Hamburger Evron & Co.

Purchasing groups are gradually coming back to the market and bid much higher prices than contractors in land tenders – sometimes by tens of percent. The result: prices are rising; landowners can demand high prices and, as ever, the buyers will pay the price

 “Purchasing groups increase competition in the real estate market and are not the cause of the rise in prices”, was the conclusion in a report published by the State Revenue Administration at the Ministry of Finance in May 2010. On its publication, the report won scathing criticism from developers, who had watched how purchasing groups in their heyday paid record prices for land. In the past year, after a recession in the activity of purchasing groups as a result of tax restrictions imposed on them by the government, it seems they are seeking to return to the market and are again paying prices in excess of market prices for land.

“Globes” examined the results of tenders from the last year and found that the reality is far removed from the conclusions of the report.

The Ministry of Finance has not drawn up an additional report since, and this week refused to relate to our conclusions on the grounds that “we’re talking about an old report”.

Earlier this month, the Israel Land Administration published the results of one of the more popular tenders it had marketed in the past year – for the purchase of land to construct 222 apartments on the Mikve Israel Agricultural School area in Holon.

In the tender, 18 bids were submitted, with some of the largest real estate companies among them, including Shikun & Binui, Africa Israel, Gindi Holdings and Electra. The majority of the bids ranged in price between NIS 111-118 million, indicating that most of the developers bidding for the tender priced the land at around NIS 515,000 for the land component per apartment.

But the tender was actually won by a purchasing group organized by former media personality Sharon Gal and purchasing group organizer Keren Ben David, who submitted a bid of 131.2 million shekels, a sum reflecting a value of NIS 590,000 for the land component per apartment. Gal and Ben David priced the land at a higher amount, even though they marketed 4-room apartments at prices starting from NIS 1.25 million – significantly lower than the prices of the apartments the real estate companies expected.

A 6,000 sq.m park

This week, in a conversation “Globes” conducted with a sales representative of the Davidson Group, which is owned by Ben David, as someone interested in purchasing a 4-room apartment for NIS 1.25 million, the representative explained that this was a price “from a previous era”. Today, we were told, six 4-room apartments remained and these were at a price starting from NIS 1.55 million. According to real estate developers, even such a price, for a 4-room apartment in a high-rise tower in Holon, which also includes underground parking, is not a realistic price. Only the test of reality will prove whether Gal and Ben David have stood by the promises they scattered before winning the tender.

According to Amos Dabush, VP Marketing at Y. H. Dimri, “Purchasing groups have in the past two years hiked up the price of land by between 20% and 30%. In the tender in Holon, a group that offered apartments at NIS 1.25 million won, at a time when the cost of construction only of an apartment in a tower reaches NIS 800,000. In addition, the plot in Holon covers 8,000 sq.m and the buildings will be constructed on 2,000 sq.m of these. One has to do something on the remaining 6,000 sq.m. Every developer knows that a 1,000 sq.m park costs NIS one million”.

According to Attorney Jacob Atrakchi, CEO and owner of development company Aura Israel, “It is clear to everyone that purchasing groups have caused an increase in the price of land and they’re continuing to do so. The organizers of purchasing groups are willing to pay significantly higher prices than developers, because they are betting on the money of others”.

Atrakchi adds that “purchasing groups don’t today have any tax advantage and the organizers are closer to being wheeler-dealers than real estate experts. Group organizers make promises they are not capable of keeping – they cannot lower the cost of land, development levies or planning and construction costs and therefore the product will be more expensive. The reality will in the end slap the purchasers in the face as they will have to pay the full price plus extras, and that is if they receive a product at all. The group organizers are riding on the back of the plight of young couples and making them false promises. These couples could end up without a roof over their heads. To my sorrow, the regulator is not doing anything to put a stop to it”.

Another example: During the month of January 2013, the Israel Land Administration marketed plots for the construction of 425 apartments in the Plant Nursery neighborhood of Tel Aviv. On two of the plots, intended for the construction of 192 apartments, Africa Israel won for an amount of NIS 1.1 million for the land component per apartment. On three additional plots for 232 apartments, Gindi Holdings won at an amount of NIS one million for the land component per apartment. Whereas a purchasing group organized by Chani Horowitz won a plot for 28 apartments for NIS 1.23 million, approximately NIS 100,000 more for the land component for each apartment.

In the new neighborhood in Kiryat Gat, where the State is currently marketing land by tender, purchasing groups are offering apartments for sale at NIS 690,000. According to Dabush, “Even in the most flexible scenario, where land is free and free of purchase tax, the cost of development there is NIS 175,000 per apartment, to which must be added the cost of construction of NIS 550,000-600,000 for a simple apartment in a building of up to nine floors. To the cost of construction one must add 18% VAT. Additionally, where is the cost of building permits? Constructor costs? Supervision? And what about group organizer commissions?”

A tender that recently closed in Ramat Bet Shemesh Gimmel also proves that purchasing groups are bidding higher prices on land. Thus, a bid by an association and a bid by a contractor on two similar plots yielded a difference of about NIS 30,000 per apartment “to the favor of” the purchasing group. On one of the plots, which permits the construction of 70 apartments, eight bidders competed and in the end an association named ‘Nofei HaRo’e’ won, with a bid standing at a land value per apartment at a level of approximately NIS 305,000 – about 70% higher than the price the assessor evaluated before the tender.

