November 6, 2015
The Israeli financial media is full of advertisements urging Israelis to invest in real-estate opportunities. These range from pictures of rolling meadows near Hadera, which are always portrayed as on the verge of being rezoned from agricultural to commercial and/or residential use, to towering office buildings in downtown Manhattan — which are sometimes presented as being on the verge of reconversion from office to residential use, but never back to farmland…
Among the other seemingly attractive places Israelis are being urged to consider are Berlin, London and various places in the US, from Boston to Los Angeles. The possibilities range from buying very plush apartments, to buying-to-rent very humdrum apartments, to office buildings, shopping malls, student accommodation, retirement homes — any and all forms of human habitation, all over the developed patches of the planet.
You could even invest in real estate here in Israel — but that’s boring. Owning property overseas is what rich people think they should do, despite the Talmudic blessing, incorporated into some versions of Grace after Meals, “may your property be close to town”. Obviously the early rabbis didn’t appreciate the advantages of geographic diversification in a globalized economy.
However, as soon as you move from the stunning photography to the nitty-gritty of actually making these investments, the first stage in the move from la-la-land to reality takes place. Unlike investing in overseas securities –which can be done nowadays whilst sitting in your kitchen or den and using the sophisticated-but-standard online systems offered by banks and brokerage companies to buy virtually any traded security anywhere — real estate investment is complicated and time-consuming.
Wolves, sheep — and intelligent investors
The sophisticated investor will appreciate that it is precisely those features, such as complexity, non-commoditisation and the need to expend effort that create the opportunity to make above-average profits. But the advertising is not directed at sophisticated investors, rather at those who think they are, or would like to present themselves as. In between the wolves and the sheep are a relatively small group of people who want to invest in foreign real estate, have the means to do so, appreciate the barriers and hurdles they must surmount on the way — and want to know how to proceed in an intelligent manner.
The obvious first stage would seem to be to “kick the tires” — go and see first hand, meet with professional people in the place/s you are interested in and learn how things are done there, wherever “there” may be. But this requires time and effort, the two resources that this kind of potential investor is very short of. A smart approach, given that Mohammed won’t go to the mountain, would be to bring the mountain to Mohammed — or, in this case, to Avi, Yossi, Haim or whomever the potential Israeli investor might be.
Enter Israel Discount Bank of New York (IDBNY), the oldest and largest Israeli-owned bank in the US, with a conference focused on real estate investment in the US, and aimed at well-heeled Israelis. Held on Monday of last week (October 26) in a suitably trendy venue in Tel Aviv’s harbor district, the event offered a series of presentations addressing the general topic from various angles.
The bank, of course, presented the financing issues and how it can help you deal with them — because using Other People’s Money is a central tenet of real-estate investment. An Israeli lawyer reviewed the considerable legal and taxation issues involved in real-estate deals. And a few Israelis active in the field in different roles imparted wisdom based on their experiences — for which read success stories. Objectively there may be more to be learned from the failures, but for some reason no-one comes to tell other people about how they screwed up and went bust — and people don’t really want to hear that stuff anyway.
But by far the best presentation — to my mind, at least — came from a Texas-based real-estate entrepreneur, who has expanded an existing family business and with whom IDBNY has developed a strong relationship. The reason why it stood out was that although it was a success story, from a business perspective, and could and should be used as a case study in business schools, the people who run Virtus Real-Estate Capital have their feet on the ground, are not detached from financial and economic reality, and are aware that what they do is part of a wider economy, not a self-contained bubble.
The story that Virtus told was, therefore, not merely “this is how we do things — ain’t we jus’ the greatest”. Remarkably, it was the Texan who avoided telling tall tales, instead actually pointing out that — gasp! — real-estate is a cyclical business and –shock!! — if you get it wrong you can and will lose heavily. Indeed, the virtue of Virtus is that they not only pay attention to economics, and understand that real-estate is deeply influenced by monetary policy, they have actually made socio-demographic trends the key underpinning of their business strategy.
The message that Virtus almost made explicit, but that no-one else wanted to talk about, for obvious reasons, is that the buoyant real-estate market — in the US and indeed throughout the developed world — is primarily the result of ultra-low interest rates and the availability of enormous amounts of money looking to be invested or lent out. That’s fine and everyone can have a ball, but the risk/reward balance is increasingly skewed toward high risk. They don’t mention that in the adverts.