Israel`s Real Estate Newsletter

Israel’s Real Estate Newsletter
Brought to you by MAN properties
Issue 11 July 2008
.
On the Road to Success
. .
Brazil
Just Before You Sell
.
Models of Hotel Management
Magazine APRIL 2008
MAN
The hoopoe has been named Israel’s national bird.
The only extant member of the Upupiformes family living
in Israel, the hoopoe is common in all parts of the country,
especially in settled regions, grasslands, irrigated lands, parks
and forests. Until the 1940s the hoopoe nested primarily in the
coastal plains, but with the increase in the area of cultivated
fields and meadows, their population grew. Outside Israel the
hoopoe is common in Europe, Asia, and Africa.
MAN Properties
The leading Israeli
commercial real estate firm
Brokerage, consulting,
marketing, valuation, project
management, and asset
management
MAN Properties in association with
CB Richard Ellis
in association with
2
Magazine APRIL 2008
MAN
MAN Properties – a network of real estate consultants
92 Igal Alon, Tel-Aviv 67891
Phone: +972-3-5616161 Fax: +972-3-5628787
Haifa office: +972-4-8219111
www.man.co.il www.cbre.com
Contents
Contributors:
Publisher
MAN Properties, 92 Yigal Alon St. Tel Aviv 67891
Tel: +972-3-5616161 Fax: +972-3-5628787
4
Market Survey
6
Recent Deals
MAN
MAN
CEO & Joint Managing Director
7
Jacky Mukmel
Joint Managing Director
Acquisition Groups
Shlomi Vaknin
Chief Editor
Ofir Dvir
Chaim Agi
Jacky Mukmel
8
National Outline Plan
9
Correction
10
Worldwide Survey
12
On the Road to Success
14
Models of Hotel Management
16
Just Before You Sell
MAN
Associate Editors
Smadar Pomerantz, Michal Ganot
Graphic Design and Production
Moshe Pereg
Chen Shein
MAN
Translation & Editing
e-Doc
Itay Rogel
E-mail us
feedback@man.co.il
Information herein has been obtained from sources believed reliable.
Although we do not doubt its accuracy, we have not verified it and
make no guarantee, warranty or representation about it. It is your
responsibility to independently confirm its accuracy and completeness.
Any projections, opinions, assumptions or estimates used are for
example only and do not represent the current or future performance of
the market. This information cannot be reproduced without prior written
permission from MAN properties.
Yehiel Rechschaffen
18
Brazil
Smadar Michaelov
21
Guaranteeing the Investment
Jay Lee
21 Real Estate Investments Jacky Mukmel
22 The Global Market
CB Richard Ellis
From the Editor
Dear friends,
I am happy to bring you the new issue of MAN
Magazine. In the course of preparing the current
issue we celebrated the 60th anniversary of the State
of Israel. I am sure that our readers will agree that the
field of real estate has made a decisive contribution
to the development of the economy and business in
Israel. For this reason, we are featuring in this issue
the Israel National Roads Company (Ma’atz) in a
survey of its contribution to the development of the
transportation infrastructure in the country.
In future issues we will continue to portray Israeli
and international companies that contributed to economic activity in the country.
As in all our issues, we present again a selection of articles written by the experts
of MAN Properties alongside articles of leading professionals in a variety of fields
such as law, taxation, accounting, and more.
Finally, we bring you our quarterly surveys and our evaluations of current
and future trends in the market. CBRE, which is represented in Israel by
MAN Properties, provides the global market survey and the table of
prices and rents.
We wish to thank all our readers who have shared
with us their comments and opinions
about the magazine,
and we hope that you
will derive much benefit
from the current issue.
As always, we are ready
at all times to answer your
questions about the topics
raised in our magazine or
any other issue you wish to
discuss with us.
67891 ‫ תל אביב‬,92 ‫ יגאל אלון‬,‫ן נכסים רשת יועצי נדל"ן‬.‫א‬.‫מ‬
04-8219111 :‫ חיפה‬03-5628787 :‫ פקס‬03-5616161 :'‫טל‬
www.man.co.il www.cbre.com
Enjoy the reading.
Jacky Mukmel
CEO and Joint Managing
Director, MAN Properties
Magazine APRIL 2008
MAN
3
MAN Properties
At the end of the second quarter of
2008 the world real estate
market continues to capture
the headlines in the
newspapers and
business
supplements,
in Israel
and
abroad.
In Israel the activity in the real estate area continues
to be vigorous, as in the previous quarter, in the fields
of both residential and income producing property. In
the background, the frequent increases in the prices of
fuel, iron, and other construction input materials are
spreading uncertainty in the area.
A decreased in values of the real estate indices traded
in Tel-Aviv was contained in April, and it appears
that the market has stabilized. The real estate firms are
completing the presentations of their financial results
for the first quarter of the year, and it appears that the
growth trend continues for most of them.
In the second quarter of the year we
witnessed a continuation of the positive trend, with a
tendency for a 7% to 12% increase in prices of across
the country, in all sectors. The increase reflects not only
the reduction in the inventory of available spaces but
also the increase in the prices of inputs. We estimate that
these increases will continue in the course of the next
quarter.
Note that rental prices in all areas, surveyed and
summarized in the table, are calculated based on an
exchange rate of NIS 4.1 to the dollar, as opposed to the
average rate of NIS 3.5.
This survey covers the first quarter of 2008.
Following is a detailed account of the situation in all the
sectors.
The office market
The office market has shown continued increase in
prices throughout the first quarter. Office space rentals
have increased by some 10% throughout the quarter.
These significant increases have already become a norm
in the real estate area.
The growing excess demand in Tel-Aviv continues
to cause sharp increases in the area, from around $21/
sq m on average in the previous quarter to nearly $23 in
the current one. This represents an increase of 10%, as
4
Magazine APRIL 2008
MAN
opposed
to one of 7-10%
in other cities such as
Petah Tikva, Netanya, and Herzlia
Pituah. An example of the sharp increase
of prices in Tel-Aviv is the rental agreement
between Azorim and Polar, in which Azorim rented
a floor of offices based on a calculation of $43/sq m,
nearly double the average price. We believe that the
record will be broken again soon.
The retail market
In the retail market significant price increases have
also reached 10%, rising from an average of $43.75/
sq m in the previous quarter to $47.26 in the last one.
The increases are mainly the result of the marketing
strategy of food and galanterie chains, and of large
office services that are located in general in shopping
centers but are now trying to penetrate the office and
industrial areas to create additional meeting points with
clients within their work environment.
These chains are deepening their penetration into
the areas of employment by opening concept shops and
boutiques in smaller spaces than the large, traditional
stores. Among chains that made this move are Office
Depot, Tiv Taam, Roladin, and others, as well as
the banks. This phenomenon is more pronounced in
Herzlia Pituah, Ramat Hahayal, and the Kirya site in
Tel-Aviv.
Industry
In the field of industry we witness a similar price
increases at rates comparable to those in office space
and commerce. In the Tel-Aviv area the increase was
about 10%. Moreover, because of the decrease in areas
intended for clean industries and the high density in
existing areas, many industrial spaces that are adjacent
to clean industries are being renovated and populated
by clean industries.
Following renovation, these structures become
high-tech buildings at rents comparable to those in
second-rate high-tech buildings. This phenomenon
is especially prominent in Petah Tikva, where rents
increased by about 7% on average, from $8.57/sq
m to $9.17, after the process of conversion to clean
industries has been exhausted in industrial centers such
as Herzlia Pituah and Ramat Hahayal.
Monthly rental fees
In all our surveys of offices, industry, and commerce
we witness continued increases in price over time.
These increases are the result of several financial
circumstances that characterize the market today.
A reduction
in the number
of building starts in
recent years, together
with expansion and growth
in economic activity in all the sectors naturally resulted
in excess demand vis-à-vis the existing supply. An
increase in the price of raw materials and construction
inputs such as iron, cement, fuel, and others, as well
as the credit crunch following the sub-prime crisis are
further contributing price increases.
The significant weakening of the dollar causes more
and more entrepreneurs to disengage entirely from the
exchange rate and to set rental prices in NIS. The price
is generally calculated based on an exchange rate of
NIS 4.1 to the dollar. This produces especially high
rates of increase in rental costs in the Gush Dan area
and in adjacent towns.
Setup charges have also gone up for the same reason.
In the past these costs were calculated on the basis of
$300/sq m. Today, at an exchange rate of NIS 4 to the
dollar, this price amounts to NIS 1,200.
In Tel-Aviv, recent rental deals were priced at NIS
90-120/sq m. In the satellite cities, such as Herzlia and
Petah Tikva, we see deals at NIS 65-80/sq m, calculated
in dollars at NIS 4. At Airport City, rentals range
around NIS 80/sq m. At the current exchange rate of
around NIS 3.4/$, this price equals $23/sq m.
Nevertheless, we do not foresee that the continuing
increases in prices will result in the short term in
companies leaving the office buildings across the
country because existing rental agreements are
generally long term. There is no doubt however that in
the course of the following two years space-intensive
companies will consider moving their activities to
the periphery to reduce their rent significantly. This
phenomenon is not new. The Migdal Insurance
company decided at the end of the 1990s to move the
center of its activities to Petah Tikva to reduce rent and
municipal taxes. Migdal was not the only insurance
company to do so. The Bituach Yashir group also
moved in recent years to Petah Tikva, the Mizrahi
Bank moved to Ramat Gan, and the Discount Bank
considered at some point to move to an office tower in
Ramat Gan.
It is reasonable to assume that this phenomenon
will expand as current contracts reach their end and
companies must cope with the rent being demanded
and a significant increase in the companies’ expenses,
which will seriously affect their profits.