An interesting point is that for some of the land, higher bids were submitted that were disqualified. According to knowledgeable sources, familiar with the details of the tenders, these bids were submitted by associations, and also reached levels of between NIS 325,000 and NIS 340,000 for land per apartment, including development.

“Unrealistic expectations”

The CEO of Africa Israel Residences, Oren Hod, recently told “Globes” that the unrealistic pricing of land by the groups is causing unrealistic price expectations among landowners.

One such example is the “Or Bavli” project, which Inbal Or tried to put together on the land of private owners in the Bavli neighborhood in Tel Aviv. After real estate companies had checked the land over the years and reached the conclusion that the price being asked by the owners of the land was too high, Or decide to sign an options agreement with the landowners for NIS 210 million, which calls for the construction of 150 apartments. There is also the cost of evacuating the families living in the complex, which she estimated as an additional NIS 70-80 million.

Another example of high pricing by a purchasing group that was not in the end realized is the sale of the plot at 20 Meir Ya’ari Street in the Kochav Hatsafon neighborhood in Tel Aviv. In June 2013 a purchasing group organized by Chani Horowitz won a plot intended for 36 apartments for NIS 76.5 million. Opposing her, real estate company Shimshon Zelig withdrew after offering NIS 55 million. Horowitz did not ultimately realize the purchase and another purchasing group, Arditi Hybloom, finally won the land for NIS 64 million. Contracting companies such as Gindi Holdings, Zvi Zarfati, Aura Israel, and Avi and Nissim Bublil, also participated in the additional round of the tender, but they priced the land at a lower amount. By the way, at the end of 2012, the assessor Guy Sharet assessed the value of the plot at NIS 43.7 million.

At Charish too, purchasing groups and associations priced the land at a higher price than the developers. Many associations and purchasing groups, alongside contractors and developers bid in the tenders published at the end of 2012. The fact that the ultra-Orthodox associations and the purchasing groups put together for secular and national religious sectors fought tooth and nail ultimately caused a spike in prices in the new town.

The best example of price differences was actually apparent after the disqualification of most of the ultra-Orthodox associations. This led to a situation in which contractors and developers won with much lower bids as a result of the stalemate. The associations and purchasing groups in the original tender set a threshold of more than NIS 110,000 for land per apartment, including development, and the contractors and developers submitted lower bids. Had the ultra-Orthodox associations not been disqualified, most compounds would have closed at the higher prices that would have prevailed.

Lapid’s VAT plan: Another blow to purchasing groups

In the milieu of Minister of Finance, Yair Lapid, it was made clear last week that the initiative to set VAT at a zero rate for young couples buying a new-build apartment as their first home, would not apply to those purchasing from a purchasing group. This is because those who join a purchasing group are not buying an apartment, but a right in land, thus turning themselves into developers.

On the face of it, it would seem that most purchasing groups do not anyway meet the criteria determined by Lapid: most advertising refers to projects in the Tel Aviv area, for apartments with a price tag of more than NIS 1.6 million, and aimed at buyers that are mainly investors. Except that this evaluation is not correct: many purchasing groups unite in the periphery under the definition of an “association”, and offer apartments at low prices to young couples purchasing their first apartment.

Yaron Gindi, President of the Chamber of Taxation Advisers, believes that the step will push the entire market into competition as the purchasing group organizers, whose members will not enjoy the benefit, will have to drop out of the competition and build for another market segment.

Also, according to Attorney Dor Shacham, a partner at law firm Hamburger Evron, “This is a death blow for purchasing groups, because once a benefit is given to the purchase of apartments from contractors, and it doesn’t apply to buyers of apartments from purchasing groups, it causes a change in the balance, and in the terms between the two, which makes buying an apartment from purchasing groups less attractive”.

“Keep tenders separate for groups and for contractors”

The activity of purchasing groups often discourages developers from participating in tenders to buy land, because of the knowledge that groups overprice and submit bids that are higher than the market price of land. “The associations and purchasing groups offer high prices and this pushes the market upward. This has been clearly obvious for quite a long period”, says Yaki Reisner, CEO of the Raisdor Company. “There are tenders where as soon as we see that associations are entering, we give up because we know they offer high prices. The groups offer prices without any calculation and with no sense of responsibility and this most certainly leads to a rise in the price of land.

“This is what is happening now in Kiryat Gat, for example. We thought of submitting bids, but we saw the number of groups and associations that were planning to participate and we dropped out. Contractors that have to continue their momentum and participate will have to bid a high price. Because of this, the prices in the tenders there will be around NIS 100,000 for land per apartment without development, and not about NIS 20,000, which is what should have been”.

Reisner believes that the only solution would be for complete separation between associations and contractors in land tenders: “If tenders are issued for separate compounds for groups and associations, and for contractors, the prices will be different. It will be possible to clearly see the difference and, in addition, the groups and associations will not drag the market up as they are doing today”.