Developers reluctant to cut apartment prices despite slowdown

The past year has been volatile in the Israeli housing market. Between November 2021 and October 2022 housing prices rose more than 20%, the highest annual figure in a decade, but for several months now the housing market in Israel has been showing signs of slowing down, especially in the new apartments sector. Only 5,100 homes were purchased in October 2022, according to the report of the Ministry of Finance Chief Economist published last week.

In November the Central Bureau of Statistics reported a 25% fall in the purchase of new apartments compared with the second quarter, and a 40% fall from the third quarter of 2021. This trend will likely continue, and this has been the aim of the Bank of Israel, which has been raising interest rates in order to fight the cost of living in Israel, including housing prices.

The sales departments of real estate developers have been examining how to tempt buyers in the current situation.

“I think that 2021 was not a relevant indication for today,” explains Irit Hopper, the owner of InHouse Real Estate Management and Marketing, which is currently marketing new homes in five projects in Ashkelon, Modi’in, Rosh Ha’ayin and elsewhere. Hopper explains that 2021 was an exception in every possible way, and the comparison to this year in her eyes is a mistake. “In my opinion, the logical comparison should be to 2019 – before Covid – which was a relatively normal year, but with zero interest. In relation to it, we really see a slowdown, but definitely not stagnation.”

This is a return to sanity and normality in the market

Eldar Real Estate and Marketing CEO Ronny Cohen, who is currently marketing 100 projects around Israel agrees and thinks that 2021 was an abnormal year in which 151,000 new and second-hand apartments were sold, while in a regular year the figure would be closer to 110,000. “If you look at the numbers for 2021, we see that there was a rise of about 40% in sales, and what we see now is a return to a sane market.”

“We feel the fall and we’re experiencing it in the field in the past few months. Ultimately it is a return to a sane market. Although the reasons are a rise in interest rates and the harm to the purchasing power of the public, and there are other reasons, but it is a return to sanity and normality in the market.”

Cohen says that the continued price rises has created a gap between equity and prices, and as a result mortgages increased and this reduced the amount of purchases. He explains, “There are all kinds of trends that are starting to happen as well, such as ‘geographical compromises’: those who thought of buying in Hod Hasharon end up buying in Netanya, for example. There is also some sort of return to smaller apartments as well.” Cohen adds that the issue of the apartment inventory that has run out also plays a significant role.

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“Talking about crisis influences the atmosphere”

Shmulik Levy, owner and CEO of Ambassador Group, which specializes in consultancy and marketing for real estate companies, says, “In 2021 and until the first quarter of 2022, to be exact until April-May, real estate was boiling over. There were price rises and demand was very high – investors, young couples, and those moving up to bigger homes. In fact, almost all of the inventory that would have been sold and today the situation is that most of the goods have been sold, and what is left for developers are the less attractive apartments, which means that the options have been reduced.

“In addition to that, the real estate market is emotional, and when we constantly talk about a crisis in the housing market, it affects the atmosphere and currently the feeling among the public is that investing in real estate is not attractive.

“You can feel this cooling down in the amount of leads we receive. If during the boom period everyone in Israel was interested in real estate and everyone wanted to check out the situation, we would receive 700-800 leads for each advertisement, which is a really large amount, today we receive 30% less. However, the deal ratio is three times higher, meaning that someone who enters the site and is interested, then there is a reasonable chance that they are very serious.

“Those who buy today are moving up to bigger homes, not investors. Until recently it was a seller’s market, today it is a buyer’s market, every buyer who comes gets the best treatment.”

Levy’s claim that the market has shifted in favor of the buyers at this stage is also well felt in the market in general and not only in the new apartment market, but it turns out that not everyone shares this opinion. “For the past two weeks, the sales offices has been working, and I see the increase in pace,” Hopper emphasizes, and believes that it is not necessarily a buyers’ market today. “I think there is a balance in the market, the sellers want to sell and the buyers want to buy, and nobody is under pressure – the bargaining power is balanced. “We have a project in Kiryat Gat, built by Ram Aderet that we are marketing, and there 35 deals were made in two months, which means that there are areas where there is no slowdown. 3-3.5 room apartments are moving. We are also selling in Bat Yam. We just opened a project for marketing and we have already completed 10 deals without even advertising.”

The tech crisis has harmed sales in Tel Aviv

Real estate marketers believe that Tel Aviv has recorded the most significant decrease. Nir Shmol, founder and CEO of the Urban Renewal Co., which currently markets more than 15 projects nationwide that include about 2,000 housing units, believes that the slowdown in sales is felt more in the Tel Aviv area than in the rest of Israel and the reason for this is the tech crisis.

Between April and June 2022, 522 deals were agreed in Tel Aviv, but between July and September, 120 fewer deals were made, representing a 23% decrease. Shmol says, “The housing market in Tel Aviv was driven by tech people. The tech sector, which was responsible for 40% of Israeli exports, has suffered a big blow in the last six months, and the value of many of the companies has been cut by more than 50%. As a result, tech employees who had options in the company and equity of several million shekels, as soon as the stock fell, these options were worth nothing and their equity disappeared.”