Comparison table between leasing / selling rates in Q4 2007 and Q1 2008
Q4 2007
Q1 2008
Average occupancy
Category
rate
Average
rent per
month per
sq m ($)
Average
selling
Average
price per
Occupancy
sq m ($)
rate
Average
rent per month per sq m ($)
Average
selling
price per
sq m ($)
Office
96%
21.26
3,645
96%
22.97
3,938
Commercial
96%
43.75
7,501
96%
47.26
8,102
Industry
90%
12.74
2,183
95%
13.37
2,292
Storage & logistic
90%
12.74
2,183
95%
13.37
2,292
Office
96%
17.15
2,940
96%
18.36
3,147
Ramat
Gan
Commercial
95%
24.99
4,284
95%
26.73
4,583
Industry
90%
11.93
2,045
93%
12.76
2,187
Storage & logistic
90%
10.82
1,854
93%
11.57
1,984
Office
97%
21.27
3,647
97%
22.75
3,900
Commercial
96%
37.16
6,370
96%
39.76
6,816
Industry
95%
12.36
2,119
95%
13.22
2,267
Storage & logistic
93%
12.36
2,119
93%
13.22
2,267
Office
95%
14.90
2,555
95%
15.95
2,734
Commercial
90%
23.39
4,010
90%
25.03
4,291
Storage & logistic
90%
8.65
1,483
90%
9.26
1,587
Office
95%
15.44
2,647
95%
16.52
2,833
Tel-Aviv
Herzliya
Ra’anana
Petach
Tikva
Commercial
90%
19.11
3,277
90%
20.46
3,507
Industry
90%
8.57
1,469
90%
9.17
1,572
Storage & logistic
95%
8.57
1,469
95%
9.17
1,572
Office
90%
13.45
2,306
90%
14.39
2,467
Commercial
85%
24.26
4,158
85%
25.95
4,449
Industry
90%
8.82
1,512
90%
9.44
1,618
Storage & logistic
93%
8.82
1,512
93%
9.44
1,618
Office
90%
12.50
2,143
90%
13.37
2,291
Commercial
92%
19.53
3,348
92%
20.90
3,582
Industry
92%
19.53
3,348
92%
20.90
3,582
logistic
86%
5.99
1,027
86%
6.40
1,098
Office
86%
11.90
2,039
86%
12.73
2,182
Lod
Commercial
85%
18.33
3,143
85%
19.67
3,372
Industry
85%
9.73
1,669
85%
10.41
1,785
Storage & logistic
85%
8.65
1,483
85%
9.26
1,587
Office
90%
12.98
2,225
90%
13.89
2,381
Commercial
85%
19.47
3,337
85%
20.83
3,571
Industry
85%
9.63
1,651
85%
10.30
1,766
Storage & logistic
86%
9.20
1,577
86%
9.84
1,686
Office
85%
12.92
2,215
85%
13.82
2,369
Jerusalem
Commercial
90%
18.90
3,240
90%
20.22
3,467
82%
8.93
1,531
82%
9.55
1,637
Storage & logistic
85%
8.40
1,440
85%
8.99
1,541
Netanya
Rechovot
Haifa
Industry
This survey has been carried by sampling the different business districts and according to transactions carried through the last quarter. Note: $/NIS rate in this table is $1=NIS 4.1.
5
Recent
Deals
MAN Properties
1 The high-tech company Saron
Technologies rented 750 sq m in the BSR
Towers on Ben Gurion Street in Bnei Brak at
$22/sq m. The company also rented 20 parking
spaces at a monthly rate of about $150 per space.
The agreement is for a period of three years with an
option to extend it for an additional three years.
2 The Sason Hogi real estate firm, is
transacting a second property in Kiryat Matalon
in Petach Tikva. The company signed a contract
with Lenox in a combination deal for the
construction on a 5.5 duman plot that it owns.
The building plan for the plot in question allows
the construction of some 19,000 sq m of offices
and commercial floors.
3 Harel Insurance Company purchased
from Electra Real Estate, “on paper,” the
Rakevet Tower in Tel-Aviv. The estimate is that
Harel will pay for the property $50-60M. The
Rakevet Tower, which will be built on 58-68
Harakevet Street in Tel-Aviv, will contain some
20,000 sq m. According to plan, the ground floor
will be designated for commerce, above which
there will be 22 floors of office space. In addition,
the project will include 5 floors of parking and
storage. The tower already enjoys great demand
for its office space and especially high rental
prices of $22-28/sq m. The project is currently
at the stage of obtaining building permits, and is
expected to be populated in 2011.
4 Elrov Real Estate, under the control of
entrepreneur Alfred Akirov, purchased the
Beit Asia office building on Weizman Street in
Tel-Aviv for NIS 220M. The office building is
situated in a location of the highest demand in
Tel-Aviv. It has an area of approximately 23,800
sq m, including underground floors with 330
parking spaces, roof floors with a total area of
some 6,300 sq m, ground floor, mezzanine, and
five additional floors with a total of 17,500 sq m.
Rental fees are estimated at $16/sq m on average
(excluding management fees), with some 80% of
rental agreements pegged to the dollar.
6
Magazine APRIL 2008
MAN
5 The DNF high-tech company rented for
the purposes of establishing corporate offices in
Israel 400 sq m of office space on Habarzel Street
in Ramat Hahayal in Tel-Aviv, at a monthly
rent of $19/sq m. The rental agreement was
signed for a period of two years, with the option
of extending it for an additional two years; the
option can be exercised at a 5% increase in rental
fees.
6 The “Ronymar” Paper company signed
an agreement for the sale of the Nir-Tech
building in Park Afeq in Rosh Ha’ayin to Asfan
Properties, for NIS 44M. The property contains
some 8,500 sq m of offices, of storage, and a
parking floor that accommodates 160 parking
spaces.
7 The Reit 1 company purchased four floors
with a total area of 3,000 sq m in a 10-floor
office building in the Amdocs site at Ra’anana
junction for $6.8M (NIS 24.5M). The transaction
reflects a price of approximately $2,300/sq m.
The floors are rented to Amdocs and Dafner for
annual rental fees of some half a million dollars,
reflecting a yield of approximately 7.3% per
year. Reit 1 purchased the offices from S.A.N,
which is owned by Nachum Ezra and Zeev
Ganot. Saan continues to hold the remaining
floors in the building as well as additional space
at the site, which are rented to Amdocs, Nice, and
Microsoft.
8 Lonnie Herzkovich, owner of Isfar,
the importer of Sony products to Israel, sold
the company’s office building in the Herzlia
industrial zone for NIS 89.5M before VAT.
The new owner of the building is the Reit 1
investment fund, under the control of Excellence
Invest. Reit 1 will finance the purchase with a
bank loan that is not backed by collateral.
9 Teva purchased from the real estate group
Isras-Rasco, under the control of Shlomo
Eisenberg, 7.7 duman in the Hevel Modiin
industrial park for NIS 104.7M. The Hevel
Modiin industrial park is adjacent to Shoham
and only a few kilometers from Airport City. The
park, which comprises 1,730 duman, allocates
space primarily for storage and logistics areas,
knowledge–based industries, and commerce
and service areas. In the area it purchased Teva
intends to establish a main logistics center.
10 The Phoenix Insurance Company
purchased 25% of the Star Center site in Ashdod
for NIS 132M. The remaining 75% remain in
the ownership of Jacky Ben Zaken, Avraham
Nenikashvilli, and former soccer player
Haim Revivo. The price paid by the insurance
company reflects a value of NIS 530M for
the mall. The Star Center site, with an area of
90 dunam, includes 47,000 sq m for rentals
and some 1,400 parking spaces. 95% of the
commercial space is rented to 125 businesses
and chains that yield an annual revenue of NIS
40.4M.
11 The ISSTA chain of travel agencies,
which is managed by Achishay Gal, is expanding
its operations in the area of income-producing
property. The company purchased from a
subsidiary (50%) of Nehushtan Investments,
under the control of Levy Kushnir, its share in the
California House on 120 Igal Alon Street in TelAviv for NIS 40.25M. California House includes
a commercial ground floor, four floors of offices,
and three floors of parking, from which ISTA
purchased 1,405 sq m of commercial space on
the ground floor, 211 parking spaces, and 1,200
sq m of storage space. The areas are leased to
nine renters, among them Eurocom and Mirs, for
an annual rental fee of NIS 3M before VAT.
12 The Brazilian Embassy signed a rental
contract in the Discount-Loewenstein Tower
in Tel-Aviv for the rental of 740 sq m on the
30th floor of the tower for NIS 150/sq m. The
agreement is for five years with an option for
extending it for an additional five years. The
tower, located at the corner of Yehuda Halevi
and Herzl streets, is the flagship project of the
Loewenstein group and is populated by the
management of the Discount Bank (18 floors),
investment houses, and embassies.
13 American-Jewish businessman
Yehoshua Gutman completed a particularly
successful real estate round when he sold the
U Bank house on Rothschild Avenue in TelAviv for $23M. The 10-floor U Bank house is
situated on an area of 858 sq m on 33 Rothchild
Avenue in Tel-Aviv. Gutman purchased the
building only two years ago. The buyer, Lenox
Investments, intends to add 15 floors of luxury
apartments.
Acquisition groups
for the purpose of construction: VAT aspects
Shlomi Vaknin, C.P.A., Attorney, Meir Mizrahi Law Offices
Establishing an acquisition group for
the purpose of construction generates
tax savings for each member, with
saving produced by the absence of
VAT liability on purchasing the
land by the group representing the
dominant portion. This article surveys
the alternatives that may produce a
tax liability on the sale of land by the
acquisition group.
But first let us look at the reason
why the purchase of the land by the
acquisition group is not subject to VAT.
The Value Added Tax (VAT) Law imposes
a tax liability on the sale of land
by a dealer or on the sale of land
that will serve the business of
an entrepreneur even if he does
not deal in land. The VAT Law
also imposes a tax liability
on people who do not deal in
land, including non-profit
organizations and financial
institutions, whenever they
sell land to dealers, non-profit
organizations, or financial
institutions. By contrast,
in a transaction in which a
group of buyers purchases
land from a private citizen
or a local authority
there is no tax liability
because on one hand
the person does not
deal in land and
on the other the
acquisition group
is not a dealer, nonprofit organization,
or financial
institution. (This
is true for local
authorities as well
when selling land to
acquisition groups.)
Nevertheless, there are several approaches to
the definition of a transaction, which if adopted
are likely to create a tax liability.
The first approach treats the entrepreneur as
someone purchasing land from the owner of the
right and selling a residential apartment to each
member of the group. In this case, the full price
of the apartment, including the land, is subject to
VAT. But as long as it is not possible to identify
clearly the presence of a prominent and dominant
entrepreneur by examining the agreements
between the parties, this approach will be difficult
to apply.
The second approach regards the seller of the
land as a dealer for all intents and purposes.
In this case, the tax authority must
prove that the characteristic tests
for a business apply to the seller.
These have been formulated over
the years by case law and include
tests of frequency, competence,
financing, and more. To create a
VAT liability on the sale of land,
the tax authority may regard
the large number of buyers as
evidence of a business. The
buyers, however, will point out
that sales to an acquisition group
is one transaction and that its
circumstances do
not allow
applying the tests for the definition of a business,
including the definition of an entrepreneur.
The third approach regards the acquisition
group as a non-profit organization. When a buyer
of land is a non-profit organization the sale of the
land is subject to VAT. For the purchasing group to
be considered a non-profit organization as defined
by the VAT Law, the tax authority must determine,
among others, that the acquisition group is an
“association of individuals” whose business is not
the generation of profit. The accepted interpretation
of the term “association of individuals” establishes
several tests, including the existence of common
activities, centralized management and its
separation from the right to enjoy the assets of
the “association,” the potential for
continuation beyond the lifetime
of the members, and such. It
follows that the definition of
non-profit organization in the
VAT Law is not suitable, in
our opinion, to an acquisition
group because of the nature of the
association, the manner in which
the group is managed, the absence
of separation between the owners
of the right, and the duration of the
activity. Furthermore, an interpretation
that regards every association of several
individuals,
which grants
them a
relative
advantage,
an action
that turns the
group into
a non-profit
organization
is not
consistent
with the
essence
of the
definition
of nonprofit
organizations by the
Law.
