Real-estate valuation in Israel

The real-estate sector in Israel is very localised with a dearth of international investors, especially in commercial property. The causes are varied, but the most salient is that the country represents a small isolated market.  

However the situation may now be changing with the normalisation of relations between Israel and its Arab neighbours, the latest development being the signing of diplomatic agreements with the UAE and Bahrain. New commercial relations between Israel and the Gulf states might encompass real estate as well: yields in Israel are relatively high, so international investors might sense an opportunity here. 

Homeownership levels in Israel have traditionally been high, but are currently less than 67% for the country as a whole, and substantially lower in Tel Aviv. Ownership has in fact been on a downward trend during the past 2 decades due to a lack of affordable housing.  

To overcome this, the government initiated a programme of subsidised housing for first-time buyers in 2015, and another to develop the previously non-existent build-to-rent sector in 2017. 

House prices rose a cumulative 120% between 2008 and 2018, an annual average price growth of about 8%. Since then prices have been volatile, although they rose 3% during 2020 despite the pandemic.  

Residential rental values meanwhile grew at only 2% annually from 2008 to 2018, the difference between these and house prices resulting in downward pressure on rental yields. 

Commercial leases have historically been short, usually 3–5 years with a further option period, and 10 years at most. Additionally, rents are indexed to inflation. Both of these have affected valuation methodology – layered or term and reversion techniques are rarely needed, as their influence on the valuation is immaterial due to the negligible difference between passing and market rent over the lease period. 

Logistics and data centres represent an emerging market trend, and have proved resilient to COVID-19. As elsewhere in the world, however, retail rent payments have plunged, as have those for offices, albeit less severely. In Q4 of 2020 high street retail rents in Tel Aviv were down 15% year-on-year, while office rents were down 8%. 

Property taxation is both local and national. At a local level are the council taxes and betterment levy, the latter payable on the increase in value when planning permission is received. The levy is determined by valuations and is a significant source of work for valuers in Israel. The betterment levy is paid, when land is sold or developed, at a rate of 50% of the uplift in value. At the national level, there is stamp duty at the rate of 6% and a capital gains tax on property at 25%. 

The requirements for qualification include studying an accredited undergraduate or graduate degree, or independent study of particular subjects prescribed by the CLV including geomatics and mapping, civil engineering, accountancy, statistics, real estate finance, microeconomics, macroeconomics, valuation, urban economics, urban planning, planning law, land law and two additional final exams dealing with valuation in practice. followed by a 1-year training period with an appropriately experienced registered valuer and a final assessment process that includes a series of written CLV exams. 

There are about 2,000 valuers in the country, with most being single practitioners. The largest valuation advisory firms employ no more that 30 valuers, all of them concentrated in the Tel Aviv area and all of them independent practices. The Government Valuation Office – a unit of the Israeli Ministry of Justice akin to the UK Valuation Agency Office’s District Valuer Services – employs about 35 real-estate valuers. 

Historically, most valuations in Israel were either for statutory purposes or bank loans. To these functions has now been added financial reporting, following Israeli adoption of the International Financial Reporting Standards a decade ago. 

However, statutory valuations, such as those conducted for betterment levies or compulsory purchase, or quasi-statutory valuations for lease renewals on ILA-administered land, are to this day a significant part of valuation work commissioned in the country, and they have had a huge impact on the education of valuers and methodology alike.  

Another large area of practice is viability appraisals, most of which are for bank lending purposes. This area of the market is controlled by a handful of advisory firms that employ both valuers and cost engineers. 

The most important database valuers use is that of the Israel Tax Authority, which records all property transactions other than leases. For lease transactions, valuers usually rely on their own internal records or on asking prices. They can also search for information from valuation reports published for regulatory purposes, which in Israel are made publicly available online by the Israel Securities Authority and the Tel Aviv Stock Exchange. 

All publicly available information, including transactions, mapping and cadastre, planning, environmental hazards and more, are collated on the government GIS site, which is publicly available and free of charge. There is a wealth of other easily accessible public information, the only exception being information on lease transactions. 

The Israeli Valuation Standards, published by the Council of Land Valuers are highly prescriptive, rules-based standards, but are not formally compliant with International Valuation Standards (IVS), with no current steps being taken to integrate with it. 

Similarly, the valuation profession has been historically insular, mirroring the lack of international investors in commercial property. Much of this is due to a relatively small market and the perceived geopolitical risk of investing in the country.  

However, it is also due to a lack of commercial property performance measurements; inconsistency in area measurement practice; the use of a unique set of valuation standards that have not been formally harmonised with the IVS; and the lack of RICS members in Israel, among other factors. 

However, there is movement towards greater transparency. The adoption of IFRS in Israel prompted major changes such as commissions for asset valuations which have greatly enhanced professionalism in valuation practice. and a subsequent case in the Israeli Supreme Court case forced the Israel Tax Authority to publish its full transactions database online; the resource plays a similar role to that of UK Land Registry data. 

Lately, the valuation profession has taken on some initiatives of its own. The IREAA joined the IVSC in January 2019, while the IVS were translated into Hebrew and published in July that year.