By Mark Eichler
General Counsel and Chief Compliance Officer
Real estate is generally viewed as a "safe" investment. However, that does not mean you can't lose money investing in real estate. On the contrary, as many investors unfortunately learned in 2008/2009, not only is it possible, but it is actually quite easy to lose money investing in real estate. This is particularly true if the property is over-leveraged or the investment is in a development project.
Investing through an Israeli real estate investment trust, or REIT, substantially reduces or removes these risks. Under the "investor-friendly" Israeli REIT rules, a REIT is limited in the amount of leverage it can use. In general, a REIT's leverage is limited to no more than 60% of the value of its real estate assets and 20% of the value of its non-real estate assets. These debt levels are significantly below those of typical real estate investments and provide investors with ample protection against foreclosure should property values fall.
The REIT rules also limit a REIT's ability to invest in certain types of projects. More specifically, the rules require the REIT to invest primarily in income-producing real estate and generally preclude the REIT from engaging in certain impermissible activities. These rules ensure that the REIT does not get involved with risky development projects that could result in a substantial loss of capital.
Finally, the REIT rules also require the REIT to distribute at least 90% of its ordinary income and 100% of its capital gains on an annual basis. This protects investors by providing them with a substantial annual dividend, rather than allowing management to accumulate capital or reinvest investment returns.
A further differentiating factor unique to the Israeli real estate market is the rather strict lending standards utilized by Israeli banks. For example, to receive mortgage financing for a commercial property, the lending bank will typically review the current leases and the creditworthiness of the tenants prior to making a loan. This level of diligence not only reduces the bank's risk of a default, but also protects investors by ensuring that overly risky loans are not available in the marketplace.
At Habira Group we believe that the Israeli REIT structure provides investors with a financial vehicle that can both pay a strong annual dividend and protect their investment.