Magazine APRIL 2008
MAN
7
National
Outline
Plan
No. 38
Ofir Dvir, Attorney, with Ifat Shahar
& Assoc., Law Offices
Dvir
According to forecasts by
research institutions in Israel and
abroad, Israel will be the site of a
strong future earthquake.
Findings indicate that the entire eastern portion
of the country is at high risk of an earthquake
relative to the risk present in various other parts
of the world. The findings also show that areas of
the highest population density in Israel are also
included in the affected areas along the SyrianAfrican fault line. Although the forecasts do not
predict an exact time for the earthquake, they
indicate that the threat is real and requires advance
preparatory measures.
In view of the concerns aroused by these
forecasts, in 1975 Israeli Standard 413 was
enacted, specifying construction requirements
aimed at reducing the danger of building collapse
at the time of an earthquake. Because of the need
to reinforce also structures that were erected
before the enactment of the standard, and which do
not necessarily meet its requirements, a National
Outline Plan was prepared in 2005, NOP 38, for
the reinforcement of existing structures against
earthquakes.
NOP 38 applies to existing structures
whose construction was authorized before
January 1, 1980, except buildings that
8
Magazine APRIL 2008
MAN
Standard 413 exempts from its sway. The
objective of the plan is to institute arrangements
for improving and reinforcing structures, identify
structures that require reinforcement, and set
guidelines for their reinforcement. To encourage
the realization of this objective, interested parties
receive incentives in the form of additions to their
existing buildings. Because of the difficulties
in financing of the plan by the residents,
entrepreneurs who will choose to finance the
project and carry it to completion are also entitled
to these incentives, as are the owners who wish to
implement the plan in apartment houses.
An example of the incentives offered
by NOP 38 is Paragraph 2.3 of the plan.
This paragraph decrees that in exchange for the
entrepreneur’s willingness to finance the cost
of reinforcing the building, the owners of the
apartments grant the entrepreneur building rights
in the building. The owners can choose whether
to entrust the execution of the work to a contractor
or to a private company.
If the residents choose to have a
contractor perform the work, they choose
the contractor, sign a contract for the work,
and supervise its execution. The contractor is
responsible for all the activities involving the
authorities and other professionals, but the
residents must make sure that their interests are
protected according to the contract they signed.
The residents can also choose to hire a private
company that manages the project for them. The
company then hires a contractor and retains the
profits from the sale of the units or transfers the
building rights to the contractor in exchange for a
certain percentage of future profits. In either case,
in addition to the reinforcement of the structure,
the residents enjoy other meaningful benefits such
as the addition of an elevator and parking spaces,
enlargement of the apartments, renovation of
the outside of the building, and at times the
construction of a “safe room.”
It follows that the plan for reinforcement
of the structures benefits all parties: the state
benefits from lowering the risk of disaster on a
national scale, the local councils benefit from
improvement in the appearance of the city,
the entrepreneur benefits from the sale of the
apartments, and the residents gain safety, a higher
quality of life, and an increase in the value of
their apartments that can reach tens of percentage
points.
If this is so, why is it that since the plan has
been enacted it has not been implemented
nationwide? The answer is that various factors,
related and unrelated to each other, have been
holding up implementation of the plan. But lately
several legal steps have been taken that address
most of the delaying factors.
The chief impediment was Paragraph 62 of the
Land Law, 1969, which decrees that the rights
of apartment owners cannot be altered except
with the agreement of all apartment owners in
the building. In other words, according to this
paragraph, when residents desire to implement
the plan in an apartment house, they must first
obtain the agreement of all the owners in the
building. Consequently, it is sufficient for one
resident to refuse to agree to the implementation
of the plan to prevent it from happening.
To overcome the difficulties in obtaining the
unanimous agreement of all the residents to the
plan, in January of this year the Land Law of
1969 was amended. The amendment enables
reducing the majority required for ordering the
construction of a new unit in an apartment house
to 66% of owners, when construction is intended
to reinforce the structure against earthquakes,
and with approval of the Supervisor for Land
Registration.
To our readers – Our
apologies for an error that
occurred in the previous
magazine (#9) regarding the
average selling prices of
Q3 2007.
The correct figures
are shown in
this table.
Another obstructing factor that caused delays
in the implementation of the plan was a lack of
taxation incentives to the entrepreneurs who
perform the work. If entrepreneurs must pay
full tax for implementing the plan, the project
may become economically unprofitable.
Understanding that without tax incentives
the entrepreneurs would not participate in the
program, and given the state’s desire to increase
the motivation of the entrepreneurs to hasten
implementation of the plan, the Knesset has
granted several additional incentives. An
emergency measure attached to the Planning and
Building Law, which was enacted in the Knesset on
26.11.2007, grants a partial exemption of 90% of
the betterment tax, so that only a 5% tax is imposed
on betterment that is the result of NOP 38.
In addition, Amendment 62 to the Land
Betterment Tax Law has been enacted recently,
granting exemptions from betterment and sales
tax for the sale of land rights whose value is
affected by building rights granted by virtue of
the plan. This type of legislative intervention is
expected to improve significantly participation
in the plan, both on the part of apartment house
residents and of entrepreneurs.
An additional delaying factor was the absence
of leveraging of the plan by the local authorities.
Recently several local councils have begun
advertising the plan to the residents, but the
appeals to residents should also contain clear
instructions for the implementation of the plan.
The drive should also be carried out nationwide.
It appears that incentives by local councils
have great value in leveraging the plan. Local
authorities that encourage the implementation
of the plan generate great interest among the
residents and contribute to greater participation.
Although there is need for increasing public
awareness and for greater involvement and
incentives on the part of local authorities,
we seem to be on the verge of a large-scale
plan. Note, however, that the plan requires
meeting strict standards. For example, various
stages of implementation of NOP 38 require
verification by engineers and certification
that there is indeed a need for reinforcing the
structure, a recommendation as to the method
of reinforcement, an opinion of an architect
regarding the building rights and the solutions for
implementation, and a legal opinion to verify that
there are no legal impediments to implementing
the plan.
Those wishing to implement the
plan should note that choosing
experienced and reliable
professionals is a condition for the
success of the project. We believe that
interested parties will soon realize that State
support for the plan and the improved incentives
have created a program that promotes not only a
deserving and necessary objective but also offers
broad and profitable business opportunities to all
concerned.
Dvir & Assoc., Law Offices, specializes
in family, criminal, and commercial law
Magazine APRIL 2008
MAN
9
Worldwide survey of real estate firms’ financial repo
Chen Shein, Accountant, and Yaniv Ziv
Real estate firms are involved in
a wide range of activities, including
entrepreneurship, development,
construction, management, and maintenance.
In a survey we conducted for Ernst & Young,
we chose to focus on investment real estate
firms.
The main IFRS standard that addresses the area
of real estate investment is IAS40 – Investment
Property. At first sight the standard looks simple
to implement, but the relations between it and
additional standards such as IAS 12 – Income
Taxes, IAS 16 – Property, Plant and Equipment,
IAS 17 – Leases, and IAS 18 – Revenue, as well
as substantial differences between operating
procedures and legislation in various real estate
markets around the globe, have led to diverging
interpretations in practice.
In the course of 2007 we surveyed 25 leading
public real estate firms in Europe, the Far
East, and Australia with a total market value
exceeding $200B, and examined the manner in
which the international rules of real estate are
implemented in their reports.
Measuring Investment Real Estate and Real
Estate Under Development
As expected, because of the focus of real
estate firms on the net value of the assets, the
overwhelming majority of firms elected to adopt
the fair value model in IAS 40 for the purpose
of evaluating investment real estate. Two firms,
however, chose not to adopt this model. Initially,
IVG chose to use the cost model because it is
possible to switch from the cost to the fair value
model at any time, but changing over in the
opposite direction is not possible. The firm elected
to “sit on the fence” and see what effect the model
would have on other firms in the industry, and two
years later decided to switch over to the fair value
model. The other firm, Klepierre, understood
the needs of the market, and although it chose to
use the cost model, it produced pro forma reports
based on the fair value model. There is agreement
about the policy used with regard to investment
real estate under development, with most of the
firms electing to use the cost model according to
IAS 16.
Nevertheless, from among five firms that apply
the reevaluation model to investment real estate
under construction according to IAS 16 (whereby
changes in fair value are credited directly to the
capital and not to profit and loss) four are from the
UK and the fifth from Australia. This finding can
be explained by previous accounting rules in these
countries, which handled investment real estate
under development according to fair value.
The question whether the reevaluation model is
at all applicable to real estate under development
under IAS 16 was tested within the framework of
IFRIC, which determined that although according
to IAS 40 there is no possibility of reevaluating
real estate under development, IAS 16 does not
prohibit handling real estate under development
within the framework of the reevaluation model.
Nevertheless, since the publication of IAS 40
the use of the fair value model in accounting has
become increasingly common, and as a result
IASB published a draft resolution whereby real
estate under development is also included under
IAS 40. If the draft resolution is adopted, as of
January 2009 real estate under development will
be considered as investment real estate and will be
handled accordingly, including being represented
by fair value, with changes credited to profit and
loss.
Valuation Methods
IAS 40 does not require but it encourages the
use of external value appraisers, and indeed all
firms participating in the survey used such an
appraiser.
The standard requires disclosing the identity of
the value appraiser, the method of valuation, and
the assumptions used in the valuation. The survey
found differences in the scope of disclosure
between the firms, ranging from a few lines to
three pages.
Principal Findings
Almost all the firms adopted the IAS 40 model of
fair value in evaluating investment real estate.
Only firms in the UK and Australia took
advantage of the IAS 16 option of reevaluation for
investment real estate under development.
All the firms used external appraisers, but only
a few made public the assumptions used in the
valuation.
A mixed approach was used regarding goodwill.
Some of the firms eliminated goodwill
immediately, but some continue to include it in
financial reports.
Despite many issues arising from aspects of real
estate tax deferral as a result of IAS 12, the accounting
policy does not always describe the method used to
address complex problems in this area.
Most of the firms used the alternative approach of
IAS 23 – Borrowing Costs to capitalize financing
costs to the cost of a qualifying asset.
Most of the firms use proportional
consolidation for joint ventures rather than the
equity method despite the fact that the former
option will be eliminated in the future.
Revenue Recognition
Paragraph 9 of IAS 18 addresses the date on
which revenue is recognized when real estate is
sold. Because of lack of clarity in the definition of
the date on which revenue is recognized, part of
the firms participating in the survey recognized
revenue at the time of transfer of ownership in the
property, whereas others recognized revenue at
the time the substantive risks and benefits of the
In the course of 2007 we surveyed 25 leading public re
10
Magazine APRIL 2008
MAN
orts based on international accounting rules (IFRS)
property were transferred to the buyer.
