The Real Estate Industry during the Coronavirus Crisis – A Special Analysis

The Real Estate industry is one of the vital economic industries. The industry’s direct share of the GDP in 2019 is estimated to be about 6% with an aggregate projects’ financial scope of about NIS 150 billion in this year. There are currently about 15,000 projects under construction in various stages of execution, with more than 100,000 apartments in active construction. Over the past few years, it seems as if two real estate markets has been operating – the free market, which contributes about 75-80% of the industry’s operations, and the Mehir LaMishtaken (government price capped projects) market, which contributes about 20-25% of the industry’s operations.

The industry is currently experiencing a disruption in its operations in the shadow of the coronavirus crisis, after a challenging year by its own right in 2019, during which the industry stabilized in a level of a lower scope of operations compared with previous years, from both the construction starts aspect (about 51,000 construction starts in 2019, compared with the record of about 56,300 construction starts in 2016) and the number of new apartments that were sold in the free market, after neutralizing discounts Mehir LaMishtaken apartments (about 23,200 new apartments that were sold at market prices in 2019, compared with the record of about 36,000 apartments that were sold in 2015).

Like many other industries, the real estate sector is highly exposed to the effects of the coronavirus crisis, despite the fact that is was excluded in early March 2020 from the Emergency Ordinances by the government and defined as a vital industry where works can, presumably, continue regularly.

From the supply side, the industry has been suffering since 22.03.2020 from a manpower shortage of 50,000 workers due to the lockdown in the territories of the Palestinian Authority. Thus, most of the workers who were staying in Israel returned to the Authority – out of a total of about 65,000 territory workers, less than 15,000 remained in Israel, as of early May. The current timing of the Ramadan (23/04-23/05) contributes to the disruptions in the industry’s manpower, despite the National Security Council’s decision from late April to enable re-entry of construction workers form the Palestinian Authority to Israel starting from the 03/05/2020.

Alongside with the manpower shortage, there is also a shortage of construction inputs, both imported and locally produced, in a scope of 20-30%. Some of the products that are in shortage: Concrete products, aluminum products, ceramics products, internal design products, sanitation products and more. As a result of the manpower and materials shortages, according to the Israel Builders Association, the construction industry is currently at an output level of less than 50%, and therefore delays are expected in the deliveries of numerous projects. As of today, there is no recognition of coronavirus as a Force Majeure yet and discussions are held on this topic in government agencies. In addition, the economic uncertainties and the teleworking routine led to disruptions in the work of the Planning Administration – which slows the rate of plan approvals for new projects.

On the demand side, there is a decline in the number of purchased apartments due to the lack of employment certainty in the labor market (at the peak of the crisis, the unemployment rate reached a level of about 27%, compared to an unemployment rate of only 3.4% before the crisis), an increase in the interest rates of bank mortgages, and limitations on movement in the economy. In this context, the industry entered the crisis in a situation where demands exceed supply, and we can assume that after a while, demands would increase back.