Boston, MA -- (SBWIRE) -- 10/24/2013 -- Commercial real estate expansion is dependent upon a healthy macroeconomic environment. We project real GDP growth in Israel to come in at 3.7% and 3.8% in 2013 and 2014. Although the beginning of natural gas production in the Tamar gas field will ensure that growth accelerates compared with 2012, the domestic economy will remain in a soft patch, with austerity measures hitting private consumption hard. Poor economic growth will adversely impact the sector as it serves to dampen both property fundamentals and capital markets placing downwards pressure upon tenant retentions, rental growth, yields, development activity, financing and asset values.

Nevertheless, on the whole demand is on the up, resulting in high occupancy rates and increasing rents. However, the development pipeline remains relatively stagnant. As such, we anticipate that favourable absorption-completion dynamics will buoy the commercial real estate leasing sector in the short term, but unless development activity picks up this indicator will serve as a hindrance to long-term growth.

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With a focus on the three principal cities of Jerusalem, Tel Aviv and Haifa, the report covers the rental market performance in terms of rates and yields - and examines the commercial office, retail, industrial and construction sectors throughout the country in the context of a market characterised by an optimistic five year outlook. The key growth areas, driven partially by market consolidation, are also explored, along with a detailed look at the country's construction segment.

Key Points

- Elevated risks of instability in Israel's neighbours, including Jordan, Lebanon, Syria and the West Bank and Gaza, have raised political risks, and investors' risk appetite may be tempered by the potential for a spill over of instability into the country's borders.
- House prices in Israel have risen rapidly in recent years, raising concerns that a bubble has formed in the property market. However, an increase in supply, coupled with macro-prudential measures on the part of the government designed to bring down prices, have seen the market cooling in the past few months. As a result, a sharp drop in prices is unlikely at this stage.

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