Recognizing revenue for the sale of real
estate becomes more complex when the asset
is sold before its completion, or at times before
the beginning of construction. In determining
the proper treatment for recognizing revenue
for contracts signed before the project has been
completed, it is necessary to establish first
the applicable standard: IAS 18 or IAS 11 –
Construction Contracts. This issue is addressed
by IFRIC D21, published in July 2007, which
provides guidelines for recognizing revenue from
the sale of real estate. D21 specifies when the
sale of an asset before the end of construction is
considered as an executory contract under IAS 11
(in which case revenue is recognized according to
the progress of the work), and when the sale of an
asset is considered under the definition of IAS 18
(in which case revenue is recognized only when
the risks and benefits are transferred to the buyer,
that is, at the time the property is transferred).
Goodwill
The claim has been made that a firm that values
its assets according to the fair value method
cannot include goodwill in its financial reports
because goodwill represents future cash flow,
which is already incorporated in the property
when the fair value is considered. Under the
influence of IFRS this issue became more
substantive because according to IAS 12 one must
acknowledge a liability for deferred taxes, which
in general is significantly higher than the amount
of the liability for taxes that have been taken
into account in the transaction. As a result, the
goodwill in the transaction increased significantly
and “artificially.”
Whereas IAS 36 – Impairment of Assets
states that one must consider future cash flow
before tax, in our opinion IAS 36 did not intend
to immediately devalue goodwill as a result of
deferred taxes despite the fact that often this is the
accepted practice.
In our survey we found that there are
extensive differences between the firms in the
way in which they treat goodwill. A portion
of the firms continued to recognize goodwill
in their financial reports while checking
yearly for depreciation, whereas other firms
eliminated goodwill immediately. Two
firms even immediately recognized negative
goodwill, which was included in the profit and
loss statement.
In our opinion it is not necessary to reduce the
goodwill produced by deferred taxes, and it is
possible to justify within the rules of international
accounting leaving it on the books.
Financing Costs
Among 23 firms that detailed their accounting
policies regarding financing costs only two chose
not to capitalize the financing costs of qualifying
assets under development. This is likely to
change because IASB, as part of its merger with
US GAAP, requires that as of 2009 property
financing costs be capitalized, and the option not
to capitalize is abolished.
Nevertheless, the amended IAS 23 does
not mandate capitalization of credit costs
of assets treated with the fair value method
because capitalizing the costs will not change
the measurement of the value of the asset; from
this point of view, the amendment does not
differentiate between assets treated with fair value
vis-à-vis profit and loss (investment property)
and assets treated with fair value vis-à-vis capital
reserve (permanent property).
Accounting Treatment of Joint Ventures Real
estate firms often participate in joint ventures
for various real estate projects. At times these
deals are covered by IAS 31 – Interests in Joint
Ventures. Currently the standard recommends
two methods for these transactions: proportional
consolidation and the equity method.
Our survey revealed many approaches to this
subject. Seven firms adopted the equity method,
ten firms adopted the proportional consolidation
approach, and the remaining eight firms described
the approach they chose to follow. Again, we can
identify geographic characteristics, with six of the
seven firms that adopted the equity method being
from the UK and Australia. The proportional
consolidation option will most likely be abolished
by the IASB within the framework of its
alignment project with US standards. According
to a draft published by IASB, joint ventures will
be treated only according to the equity method.
Summary
Real estate transactions are a good
example of differences that can arise from
the implementation and interpretation of
international accounting risks. In some areas
there are no differences between the firms, as
in the case of applying fair value to investment
real estate. By contrast, there are subjects in
which there are discrepancies between the
firms, as in the case of the reevaluation of real
estate under development.
Perhaps even more interesting is the level
of disclosure that firms use in their financial
reports regarding topics such as the manner in
which the fair value of real estate is appraised,
explanations about the manner in which they
chose to treat goodwill, etc.
Considering the differences in legislation and
regulation in the various markets, full disclosure
of the assumptions and decisions applied is of
vital importance to investors for comparing
firms. It will be interesting to see how the firms
cope with the disclosure requirements of IFRS 7
that started in the year 2007.
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eal estate firms in Europe, the Far East, and Australia
Magazine APRIL 2008
MAN
11
On the Road to Suc
MAN Properties
Drivers on our roads know that immediately
after extricating themselves from the traffic jams
on Ayalon and proceeding north, south, or east
they run into recently inaugurated highways, sings
announcing a new interchange, or simply refreshed
road markings. Ma’atz, one of the oldest companies in
Israel, is an inseparable part of economic and business
development in the country. So let’s get acquainted.
A bit of history Historians worldwide attribute the
secret of Israel’s success to the fact that the Zionist
entity in Palestine knew how to build its national
institutions and economic infrastructure in the three
decades preceding the establishment of the State.
These institutions made possible a rapid transition to
independent statehood and the country’s impressive
economic growth, especially in light of developments
in other countries that gained independence in the
1940s and 50s. One of the most important institutions
that formed the infrastructure of a diversified and
dynamic economy was Ma’atz, or according to its
original name, “The Engineering Arm of Public
Works,” PWD, established in February 1921.
The institution was headquartered in Jerusalem
and headed by British officers, engineers by training,
employed as civil engineers rather than military
personnel. Together with them worked Jewish
engineers, mostly from the Technical Department of
the Jewish Agency. With the establishment of the State,
in 1948, these engineers formed the core from which
Ma’atz emerged. The engineering unit was engaged
in the planning and construction of ports and state
institutions, and the paving of the first roads. This was
the initial development of an infrastructure for roads
that had previously served mostly carriages alongside
the first automobiles, primarily military vehicles used
by the foreign rulers of the country.
At the time of the establishment of the Engineering
Arm of Public Works there were 400 km of roads in the
country. In 1946 there were already 2,720 km, many of
them narrow, dusty, and unpaved.
With the establishment of the first Israeli
government Ma’atz became part of the Ministry of
Labor and was charged with paving the roads and
constructing the government buildings. In the first
decade of its existence, its annual budget was around
140M lira in constant value. The money served
12
Magazine APRIL 2008
MAN
the paving of close to 1,500 km of roads and the
construction of various government service buildings,
with an overall area of over 4 million sq m. One of the
challenges faced by Ma’atz after the establishment
of the State was the fact that the new borders of the
country have severed many of the roads and as a result
entire regions were cut off from the main roads. This
was the state of the highways leading to Jerusalem and
the Dead Sea, among others. Therefore the urgent need
arose for paving new roads to the isolated localities to
ensure communication, supplies, national security, and
development.
There was also a need to rehabilitate the main
highways that have been destroyed during the war,
including the Gvura road (No. 44, to Jerusalem), the
Coastal road (No. 2, between Netanya and Tel-Aviv),
the Ein Kerem-Nes Harim road (No. 386), the North
road (No. 899, which stretches along the northern
border), the Beer Sheva-Dead Sea road (No. 25), the
Plugot road (No. 40, which reaches Beer Sheva), the
Mitzpe Ramon road (No. 40, which ends in Eilat),
and more. Tens of thousands of new immigrants
were involved in the efforts to pave the new roads
and to restore the old ones, and in remote locations
labor camps were set up to house the workers, to help
complete the construction and settlement work faster
and more efficiently.
At the time of the establishment of the State, there
were some 3,000 km of highway. A decade later, at
the end of the 1950s, there were approximately 4,500
km. At first, unpaved roads were included in the count,
but eventually only the paved ones were counted. At
the beginning of the third millennium the interurban
network of highways reached some 5,716 km.
Over the years Ma’atz became increasingly
professional. From employing tens of thousands
of mostly unskilled workers, Ma’atz reduced its
workforce by the 1980s to approximately 2,000, and in
the 1990s to 800 workers only.
From unit to company
At the beginning of 2005 the Israel National Roads
Company was given responsibility for the planning,
development, and maintenance of the interurban
system of highways in Israel. The governmental
company follows in the footsteps of Ma’atz, the support
unit of the Ministry of Transport, that brought with it a
tradition of 85 years of enterprise in the course of which
it established the highway system of Israel. The current
objective of the company is the development of safe
and forgiving highways and the interconnection of the
roads infrastructure into one modern network.
Ma’atz in perpetual motion
Currently Ma’atz must address serious challenges
such as the annual growth in the number of vehicles,
safety on the roads, protection of the environment, use
of green technologies, and naturally the expansion of
the national infrastructure of roads. To this end, Ma’atz
has produced a multi-year work plan that includes the
development of the network of interurban highways,
safety projects, routine maintenance, preventive
maintenance, the establishment of a traffic control
center, R&D, and standardization.
ccess
The program for the development of the national
network of highways (the “Layers Plan”) contains
projects that are in the process of development as
well as new projects. The plan provides investment in
infrastructure that will improve the citizens’ quality
of life, growth, and welfare, and will contribute
significantly to driving safety. The cost of the
development program is approximately NIS 13.3B.
The Layers Plan differentiates between the top
layer that represents the main highway system, and
the bottom layer that connects every point to the top
layer. The top layer consists of 4 highways running the
length of the country and 16 highways running across,
creating a crisscross pattern of roads. The top layer
will be paved as expressways (with exits, two-lane
traffic in each direction, for high speed). No safety
improvements will be required for these highways. For
the bottom layer most of the work will involve safety
improvements, and solutions will be devised for local
problems.
Safety-related projects are intended to provide
solutions to local safety problems that are not included
in the development plan. Road accidents claim some
500 lives every year and cost an estimated NIS 12B.
The 5-year plan will enable a significant
reduction in the number of road
accidents. The cost of the safety plan
is estimated at NIS 1B.
NIS 80B on the road
The network of interurban
highways represents one
of the most capital-intensive investments in the
country. The assets include, among others, some
5,716 km of highway, interchanges, bridges, tunnels,
as well as electrical systems, traffic lights, and other
infrastructure. These assets are estimated at a value of
NIS 80B.
The 5-year plan was intended to preserve this
asset and enable routine and safe use of the highway
network. The maintenance budget stands at
approximately NIS 3.2B per year, which includes
dealing with “orphan” roads, 1,500 km of highways,
mostly within the jurisdiction of local councils, that
are not being maintained by the councils and are
not defined as falling under the responsibility of the
Israel National Roads Company, as Ma’atz is known
today. These roads represent a safety hazard that must
be addressed urgently. The work plan also includes
investment in a modern traffic control center that will
enable efficient, quick, and safe control and operation
of the network of highways. The annual budget of the
traffic control center is around NIS 280M.
R&D on the road
The main objective of the company in the area of
R&D and standardization is research and development
in the field of road paving and the advancement of
technological solutions that contribute to a higher level
of service and safety for drivers, taking into account
matters of environmental protection. The budget
required for R&D and standardization over the period
of the multi-year program is around NIS 103M.
Plan 2030
Plan 2030 of the Israel National Roads Company
is based on the assumption that a quality network of
highways is more than merely a way of getting from
one place to another. The plan is intended to provide
solutions to a range of issues: coping with the high
level of demand, and integration of the plan for the
highway system with the general effort of meeting
economic, social, and environmental objectives,
taking into account technological advances and
optimal planning of the company’s budget.
