In this piece, we bring you a new investment idea – one which may be very useful if you are looking for something stable, income producing, and generally uncorrelated to stocks and bonds.
In simplistic terms, the idea is as follows. Invest in a fund that lends to the Israeli real estate sector, either to developers or owners of Israeli real estate. In return, the fund takes the properties as collateral and pays you a fixed annual income (typically between 5%-7% a year- depending on the fund and provider) for a fixed period of time – say three years. At the end of the period you get your capital back or can decide to reinvest if you so wish.
The investment is often structured as a loan to the fund, rather than an ‘investment’ in the fund, meaning that interest received back is taxed in Israel at the lower rate of 15% rather than the usual 25% capital gains tax - which is obviously a nice advantage. This loan structure may make this investment suitable for US citizens.
This idea is becoming more popular amongst investors looking to diversify their overall portfolio and who are looking for additional streams of income. There are a number of reasons for this, including:
Returns are generally uncorrelated to mainstream investments such as stocks and bonds, hence it can form a useful diversification play within a portfolio
Exposure to Israeli real estate without having to buy a physical property (and all of the costs that come with it)
A regular stream of income, at a decent rate, with capital paid back at the end.
There are several boutique companies that have created such funds, with hundreds of millions of Shekels already returned to investors. The minimum to invest tends to be around 300,000 Shekel.
Of course you should always seek professional advice, and this investment should only be considered as part of your overall portfolio, as it is an illiquid investment (i.e. generally speaking you cannot withdraw your money before the end of the investment period) and is therefore only suitable if you can afford to tie up your money for the full investment period. If you can though, then this is turning out to be an increasingly popular way to invest Shekel in Israel.
At IAL we specialize in helping customers invest their funds in Israel. To discuss whether this investment might be a suitable option for you, or for more information, contact us here.