ISRAEL By Jada A. Graves

Israel may not be the first country that comes to mind when thinking about the global real estate market, but its real estate investment industry is in the early stages of a growth surge. In recent years, terrorism tied to the unresolved issue of Palestine has stalled growth in many of the country's industries, including real estate. However, in the middle of a somewhat quieter year, Israel recently approved the creation of Israeli REITs, or "Keren" (which is Hebrew for a fund), in order to promote investing in the country.

Chaim Katzman, the chairman and CEO for U.S. based Equity One, Inc. (NYSE: EQY), is the principal shareholder and chairman of the board for Gazit-Globe Ltd., an Israeli investment holding company established in 1991. Katzman estimates that local real estate investment firms own about 25 percent of the country's commercial real estate.

"Bear in mind it's a very small market," Katzman says. "The population is about 6 million. There are a few real estate companies, but still the market is highly fragmented. The market is coming from a deep recession."

Until two years ago there had been no legislative movement to establish Israeli REITs. In 2003, the Israeli Ministry of Finance asked Katzman, among others, to provide perspective on the state of the country's real estate industry and suggest means of regulating it. After studying European property company models, Katzman pushed for a similar approach to U.S. REITs. "My selling point to the government was that we shouldn't reinvent the wheel when we have something that has worked for the last 45 years in the U.S."

Leading Israeli lawyers plus a forum of approximately 25 real estate investment companies, whose name is loosely translated from Hebrew to mean, "The Public Real Estate Investment Companies Forum," also provided their respective opinions of the structure of REIT companies and legislation in Israel.

On July 25, 2005 the Israeli parliament approved legislation for the creation of REITs. The REIT must be a public company no more than a year old, with a capital gains tax of 25 percent to 34 percent applied to the transfer of appreciated property, as well as a purchase tax of 0.5 percent.

Approved legislation for Israeli REITs will become effective January 1, 2006, with two significant differences from U.S. REITs. First, there is a statutory limit of 60 percent on the amount of leverage Israeli REITs can assume. Second, Israeli REITs must have at least 75 percent of their portfolio invested in domestic real estate assets.

Other provisions include mandatory listing on the Tel Aviv Stock Exchange (TASE), at least 100 shareholders in the company upon registration, and no more than five of the investors can directly or indirectly own more than half of the REIT's shares.

S N A P S H O T

CAPITAL: Jerusalem LAND AREA: 20,330 sq km POPULATION: 6.28 million (July 2005) POPULATION GROWTH RATE: 1.2% GROSS DOMESTIC PRODUCT (GDP): $110.2 billion (2003) GDP GROWTH RATE: 1.3% GDP PER CAPITA: $16,240 UNEMPLOYMENT RATE: 10.7% (2004) MAIN INDUSTRIES: High-technology projects (aviation, communications, biotechnology and medical electronics), wood and paper products, potash and phosphates, tobacco, cement, diamond cutting. CURRENCY: New Israeli Shekel (ILS). NIS is the currency abbreviation; ILS is International Organization for Standardization code for NIS. LANGUAGES: Hebrew and Arabic (official), English (most commonly used foreign language) Sources: CIA's "The World Fact Book." Gil Kotler, chief financial officer, Gazit-Globe Ltd.

What's Next For Israeli REITs?

The passing of "Keren" is an important step to the continued evolution of the country's real estate industry, and Katzman says he anticipates revitalization of Israel's real estate market and a boost for the overall economy."This is a big piece of legislation that I think is going to do a lot to help the recovery of the real estate industry in Israel. I believe this will provide more liquidity to the market."

The new Israeli REITs will provide competition to the pre-existing Israeli real estate companies that primarily have domestic investments, according to Ariel Aven, executive vice president at Gazit-Globe, Ltd.

Aven says the existing companies are somewhat at a disadvantage because there is no loophole with which to transfer the existing company over to a REIT. The alternative to maintaining the same company structure would be selling their portfolios to the new entities. This outcome is not in the near future, Aven says, as it will take time for REITs to become established in Israel.

Katzman also says recovery of the high-tech industry will boost the office and industrial markets. A peaceful region also provides the possibility for more tourism that will bolster the hotel industry. The current political agenda can also help to determine what part real estate will play in the nation's future economy.

"I think we are seeing the first signs of recovery, or the stopping of the bleeding, if you will, and I think it has to do with the changing of the political environment," Katzman says.