The company initiated Plan 2030 because of
a need for a long-term policy that would direct
the daily activities of the company. In this
context, the company is the professional
and executory arm of the Ministry of
Transport and Road Safety and of the
government of Israel in all matters
concerning interurban highways.
Tens of professionals in the
areas of transportation and
traffic, economics, road
planning, landscaping,
statutory planning,
environmental
protection, the
railways, Road 6,
academia, the Nature
and National Parks
Protection Authority, the
Prime Minister’s office, the
ministries of Finance and of
Construction and Housing, and
others participated in the preparation
of the master plan. The team contains decision makers
from the public sector together with consultants from
the private sector and entrepreneurs.
The plan is revolutionary not only in its time frame
(strategic planning through the year 2030) but also in
approach. In the historical Ma’atz the emphasis was
always on the physical paving of new roads. Today the
vision is integrative. The company regards the system
of highways as a complex in which the driver is at the
center, in other words, the driver is customer No. 1.
Plan 2030 has two main outcomes: a long-term
plan, through the year 2030, from which the future
5-year plans of the company will be derived, and
recommendations for the next 5-year plan for the
years 2011-2015. These outcomes are manifest in the
scenarios, the policy document, and the determination
of priorities for development. A national model of
traffic forecast will be prepared for the purpose of
generating the plan. The model will also serve as a tool
for comparing alternatives and for the maintenance of
the plan until it is replaced with a newer model.
The Layers Plan was the first step toward long-term,
visionary thinking. The plan, which served as a basis
for the first 5-year plan (2006-2010), proposed two
layers for the highway system: a top layer consisting
of 4 highways running the length of the country and 16
highways running across, and a secondary layer that
includes all the other national roads.
The strategic plan for the interurban network of
highways represents the company’s continuing effort
for long-term planning, with the Layers Plan serving
as a point of reference and first tier. The target year,
2030, was set in conjunction with the planning horizon
of other plans under preparation, and to the maximal
range of statistical and other forecasts.
·
·
·
The objectives of Plan 2030
Creation of an economically and socially efficient
national interurban network of highways.
Improving the level of safety on the roads.
Establishing proper priorities for the development and
maintenance of the network and the reduction in the
number of road accidents and of their severity by using
“forgiving infrastructures.”
Improvement in the level of service for drivers.
Reducing the time of travel, the creation of a
hierarchical network that allows easier orientation,
improvement in the reliability of the system and in the
ability of the driver to estimate time of travel, setting of
priorities for the establishment of rest areas.
·
Integrating the system of highways into overall
development and construction, including intelligent
use of land resources for minimizing the damage to the
landscape, preference for expanding existing roads
over paving new ones, planning through integration
in the environment, and minimizing the effects of
the highway on the neighboring environment, and an
endeavor. ·
Preparation of a multi-year strategic plan and plan of
execution (until the year 2030) and the preparation of a
5-year plan for 2011-2015.
The Ma’atz of the past and the current Israel
National Roads Company came a long way (some of
it paved, some of it full of pitfalls) before reaching
its present destination. From here it continues
energetically to the next stop: 2030. We will no doubt
begin to see the results of the plan very soon.
Ma’atz by the numbers
5,716 km of highway
51 interchanges
2,600 intersections
405 intersections with traffic lights
520 bridges
3 tunnels
25,000 dunam of landscaping (with minimal irrigation)
2,000 dunam of landscaping (intensive care)
140,000 road signs
3,308 km of safety railing
70,000 light posts
84 cameras for traffic monitoring
19 electronic signs with changing messages
Magazine APRIL 2008
MAN
13
Models of
Hotel OwnerOperator
Relationship
Itay Rogel, General Manager of Elad Hotels,
Tshuva Group
Hotel owners in Israel
belong to the category
of holding companies
or investment
companies for the
purpose of yield on
equity. They usually
form two types of
relationships with
operators: (1) lease
agreement or (2)
operation in the name
of the owners and on
their behalf.
14
Magazine APRIL 2008
MAN
1
Lease
Agreement
The less common method in our region is
one in which the operator leases the hotel in
a free rental, as it would any other real estate,
pays a fixed rent, and occasionally pays
an additional amount as the hotel achieves
certain annual financial goals of revenue and
operational profit. There are clear advantages
to the owners in this method: they avoid
involvement with the business of the lessee
and with business and legal procedures, and
divorce themselves from the need to deal
with matters of the hotel. The disadvantage
of this method from the point of view of the
owners is that they have no ability to follow
through the implementation of reinvestment
in the hotel by means of the equipment
replacement fund, and they must rely
exclusively on the operational reports of the
operator to appraise the value of the asset as a
business at any given time.
2
Operation in
the Name of
the Owners
and on Their
Behalf
According to this method, the owners
establish a company or partnership for the
purpose of managing the hotel, and the
operator of a chain of hotels manages the
hotel within this framework. The operator
employs workers who are considered
employees of the owner for all intents and
purposes, obligates the owners vis-à-vis
suppliers, and deposits the revenues in the
owners’ bank account – in other words,
operates in the name of the owners and on
their behalf. This method maximizes the
advantages of the operator because the
owners assume all the financial and legal
risks of the hotel.
The method of
operation in the name
of the owners and on
their behalf is used in most of the
agreements between the leading chains in
Israel and the owners of the large hotels in
our region, and it is the operators rather than
the owners who enjoy the advantages of this
method. The owners remain “partners” in
the management of the hotel, and their name
is tied to that of the operators of the chain in
every activity related to the hotel. When the
relationship with the operator ends, however,
although an active skeleton remains for the
operation of the hotel, the operator carries
away all the goodwill, including the name
of the business and the hotel’s reservations
network.
This method is based on a business
approach in which all the revenues of the
hotel belong to the owners. The operator is
entitled to a basic management fee, usually
between 1.5% and 3% of expected revenues
per budgetary year. In addition, the operator
is entitled to incentive fees above the adjusted
operational profit. The annual incentive fees
can vary between 12.5% and 17%, depending
on the steps of the adjusted operational profit.
For the purpose of this calculation, the basic
management fee, the minimum payment to
the owners (if agreed upon ahead of time),
and the equipment replacement fund are
deducted from the operational profit.
The greater the bargaining power of
the owners at the time the agreement is
negotiated, the better their chances of
guaranteeing for themselves a minimum
payment from the operational profit, an
amount that paid to them even if the operator
has no balance of cash flow from the hotel
at that time and must renounce the basic
management fee to which he is entitled. For
these situations it is customary to include
a claw-back clause in the agreement, a
mechanism of retroactive payments of the
management fee for that period, based on
the future cash flow and profit situation of
the hotel. The minimum payment to the
owners is included in the calculation of the
adjusted operational profit, before payment
of the incentive fees. When the agreement
is negotiated, the owners must pay special
attention to the way in which the operator
defines the operational profit and to ensure
that the expense items before the operational
profit match their expectations of the profit
they wish to achieve.
Another budgetary
item subject to
negotiation before
the signing of the
agreement is the equipment
replacement fund. International management
networks customarily require owners to
allocate each year, as a deposit, an amount
between 1.5% and 3% of expected revenues.
At times, the allocation increases with the age
of the asset and its condition. Local networks,
however, tend to establish such a budgetary
item without a separate deposit, and at times
without implementing a proper investment
plan over the operation years.
Although the equipment replacement
fund reduces the operational profit, owners
should implement a policy of allocating
cash for this purpose and follow up on the
implementation of the multi-year work
plan of investment in the property. Note
that the equipment replacement fund has no
accounting definition, and therefore at times
owners and operators disagree whether a
given investment is within the scope of the
equipment replacement fund or an expense
for the routine maintenance of the hotel.
At the end of each calendar year, the
owners receive a balance sheet based on
which the accounts and the final division of
profits are settled between the owners and
the operator for the preceding year. Thus, the
owners “close the year” with respect to their
cash flow with a delay of four to five months.
The widespread use over time of this
method in the hotel industry in Israel and
elsewhere attests to the presence of an
efficient working mechanism between the
parties, as the method requires a substantial
amount of personal trust on the part of the
owners in the operator and in his agents, in
the manner in which the operator transacts
business with third parties, and in the
operational reports he issues.
Magazine APRIL 2008
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15
Just befor
Exemption in the transfer of rights
Introduction
Yehiel Rechschaffen, Attorney
Building rights are an artificial
asset with an economic value
created ex nihilo. Therefore,
their sale or transfer in any
form is considered a taxable
transaction unless specific
exemptions are granted.
This brief article examines
whether in transactions involving merging
and redivision it is possible to reduce the burden
of taxation or to obtain an exemption from
taxes.
Paragraph 67 of the Land Betterment Tax
Law, 1963 (henceforth, the Law) addresses
tax exemptions for transactions involving the
voluntary merging and redivision of real estate.
Following Amendment 55 to the Law, the
Paragraph decrees that in the case of merging
of abutting or continuous plots the exemption is
granted if the plots are merged in an agreement
between the owners, without the need to
complete the steps specified in the Planning
and Building Law, 1965. The exemption is
granted also in case plots that are not abutting
or continuous have been merged as long as the
merging conforms to the Planning and Building
Law.
In view of the above, we need to examine
whether it is possible in certain cases to merge
adjacent plots without the transaction being
subject to taxation if the operation takes
place consistently with a town building plan,
specifically, whether the transfer of building
rights carried out within the framework of such
merging is exempt from tax.
Paragraph 67: Exemption in merging and
division. Merging by agreement.
Originally, Paragraph 67 of the Law granted
exemption from tax only for division of land,
not for the voluntary merging of real estate that
was not the result of an order by a qualified
authority. Nevertheless, a lenient interpretation
by tax authorities in Executive Order No. 78/93
stated that the term “division” in this Paragraph
is to be expanded (exceptionally) to apply also
to the merging of land, if the merging is carried
out for the purpose of redivision.
This accommodating position on the part
of the tax authorities was not approved by the
Supreme Court in its ruling in the Steinberg
case (Civil Appeal 3380/96), in which the
Court emphasized that the exemption based
on Paragraph 67 of the Law applies only
to the division of the property between its
joint owners. As a result, the Paragraph was
reformulated and the exemption by virtue of
Paragraph 67 now applies also to merging of
land.
16
Magazine APRIL 2008
MAN
The term “merging of land” is defined in
Paragraph 67(b) of the Law as “merging of plots
based on the Planning and Building Law, 1965,
or a transaction combining abutting properties,
which according to the Law are viewed as
one right to the real property.” It follows that
Paragraph 67 of the Law grants exemption
from tax only to “contractual merging” of
plots, as long as the merging has been carried
out as part of a plan based on the Planning and
Building Law.
Note that the Paragraph also decrees that
the combination of two abutting plots is
included in the definition of “merging of land,”
enabling owners of the land to obtain a tax
exemption for contractual merging of plots
within the framework of the combinatory
transaction. But even the amended Paragraph was
not entirely applicable because the exemption was
contingent upon completion of the steps mandated
by the Planning and Building Law, a limitation
that prevented, for all practical purposes, the
application of the exemption according to this
Paragraph.