In the estimation of Levy’s company’s, there has been a 50% slowdown in deals in Tel Aviv. He attributes the slowdown to the record prices, and also to the drop in demand from tech employees, non-residents and investors. In Jerusalem he sees a decrease of about 20%. He adds, “In Netivot, Sderot, Beersheva and Dimona, there is a 50% drop in demand and sales – mainly from investors who have cooled because of interest rates and the large housing supply for marketing. In general, from Gedera to Hadera there is a 20% drop in demand, because these are cities with a low supply of apartments and demand mainly for special and large apartments: garden apartments and penthouses.” Levy also refers to the market in Haifa and says “In our opinion it is a city with its own demands and market and we do not currently see an abnormal slowdown in demand.”

So how do you cope with the slowdown?

Cohen says, “When the market is strong, the advertising part of the budget is smaller, and when the market is less strong, we make more efforts. There is no doubt that in the last six months we see more sales ads, because most developers realize that this is the time to woo customers. Demand still exists, but more is spent on ads to attract customers.” Ambassador also says the primary tool for stimulating demand is advertising. “We also give all kinds of benefits,” says Levy. “The companies court customers and give them things they didn’t get a few months ago.”

“If you look at the past few months, you can see that people are more hesitant and it takes them longer to close a deal, but in the end deals are closed,” says Hopper. “For example, if in the past the deal was closed after the second meeting, now it takes four meetings, because the clients check the issue of financing, which was once very clear, but today is an obstacle.

“At the beginning of the year, we didn’t use benefits at all. From January to July, even if someone came into the office and didn’t buy, the next in line bought. Today there is a need to provide incentives, and the benefits we give are mainly intended to respond to where it hurts, for example flexible payment plans, subsidized loans, but this it is not worth cutting the price of apartments. This month I expect an increase in the number of deals because I see that people who have been waiting for the new government realize that salvation will not come from there.

“There is no doubt that the entire recent period has been characterized by uncertainty. In recent months we have really experienced a slowdown in sales, but deals were still made and the pace was normal. There was no frenzy and there was no rush, but there were still deals.”

One thing all those interviewed agreed upon is that nobody believes that prices will start to fall. Levy says, “It is difficult for me to believe that apartment prices have fallen because there is no supply, but what is true is that in the periphery the situation is more complex, because the purchasing power there is more limited. At the moment there is no drop in apartment prices but maybe there will be a correction in specific places. I don’t see a situation where prices will drop in Tel Aviv’s Rova 4 in a TAMA project where only four apartments remain.”

Developers are in no rush to change pricing

A survey by Propdo (TASE: PRPD), which develops technology for real estate, measures were examined that housing real estate companies take during times when sales decline by tens of percentage points.

The company’s clients includes realtors, developers, other professionals as well as private customers – sellers, buyers and investors. According to a survey that the company conducted among its customers, many developers are in no hurry to make substantial changes in the pricing of the apartments, or in potential incentives.

Propdo estimates that only 20-30% of developers, “need to respond to the new reality” at this stage. Propedo does identify the need for, “Price flexibility of 1%-3% on average currently compared with the situation a few months ago, a more convenient payment spread (with financial significance), absorption of the construction input index, absorption of interest rates and/or linkage differences, including benefits and improved conditions for buyers in this period.”

Propdo cofounder and CEO Peleg Davidovitz says, “The new apartments market is in a significant slowdown over the past few months but many developers are at this stage choosing ‘to sit on the fence’ and not alter their pricing. Generally we are talking about well-established developers with higher financial strength.”

Another angle: 22% reduction in investment in residential real estate advertising

Data provided to “Globes” by Ifat Media Information, which deals with business data and analysis and processing of communications and business data, indicates that in 2022 there has been a 22% reduction in the amount of money invested in advertising by real estate housing developers and marketing companies.

The data shows that the platform where the most resources were invested in advertising residential real estate is television. Between September and November 2021, NIS 8.85 million was invested, 32% of all investment in advertising for this period. In 2022, in the same period, the amount invested in advertising real estate on television totaled NIS 8.31 million.

Between September and November 2021, NIS 7.75 million was invested in advertising in digital channels, but in the corresponding months this year there was a decrease of about 22%. The third most common medium among advertisers is billboards, and the data shows that between September and November 2021, close to NIS 5.5 million was invested in advertising, while in the corresponding period this year “only” NIS 1.78 million has been invested – a decrease of 67.6%.

In newspapers, however, NIS 3.88 million was invested between September and November 2021, but this year the numbers rose surprisingly, and the amount invested in those corresponding months was NIS 4.05 million.

Ifat Media Information CEO Meny Avrahami explains, “I don’t remember in recent years a sharp decline like this in the amount of advertising. There is a cooling off this year and it is happening because of a cooling off in the entire world of real estate.”

“In 2021, contrary to popular opinion, the construction companies advertised a lot – both residential and commercial real estate, and we mainly saw advertising by publicly-traded companies. One of the reasons for this was the desire to show the capital market that they are big.”

Avrahami adds, “2021 was also a record year in advertising, because companies wanted to attract buyers and reduce hesitation among the public, and this was also a very serious reason for advertising.”

Published by Globes, Israel business news – en.globes.co.il – on December 26, 2022.

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