Israeli institutions and UK real estate: unlocking the potential

Much has been made of the uncertainty facing the United Kingdom at present. Having embarked on a journey into the unknown with a vote in favour of Brexit, we have swiftly followed this up with electing a minority government to negotiate the choppy waters ahead. With that in mind, one could be forgiven for asking why Israeli institutions might want to consider now as a good time for investing into UK real estate? However, when it comes to uncertainty, the UK’s current situation hardly registers a tremor when compared to the uncertainty that has been faced in Israel’s short and turbulent history. As a country it has successfully met many significant geopolitical, social and economic challenges. As for the instability of coalition government, Israel does not know any other way to be governed. More to the point, Israelis in general and Israeli financial institutions in particular face a potentially once-in-a-lifetime opportunity to invest in UK real estate. The uncertainty in the UK means those with a slightly higher appetite for risk and ability to price risk appropriately can find deals. Who better to exploit that opportunity than investors used to uncertainty as a way of life, especially when you consider that the current shekel-sterling exchange rate is nearly at an all-time low. That, coupled with low interest rates, mean the spending power of Israeli investors is magnified. Notwithstanding all the reasons for Israelis to be transacting in the UK market, the level of investment appears relatively low, especially when compared to the period running up to the global financial crisis. There are a number of reasons for this, all of which could be solved through trusted partnerships. First, a key challenge for Israeli institutional investors is a restriction on the amount of leverage they can have secured against a real estate asset if they own more than 50%. As a result, investing on their own can be unattractive as without a sensible level of debt it is difficult to deliver the level of returns required. However, when it comes to uncertainty, the UK’s current situation hardly registers a tremor when compared to the uncertainty that has been faced in Israel’s short and turbulent history. As a country it has successfully met many significant geopolitical, social and economic challenges. As for the instability of coalition government, Israel does not know any other way to be governed. Second, Israelis recognise where they don’t have expertise. They know that local knowledge and understanding is key to success in real estate investment. Like most foreign investors, their ability to price risk would be enhanced by local partners with deep insight backed up by a relevant track record. Third, historically, Israeli institutions have tended to focus on prime assets in prime locations. In the current market the best opportunities are to be found outside of your classic asset classes and locations. The Northern Powerhouse and alternative classes, including industrial/logistics, multi-family, student accommodation and infrastructure provide the most interesting opportunities in the current market. For experienced UK investors the above means there is a tremendous opportunity. What Israeli institutions need are partners they can trust. Whilst trust is generally built over the long term, aligning interests through risk sharing can go a long way to building that trust. Experienced UK investors who have the knowledge but are looking for partners with whom to share risk would do well to look to Israeli institutional investors. With capital to deploy and uncertainty as a way of life, all they may need is that trusted partner to unlock the potential. Barry Gross is partner real estate at BLP London. Yoni Beck is consultant at BLP representative office, Israel