Aware of this fact, legislators amended the
Paragraph once again as part of Amendment 55
to the Law. According to the current version of
Paragraph 67, “merging of land” is defined as
“merging of abutting or contiguous plots for the
purpose of new planning, including merging of
plots, as stated, based on a plan, in its meaning
in the Planning and Building Law, 1965. So is a
combination of abutting plots or contiguous plots,
which according to Paragraph 19 (4) are viewed as
re you sell
s
formulation “based on the shares of the joint
owners in the right” was interpreted by the tax
authorities (in Executive Order No. 81/57)
literally, that is, by evaluating the ratio of the
values of the plots, so that if the values are
equal it is possible to say that the division is
based on “the shares of the joint owners
of the right.”
Amendment 55 abolished the
requirement that the division
be based on the shares of the
one right to the property.”
Thus, in every merging of abutting plots,
whether in accordance with the Law or in case of
contractual merging, an exemption from tax is
obtainable based on Paragraph 67, as long as the
other conditions are met.
Paragraph 67: Exemption in merging and
division. Proportional share in merging and
division.
Following the merging or division of real estate,
the question arises about the share of each partner
in the merged/divided plot. Until Amendment
55, a transaction involving the division of land
among joint owners or the merging of land was
exempt from tax only if offset payments have not
been made and the division was performed based
on the shares of the joint owners in the right. The
joint owners of the right
and decreed that the tax
exemption is granted in
all cases in which offset
payments have not been
made.
Following
Amendment 55, when
the joint owners of
the land divide it
according to the
value of their shares,
and no offset
payments are made,
exemption from tax
is granted by virtue
of Paragraph 67
of the Law even
if the division
does not match
their shares in
the right. This
is the case if two
partners with equal
shares divide a waterfront
property in such a way that
one of them receives one third
of the property along the shoreline
and the other the remaining two
thirds as an inland plot. As long as
the market value of the plots is equal,
and no additional payments are made,
the exemption from tax is granted for the
division.
plots are merged, or the transfer of building
rights between plots as part of a planning move
involving the merging of plots.
In appropriate cases, it is possible to claim
that the merging of abutting plots and/or
the division of plots in a manner that certain
building rights are transferred to an abutting
plot, are exempt from tax even if the building
rights “passed from one hand to another.”
These situations arise when, for example, the
municipality restricts John Doe’s building
rights on plot A, but it expands his rights on the
adjacent plot B, or when John Doe and Jane Doe
share rights in the same plot and John transfers
to Jane the rights on the roof of the building for
some other right that Jane has in the building
(exchange within the same plot). As long as
these acts of division and merging meet the
conditions of the Paragraph as formulated after
Amendment 55, we can expect an exemption
from tax for these transactions based on the
Paragraph.
In sum, it is safe to say that the
first step before any planning
move should be consideration
and examination of its tax
consequences.
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Exemption for transfer of
rights
The merging of plots as part of a town
building plan, even when the plots are not
adjacent, has become increasingly common,
and the Court approved it from the planning
point of. There are cases in which usage or
building rights are transferred from one plot to
another as part of various agreements between
joint owners and/or between the municipality
and the planning authority. The meaning of
such an action can be, for example, the creation
of special situations in which non-adjacent
Magazine APRIL 2008
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17
General
1. INTRODUCTION
Practically all real estate segments in
Brazil are currently in demand, not only
in the main cities of São Paulo and Rio
de Janeiro, but also in many smaller
regional capitals.
Since the mid-1990s, when the economic
stabilization plan was implemented (Plano
Real) and a new currency established, Brazil
has followed austere monetary and fiscal
policies, having as its ultimate goal the control
of inflation and the achievement of annual
primary surpluses of around 4%.
Over time, whenever necessary, interest rates
were increased to control inflation threats,
but basically they have been
following a downward trend
since 1995.
The basic interest rate tax
(Selic) currently stands at
11.75% p.a. Although still
high, it is less than half of what
it was only a few years ago.
After a period of modest growth, Brazil’s GDP
grew last year by 5.4%, and this year a growth
of 4.5% is expected, with GDP approaching
$1T. Unemployment figures have dropped
below 10% nationally.
These have contributed to a considerable
reduction of Brazil’s country risk assessment.
Standard & Poor upgraded Brazil's long-term
foreign currency sovereign debt to investment
grade, making
it possible for a
wider universe
of international
investors,
including U.S.
pension funds,
to plunge into the Brazilian stock market. The
upgrade sparked a 6.3% rise in the index of
the São Paulo stock exchange, or BOVESPA,
which soared to an all-time high of 70,000
points.
All these have had a profound impact on real
estate. With sustainable economic growth, more
spending power and the availability of cheaper
and longer-term financing, real estate has
attracted the interest of both local and foreign
investors. Since
2005, around 26 real
estate companies
have undergone IPO
processes, raising
approximately
$10B, three quarters
from foreign investors. Although around
75% of these resources have been directed
to companies predominantly residential,
commercial real estate has also benefited.
For the first time in years financing has been
made possible for operations involving
existing office buildings and buildings under
construction, enabling the setup of leveraged
investments. Some local property companies
have been able to partially finance
their investment acquisitions typically
at around 8% to 9% p.a. + IGPM
(inflation), or around 8% to 9% p.a.
+ TR. Depending on the situation,
recourse or non-recourse financing has
been made available by some financial
institutions.
Overview
of Real Estate
Investments
in Brazil
2. MAIN REAL ESTATE
SEGMENTS
2.1 Offices
São Paulo City
With a population of 13M inhabitants, not
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Magazine APRIL 2008
MAN
including Greater São Paulo, the city is responsible
for 15% of country’s GDP. The state of São Paulo
accounts for 29% of Brazil’s GDP.
Brief Market Overview
Total office stock:
10.44 million sq m of usable office space.
Available supply / vacancy rate :* Currently at
7% (almost half of that registered in 2004) and
dropping further. Some regions of the city show
vacancy rates of around 2% to 5%. As a result,
many tenants are forced to lease space under
construction (pre-leasing).
Net absorption
Occupancy demand levels: *
With nearly all segments (services, financial,
industrial, etc.) continuing to grow, net absorption
averaged around 130,000 sq m p.a. between 2003
and 2005. In 2006, it increased to 300,000 sq m and
in 2007 to 326,789 sq m. For 2008, an even higher
number is expected. The first quarter of 2008 has
already registered a net absorption of 150,000 sq
m, indicating strong market activity.
New stock forecast: * An average annual
delivery of around 200,000 sq m is estimated for
2008 / 2009 / 2010.
Prices
As most of the new stock scheduled for 2008 is due
to be delivered in the second half of 2008, prices
are expected to generally continue to rise for the
next 12 months. After 2008, the Brazilian economy
should continue to grow at around 4% p.a. or
more, and prices may continue to increase. Should
growth be slower, prices may stabilize.
Yields
Currently in the range of 9% to 10% for good
quality space. Should continue to compress with
lowering interest rates. Yield for absolute prime /
full lease properties will probably go below 9%.
Currently, the owners of this type of property
prefer to hold and wait for yields to go down
further. So far there has been only one small,
specific transaction below a yield of 7%.
Main investment opportunities
Existing buildings: **
Good quality leased buildings are difficult to
find. Yields around 9% to 10% or below can
be expected, depending on quality / location.
Possibility for retrofits exists, capable of providing
higher yields (say, between 11% to 13% p.a.),
but the option to develop instead may be more
interesting.
Development :**
Good opportunities exist for top quality
projects at initial stages of development, with
yield on cost ranging between 12% and 14%.
Main regions of interest are Jardins / Marginal
Pinheiros.
Rio de Janeiro
With a population of 6.3 million inhabitants,
not including Greater Rio, it is Brazil’s second
largest city, home to some of the country’s
largest companies such as Petrobrás and Vale
do Rio Doce.
Brief Market Overview
Total office stock:
Approximately 5.7 million sq m of usable office
space.
Available supply / vacancy rate :*
Currently at 6.2% (almost 40% less than
registered at the end of 2003), and dropping
further. Class A vacancy rate currently stands at
only 1.4%.
Net absorption :*
Over the last 4 years has oscillated between
25,000 sq m to 105,000 sq m as a result of lack
of supply and new stock coming on the market.
New stock forecast:*
An average annual delivery of around 90,000 sq
m is estimated for 2008 / 2009 / 2010, including
retrofit projects.
Prices
Because of severe lack of availability of good
quality office buildings, it is expected that the
new stock forecasted, with better specifications,
will be absorbed by the market. Prices are
expected to continue increasing in the short
term, depending on quality / location.
Yields
The quality of the existing stock is generally
poorer than in São Paulo, and yields for
“reasonable” quality space tend to be in the
range of 10% - 11%, depending on location. As
Rio has practically no stock of AAA-quality
office buildings, lower yields can be expected
for this type of product, perhaps around or
even slightly below 9%. Yield compression is
already taking place and should continue with
lowering interest rates.
Main Investment Opportunities
Existing buildings:
Good quality leased buildings practically do not
exist. There is possibility for retrofits capable of
providing higher yields (between 11% to 13% p.a.).
Development
It is difficult to find sites in the downtown area,
where around 75% of the city’s total stock is
concentrated. Good sites are available in the
Barra da Tijuca region (a decentralized office
region).
2.2 Retail (Shopping Centers)
Until the year 2000, the market expanded at a
fast pace, with a slow-down registered between
2001 and 2005. This market is now once again
expanding in response to consumer expansion,
with 12 malls under construction.
Net revenue rate ranges vary substantially,
depending on location and consumer base. In
the Southeastern region it varies as much as R$
35 / sq m / month to R$ 250 / sq m / month. In
the remaining regions as a whole, net revenue
ranges vary between R$ 25 / sq m / month and
R$ 125 / sq m / month.
Practiced yields in acquisition participation in
existing malls tend to be generally lower than
for offices (around 7% to 8.5%), with sharp
competition.
2.3 Industrial
General Market Overview – Business Parks
(São Paulo)
The most developed state is São Paulo, with
only 57 existing business parks, totaling 2
millions sq m. Average vacancy rate In these
business parks currently stands at 12%, with
rents rising practically in all locations. Rents
are in the range of R$ 12 / sq m - R$ 16 / sq
m / month, depending on specifications and
location.
Main Investment Opportunities
Acquisition of existing business parks in and
around São Paulo.
(Difficult to find: yield potential 9% - 11%.)
“Sale & Leaseback” of industrial properties
located next to highways. Preferred locations:
states of São Paulo, Rio de Janeiro, Paraná
(Curitiba), Minas Gerais, Espírito Santo, Rio
Grande do Sul.
(Yield potential: 10% to 11%, depending on
quality and location.)
Development of business parks in and around
São Paulo.
(Yield on rent potential: 13% to 15%,
depending on quality and location.)
