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  • The commercial real estate industry is an important element in the financial system. The industry’s bank debt accounts for about 15 percent of the banks’ total business credit. The value of the bonds of publicly traded companies in the industry totals about NIS 108 billion, and the value of their shares totals about NIS 152 billion (about one-quarter of the tradable market excluding banks and insurance companies).
  • As of the end of 2021, public companies in Israel manage commercial assets worth about NIS 160 billion, and the value of the assets owned by these companies doubled between 2010 and 2021. Most of the increase (more than 80 percent) was due to increases in the value of the assets, while less than 20 percent was due to the addition of rental space (in square meters).
  • An analysis of real estate performance during the reviewed period shows a gradual decline in the yield from rentals, although that decline is not uniform across the various asset types. The yield from increased value was volatile in the past three years, and was particularly anomalous in 2021 relative to the past.
  • An econometric analysis conducted by the Bank of Israel Research Department shows that actual monthly rental fees, one of the most important basic factors in assessing value, only partially explain the changes in asset values. In recent years, there has been a marked upward trend in the ratio of asset values to rental fees per area unit.
  • These findings raise the possibility that the asset values include expectations of growth and increased real estate values, which are not necessary reflected in some of the basic factors (actual rent receipts). However, a statistical test conducted by the Research Department did not find evidence of bubble-like behavior in commercial real estate values.
  • The asset revaluation methodology used by commercial real estate companies led to high reported profitability throughout recent years, in view of the low interest rate environment that was used as the basis for calculating the capitalization rate. With the increase in the interest rate environment, the capitalization rates are expected to gradually return to higher levels, thereby leading to a decline in accounting profits and even the possibility of losses being recorded at some of the companies.
  • Since the beginning of 2022, there has been a sharp decline in the equity values of commercial real estate companies relative to the main equity indices. These declines in the capital market apparently reflect expectations that asset values will decline in response to the increase in the interest rate environment.
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