BYSD but with a website that transforms the outfit into Gav-Yam, Haifa-based and describing itself on its website as ‘a subsidiary of Property & Building Group of the I.D.B group, … one of Israel's largest and oldest real estate enterprises’. To elaborate, Property & Building Corporation (TLV: PTBL) is also a listed property co controlled by yet another listed vehicle – the conglomerate IDB Group (TLV: IDBH) – which at least for now remains under the effective control of the self-made billionaire Nochi Dankner (of whom, more later).

And a larger slice again of the office property market– put by B-BRE at 11 percent - is held by Amot Investments Ltd (TLV: AMOT), based in Ramat Gan. Amot is the investment arm of Alony-Hetz Properties and Investments Ltd, which puts it under the effective control of another real estate tycoon, Nathan Hetz.

Privately-owned ‘Public’ Property Cos

On the face of it, a good portion of Israeli commercial property, Tel Aviv and Jerusalem-located in particular, appears to be held by publicly-traded companies – with over 50 percent by value of retail concentrated on just two listed companies (Melisron and Azrieli Group) and a similar share of office held by five (Azrieli and Melisron again plus IBC, Bayside and Amot). In reality though, the Israeli public has only a modest interest in this investment market via these vehicles, and institutional investors – such as banks, insurance companies and pension funds which could be expected to provide an oversight not available to small private investors – even less. According to profile data for each of the five companies provided on the website of the Tel Aviv stock exchange, the shareholding allocation is as follows:

As can be seen, the bulk of the shareholdings in each of these companies – some 75 percent on average - is controlled by a small group of Israeli, or expatriate Israeli, billionaires and their families – and no doubt other intimate acquaintances.

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