2.4 Other Segments of Potential Interest
Other segments such as hotels and residential
projects should be analyzed on a project-byproject basis. Because of local legislation
implications, residential projects should
be considered only for straightforward
development (i.e., construction and subsequent
sale of units, rather than retention for purposes
of rental income).
* Office buildings with central air conditioning.
** Without accounting for leverage potential.
Other Cities of Potential Interest
Curitiba, Porto Alegre, Belo Horizonte, and
Brasília are all regional capitals of potential
interest.
As in São Paulo and Rio de Janeiro, vacancy
rates have been declining in some of these
cities, and we believe there could be good
opportunities to acquire existing / leased good
quality buildings, with upside potential in rental
income, because in some cases current rents
tend to be below market. Yields will probably
be in the range of 9.5% to 11%, considering the
upside potential.
Magazine APRIL 2008
MAN
19
seller in the sales agreement for the purchase of
the apartment,” so that the price includes also
payments for changes, additions, and such.
Furthermore, the Amendment expands the
list of circumstances under which the buyer is
entitled to payment of the guarantee in case the
seller is not able to transfer possession of the
apartment or the rights to it to the buyer. Before
the Amendment it was possible to demand
payment of the guarantee only if the apartment
or the land on which it was built was seized,
if an order was issued to liquidate the assets
of the seller or to liquidate the company, or if
an order was issued naming a liquidator. The
Amendment adds to this list cases in which a
procedure freezing order or an order to place
the assets of the company in receivership was
issued, or if there is an absolute impediment to
transferring possession of the apartment to the
buyer.
New Measures
Guaranteeing
the Investment of
Apartment Buyers
Ariela Blau, Attorney, Zissman, Aharoni, Geier and Adi Kaplan, Law Offices
Purchasing an apartment is the largest
transaction most people are ever likely to
conduct. They invest most of their funds in the
purchase, and often take on loans and other
long-term obligations to finance the purchase.
To ensure that the buyers’ money is not lost
in case the company is liquidated or the land
seized, the Sales Law (Apartments) (Guarantee
of Investments of Apartment Acquirers ),
1974 (henceforth, the Sales Law) imposed
an obligation on sellers of new apartments to
provide security for the buyers’ money. The
security can take the form of a bank guarantee,
insurance policy, registering a warning note,
registering the rights to the apartment under the
buyer’s name with the Land Registry Office,
or issuing a mortgage on behalf of the buyer.
Violation of the security is a criminal offense,
punishable by fine and even imprisonment.
In practice, the most common security is the
bank guarantee because it is convenient for the
seller and it satisfies the buyers. For issuing the
bank guarantee, a method of closed financial
oversight has been set up between the banks and
the sellers. According to this method, all the
funds paid by apartment buyers are deposited
in a special account opened by the seller and
intended exclusively for the given building
project. In exchange for depositing their money
in the dedicated account, the banks guarantee
20
Magazine APRIL 2008
MAN
the buyers their investment.
But reality revealed the many loopholes in
the security mechanism created by the Sales
Law. A clear proof is the case of the Heftzibah
company, which used to be one of the largest
contractors in Israel. A significant portion
of the funds that Heftzibah collected for the
apartments it sold was not deposited in the
dedicated accounts of the participating bank,
and the buyers did not receive any guarantees.
When the company collapsed, the buyers lost
their money.
The crisis that followed the collapse
of Heftzibah and the public outcry that
accompanied it caused legislators to review
the provisions of the Sales Law. The result was
enactment of Amendment No. 4 to the Sales
Law, which added new means of supervision
and enforcement to ensure that sellers meet
their obligations with respect to the bank
guarantee security.
The Essence of the Amendment
The first measure broadens the responsibility
of the seller, who is now required to issue a bank
guarantee for any amount paid by the buyer
above 7% of the value of the apartment (in the
past the threshold for issuing the guarantee was
payment of at least 15%). The Amendment
defines the price of the apartment as “any
amount the buyer has committed to pay the
The second measure imposes on the
participating bank the obligation to supervise
the seller with regard to guaranteeing the
buyer’s money; breaching this obligation
constitutes a criminal offense by the bank
and its officers. Before the Amendment, the
obligation to guarantee the buyers’ money
applied only to the seller. According to the
Amendment the bank is obligated to issue
deposit slips for payments made for the
apartment, and buyers must pay the cost directly
into the dedicated account only by means of the
deposit slips. The bank must issue a guarantee
for each payment made by means of the deposit
slips into the dedicated account without the
need for further instructions from the seller.
Note that if the buyers choose to finance the
price of the apartment by means of a loan from
the bank or from any other financial institution,
that organization is obligated to inform them of
their rights to obtain security according to the
Sales Law.
The third measure added by the Amendment
is supervision by state authorities of the
compliance with the requirements of the
Sales Law by means of a commissioner acting
on behalf of the Ministry of Construction
and Housing. The seller must report to the
commissioner every sale of every apartment
in the project. The commissioner centrally
supervises compliance with the law by the
sellers and the banks.
The commissioner has the authority
to request any information or document
concerning the sale of new apartments, conduct
inspections at sites used by the sellers (except
their residences), receive complaints from the
public at large regarding possible violations of
the Sales Law by sellers and/or the banks and
investigate them, order the remedy of violations
and indicate the method of the remedy, and
impose financial sanctions on violators of the
Sales Law and hear their arguments.
The Amendment takes effect on October 6,
2008.
The author is an attorney in the Real
Estate Department of Zissman, Aharoni,
Geier and Adi Kaplan, Law Offices. The
department counsels private land owners,
kibbutzim, moshavim, entrepreneurs,
contractors, architects, and investors in the
course of real estate transactions, and provides
broad representation and a variety of solutions.
The Real
Estate
Investments
of Insurance
Companies
Jacky Mukmel
There has been a flood of real estate deals by
insurance companies in recent weeks. Harel, Clal, and
especially Migdal Insurance are purchasing incomeproducing property all over the country.
Migdal, for example, is negotiating for the purchase
of the holdings of Moshe and Igal Gindi in the Zahav
Mall in Rishon Lezion (75% according to a value of
NIS 1.25B), and at the same time is negotiating with
Eliezer Fishman’s Mivnei Taasia for the purchase of the
Cellcom building in Netanya for $60M. But the largest
real estate deal of Migdal is the establishment of a joint
company with Roni Itzhaki for real estate investments
worldwide, to which Migdal allocated a credit line of
up to NIS 400M. Earlier, Migdal purchased, together
with Makefet, 50% of the Kardan building for NIS
19M. Today, Migdal’s real estate portfolio makes up
5% of the company’s overall investments, and it is
naturally a huge portfolio. Migdal also owns real estate
investments financed from its nostro account, as do
other insurance companies.
Clal purchased this year an office
building in Ramat Hahayal for
NIS 107M. Harel made two large
purchases: the Krystal building
in Ramat Gan for some NIS 200M,
and the Harel building, also in the
Diamond Exchange area, for NIS
179M.
What is causing this dramatic
increase in the volume of
investments by insurance
companies in income-producing
property? The answer lies with
several factors, first of which is
the weakness of the financial
markets. During difficult periods
insurance companies are seeking
more solid investments for the
monies of their insured clients. The
risks on the stock market become
greater, whereas investment in
income-producing property is less
speculative and produces regular
income, similar to investment
in a bonds portfolio. Insurance
companies prefer not to present to
their clients extreme oscillations in
yields. Unlike other entrepreneurs,
insurance companies need not
raise funds for the purpose of
real estate investments because
they have large reserves they are
looking to invest.
The second factor is the
authorization that insurance
companies received from the
Finance Ministry in 2005 to invest
a portion of their policy funds in
real estate and not only in bonds.
And since 2005 the yield of income
producing-property has doubled.
Why specifically incomeproducing property and not
residential real estate or land?
The answer is that investment in
residential real estate and in land
is considered more speculative
and carries a comparatively larger
risk, which is not suitable for
organizations that are seeking
solid investments.
Insurance companies are
considered relatively aggressive
in the prices they demand from
renters. Nevertheless, they do not
interfere in the daily management
of the property in any meaningful
way, and are a convenient partner
for the entrepreneur despite the
fact that they do not participate
in entrepreneurship at all. At the
same time they are satisfied with
relatively lower yield than other
entrepreneurs expect.
In our estimation, the
phenomenon of insurance
companies making extensive
purchases in income-producing
property will continue in the
foreseeable future because in the
current situation it benefits all
parties. Sellers benefit from a good
buyer that is an alternative to REIT,
and the insurance companies
benefit from a solid and relatively
safe investment.
HARELMIGDALCLAL
Magazine APRIL 2008
MAN
21
the global market acc
Occupier demand in the first quarter of 2008
was generally weak in most of Europe. With 2
million sq m of aggregate leasing activity in the
15 key European markets, take-up was down
sharply on the last quarter and 12% on the last
year. Weakening office demand resulted from
the generally deteriorating economic outlook and
widespread occupier caution. In addition, some
markets such as London, Brussels, and Dublin
also witnessed a decline in demand from financial
services.
There is a widespread slowdown in the scale
of quarterly increases, with rents stalling in some
markets or even decreasing. In particular, the
major European markets that contributed heavily
EMEA OFFICE
TAKE-UP
to the recent rental growth are seeing much
reduced rental momentum, for instance, quarterly
growth of 1.25% in Madrid and a fall of close to
8% in the City of London. Elsewhere, the rates of
increase are generally substantially below those
recorded in mid-2007.
Vacancy levels continue to fall, albeit at much
decreased speed. Several major European markets
recorded a rise in the vacancy rate, including Paris,
Madrid, and Barcelona. Elsewhere, vacancy rates are
either stalled or fell slightly.
Yield movements are becoming more widely
evident across Europe, and several locations such as
Amsterdam, Oslo, and Lisbon have seen an upward
movement for the first time. Interestingly, some CEE
markets such as Warsaw and Prague, where yields
had previously been falling, also have seen the first
signs of increase in yields this quarter.
CENTRAL LONDON At 2.9 million sq
ft, take-up was virtually identical to that seen
in the fourth quarter of 2007. Occupier market
activity is therefore much lower than in 2006
and 2007, when quarterly average take-up
totaled 3.75 million sq ft. This quarter’s takeup partly reflects the completion of deals that
had been under negotiation through the later
part of last year. Greater caution is now evident
in the new requirements for large volumes
of space. Availability ticked up slightly, but
supply conditions remain tight. There is only 6.3
million sq ft of ready-to-occupy space in Central
London and the vacancy rate for the market as a
whole remains at just 3%. The volume of space
under construction continues to rise as we head
toward the peak of the development cycle, with
a particular concentration in the City market.
But the increasingly limited availability of
development finance will curtail supply additions
beyond the completion of those schemes already
under construction. The Central London prime
rent index fell by 2.2%, the first fall in the index
for four years. Prime yields moved out further in
the first quarter, to 5.5% in the City and 5.0% in
the West End, although with some signs in the
past two months that pricing may be starting to
stabilize.
22
Magazine APRIL 2008
MAN
Paris take-up totaled over 580,000 sq m in
the first quarter, sharply down compared with
the previous quarter’s figure but consistent with
the typical level seen through last year. The
manufacturing and energy sector accounted for
the single largest element of take-up, but the
financial sector also displayed some resilience, at
19% of the total. As in the recent past, upgrading
and modernization of office accommodation
was a key influence on activity, resulting in a
predominance of lettings of new or refurbished
buildings. This pattern also explains the relative
stability in vacancy at a time of generally strong
demand. Availability remains at around 2.5
million sq m, producing an overall vacancy rate
for the Paris market of just under 5%. The rate
is significantly lower than this (3.1%) in the key
Centre West market, and an acute shortage of
good quality modern stock remains a feature
of the market. Prime rents rose to €789/sq m/
annum, and there is some evidence of rents at
inflated levels encouraging occupiers to seek
cheaper accommodation in non-central and
suburban markets. The expectation of slower
income growth has pushed prime yields up by
a further quarter point to 4.25%.The two-year
construction pipeline has continued to expand
and currently stands at nearly 2 million sq m, with
much of the current construction activity focused
on the outer suburbs and Western Crescent.
Even here, location and development quality are
being assessed more closely, and the flow of new
construction starts is expected to weaken.
Take-up in Madrid fell in the first quarter
of 2008 by 27% on the last quarter and 56%
year-on-year, with 135,000 sq m transacted.
Although demand for office space decreased in
every submarket, the most pronounced decline
was recorded in two submarkets: North and City,
with take-up falling quarter-on-quarter by 65%
and 48% respectively. Slowdown in office demand
largely resulted from occupiers freezing expansion
plans in light of deteriorating economic sentiment.
The vacancy rate rose by 20 basis points to 6.85%
owing to weaker take-up and a higher level of new
developments. At a submarket level, the vacancy rate
is trending up in all areas except the CBD, City and
M-30 district. There is a significant volume of future
new supply coming onto the market in 2008, which
will have a further impact on the vacancy rate in the
outer submarkets (M-30 and M-40) in particular. The
prime rent continued to rise in the CBD submarket
to €486/sq m/annum, albeit much more slowly than
before. In other submarkets rents are either stalling or
decreasing, except the North submarket where rents
recorded a quarterly increase of 1.3%. Prime yields
have moved out for the second consecutive quarter
and now stand at 4.75%.
The Frankfurt office market slowed
substantially compared with the strong fourth quarter
of 2007, but it recorded a 22% increase in takeup on the same period last year, with 97,900 sq m
transacted, comprising mainly units below 1,500 sq
m. The German economy has not been much affected
by the turmoil in the financial markets yet, with
take-up by financial services companies accounting
for 31% in Frankfurt this quarter. A part of the
argument for a fall in take-up this quarter could
be a traditionally slower beginning of the year.
But in the context of current uncertainty and
deteriorating economic sentiment across the
globe, many occupiers are adopting a more
cautious attitude which appears to be a stronger
argument for the evident slowdown in office
demand in Frankfurt this quarter. On the supply
side, vacancy rate remained stable at over 10%,
but the relatively restricted development pipeline
is likely to support reduction in the vacancy rate
over the course of 2008. In the context of a high
vacancy rate and modest take-up, prime office
rents remained stable at €39.00/sq m/month
in the Banking District submarket, with the
weighted average rent standing at €30.22/sq m/
month at the end of Q1 2008. Given the low level
of completions scheduled for 2008, prime office
rents are likely to increase further.
Moscow continues to see high levels of
leasing activity, with take-up of 450,000 sq m
in the first quarter. Although down on the final
quarter of last year, this remains consistent with
the general level of activity recorded in 2007.
Local companies accounted for over 75% of takeup over the quarter, with the high-tech, computing,
and manufacturing and energy sectors to the fore.
As a result, rents continue to move ahead strongly,
with prime rents up to $1,700/sq m/annum. The
supply position increasingly threatens to dampen
rental growth, with the vacancy rate up sharply to
7.75%. Even if take-up comes close to last year’s
record level of 1.8 million sq m, it is likely to be
eclipsed by new development completions that are
set to exceed 2.2 million sq m over the next year,
and over 3.5 million sq m over the next two years.
There are considerable uncertainties around both
leasing volumes and development activity over
the next two years, but it looks increasingly likely
that high levels of development will stall growth.
This is beginning to be reflected in investment
pricing: following sharp yield reductions totaling
200 basis points in 2007, yields remained stable at
7.5% in the first quarter of this year.
Take-up in Berlin continued to decrease in
Q1 2008. It fell by over 47% on the last quarter
and 21% on the same period last year, but the
downturn in office take-up resulted largely from
a lack of large-scale office space. Prime rents
remained stable at €22.00/sq m/month, with little
prospect of increase in the next six months.
cording to
Following an increase last quarter, prime rents
in Lisbon are static at €20.50/sq m/month. Prime
yields have moved up however for the first time
since the end of 2001, to 6%.
Take-up in Munich was strong and on a par
with the last quarter. This represents the highest
first quarter take-up since the 2000/2001 boom,
and demand from financial services increased
from 8% in Q3 2007 to almost 20% in Q1 2008.
The vacancy rate continued to edge lower to 7%.
Prime rents in Rome now stand at €400/ sq m/
annum and are expected to rise further in the CBD
as demand continues to outstrip supply. There
is also a shift to the south of Rome where larger
flexible floor-plates are on offer.
Prime rents in Vienna rose further to €270/sq
m/annum, up 9.8% year-on-year. Vacancy rates
have dropped below 5%, with further decreases
expected in 2008.
In Zurich prime rents remain stable at
SFR 950/sq m/annum. Take-up has increased
this quarter compared with the end of 2007,
but activity in the financial sector has slowed
following the credit crisis.
The Belgrade office market has seen little
activity this quarter, with prime rents falling for the
third consecutive quarter to €19/sq m/month. The
majority of take-up in Belgrade is stimulated by
international professional and business services.
Demand weakened in Budapest in the first
quarter of 2008, but the vacancy rate remained
unchanged at below 12%. This pattern is likely to
change, as there are currently around 180,000 sq m
of office space under construction and scheduled
for completion over the next six months.
Demand in Prague remained solid in Q1,
with take-up totaling 71,400 sq m. Although this is
a decrease of 3% on the previous quarter, take-up
recorded an 83% increase on the same period last
year. Over the course of the first quarter this year
Prague office demand was largely driven by the
financial services sector, which contributed 43%
to total take-up. On the supply side, the amount of
vacant space in Prague is increasing as a result of
a substantial level of new developments coming
onto the market. By the end of Q1 the overall
vacancy rate for Prague increased to 5.9%, an
increase of 14 basis points on the last quarter.
This trend is likely to continue over the course
of 2008, especially in the Prague Outer City
submarket, as there are currently around 200,000
sq m of office space under construction, scheduled
for completion over the next six months. Prime
rents continued to rise in the Prague City Center
submarket, reaching €21.50/sq m/month. They
increased by almost 5% this quarter and 10%
on the same period last year, largely owing to a
relatively low vacancy rate, limited pipeline in
the City Center submarket, and the Czech Koruna
appreciating against the Euro. This trend of rising
rents is likely to persist in the city center despite
the substantial level of new supply coming onto
the Outer City submarkets.
P r i m e O f fi c e R e n t % Change
Net
Last
Last
Equiv
3
12
Rent
Country
City
Local
m2/y/€ Months Months m2/y/€
Prime
Office
Yield
%
Austria
Vienna
€ 22.50/sq m/month
270
2.3
9.8
284
270
Belgium
Brussels
€ 300/sq m/annum
300
0
0
364
5.5
Bulgaria
Sofia
€ 18.25/sq m/month
219
1.4
1.4
243
7
Czech Republic Prague
€ 21.50/sq m/month
258
4.9
258
287
5.42
Denmark
Copenhagen
DKR 1,850/sq m/annum 248
2.8
5.7
292
5
France
Lyon
€ 250/sq m/annum
250
0
19
269
5.7
France
Marseille
€ 215/sq m/annum
215
0
2.4
231
6
France
Paris
€ 789.00/sq m/annum
789
5.2
7.8
848
4.25
Germany
Berlin
€ 22.00/sq m/month
264
0
4.8
284
4.9
Germany
Frankfurt
€ 39.00/sq m/month
468
0
13
503
5
Germany
Hamburg
€ 24.00/sq m/month
288
0
4.3
310
4.9
Germany
Munich
€ 31.50/sq m/month
378
0
3.3
406
4.8
Greece
Athens
€ 31.50/sq m/month
378
1.6
6.8
415
6
Hungary
Budapest
€ 22.50/sq m/month
270
0
7.1
300
5.75
Ireland
Dublin
€ 673.00/sq m/annum
673
0
0
673
4
Italy
Milan
€ 480.00/sq m/annum
480
2.1
4.3
527
5.25
Italy
Rome
€ 400.00/sq m/annum
400
17.6
17.6
440
5.25
Luxembourg
Luxembourg City € 40.00/sq m/month
480
0
0
582
5.25
Netherlands
Amsterdam
€ 335/sq m/annum
335
3.1
3.1
360
5.1
Norway
Oslo
NKR 4,300/sq m/annum 535
4.9
50.9
594
5.5
Poland
Warsaw
€33.00/sq m/month
396
0
37.5
440
5.75
Portugal
Lisbon
€ 20.50/sq m/month
246
2.5
2.5
270
6
Romania
Bucharest
€ 22.00/sq m/month
264
0
12.8
300
7
Russia
Moscow
US $1,700/sq m/annum
1,076 21.4
70
1,266
7.5
Slovak Republic Bratislava
€ 18.00/sq m/month
216
0
0
240
5.8
Spain
Barcelona
€ 336.00/sq m/annum
336
1.8
9.8
376
4.75
Spain
Madrid
€ 486.00/sq m/annum
486
1.3
11
516
4.75
Sweden
Stockholm
SEK 4,400/sq m/annum
469
0
14.3
499
4.4
Switzerland
Geneva
SFR 780.00/sq m/annum 497
0
4
497
5.25
Switzerland
Zurich
SFR 950.00/sq m/annum 606
0
5.6
606
4.5
UK
Belfast
£ 14.50/sq ft/annum
196
3.6
7.4
196
4.75
UK
Birmingham
£ 32.50/sq ft/annum
440
0
8.3
440
6.15
UK
Edinburgh
£ 29.00/sq ft/annum
392
1.8
9.4
392
5.75
UK
Glasgow
£ 27.50/sq ft/annum
372
0
3.8
372
5.75
UK
London City
£ 60.00/sq ft/annum
812
-7.7
1.7
812
5.5
UK
London West End £ 120.00/sq ftm/annum
1,623 0
17.1
1,623
5
UK
Manchester
385
0
385
6.15
£ 28.50/sq ft/annum
0
Calculated from prime rent, deducting any element of tax or service charge and converting from gross area to
net internal area.
Magazine APRIL 2008
MAN
23
Magazine APRIL 2008
MAN