Monthly Archives: January 2016

“The Non-cost of Jerusalem’s Snow-no-show”

It has been said that weather forecasters appreciate economists as they tend to make them look better. This week Jerusalemites migrated between their forecast apps and their bedroom windows, uncertain which was more likely to bring the anticipated salvation. Fortunately for some, unfortunately for others, the week passed with little more than some rain and chilly winds.

In recent years Jerusalem has grown used to one or two annual snowstorms. This is always accompanied by a level of excitement and expectancy. Local journalist Jacky Levy once explained that Jerusalem, a city of sharp and harsh divides, becomes curved and malleable when covered with a layer of snow.

Far more predictable than an actual snow storm are the politicians’ reactions to the damage that the storm may have cost. Tens, sometimes hundreds of millions of shekels of damages are numbers thrown out in an attempt to receive government compensation of public sympathy for the poor local government who is landed with the demanding task of restoring order after a period of extreme weather conditions.

So how much does a snow day actually cost the local economy? How is this number calculated?

The main financial damage of a snow day is the lack of production of workers who cannot get to their offices and businesses which cannot function. If we take the GDP of Israel at about $305 billion, then 3.6 million workers producing $305 billion means each member of the work force donates $85,000 a year to the country’s production. Jerusalem boasts a workforce of approximately 405,000, so if no-one goes to work on a snow-day, the economy loses 131m NIS due to the city being covered with a blanket of white. This number makes the additional costs of snow-ploughs, electric faults and other damages seem like small change.

Although the local politicians like to throw out multiple digit numbers with commas after zeros, this reckoning is far more artistic than scientific. Similar to the estimations of the cost of a strike day, which varies between 310 million NIS and 2.35 billion NIS depending on who is asked, the cost of a snow day is really almost impossible to calculate.  Many businesses do open, albeit late and short staffed. Jerusalem’s workforce is heavily loaded with the public sector. A no-show of much of the public sector is somewhat reminiscent of the great Greek pensioners strike of 2010. Not much midnight oiled was burnt to ensure that the pensioners returned to their state of non-production. In the case of strikes, and snow-days, it is practically impossible to know how much production was lost, and how much was merely delayed.

No less challenging than estimating the cost of snow, is assessing the cost of snow talk. The wasted time spent in work places gossiping, forecasting and envisaging the storm can amount to an aggregate tens of thousands of work hours. This usually starts a week prior to any flake, and continues for three days after the mounds of blackened ice have already found their way to the dead sea.

Snow predictions require a very precise combination of meteorological conditions too be correct; economic predictions are much the same. Harry Truman wanted to meet a one-handed economist – one who could say “on the other hand”. The combination of snow and economics will therefore provide for a computation of almost no credibility whatsoever.

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Don’t be a “Tam” about “Tama”

Are Tama 38 funds offering good yields…or too good yields? In the end they will damage the project but, more importantly, the investor.

In many Israeli Cities, chancing upon a big bill-board stating “TAMA 38 project about to begin on this site” has become as routine as a passing a branch of Starbucks in Manhattan. These projects, aimed to encourage home-owners to strengthen their buildings in the anticipation of a natural disaster, are considered to be win-win and mutually beneficial. The developer gains the rights to sell two or more additional floors whilst providing additional space and stronger infrastructure for the existing owners.

As with every new real estate product comes a new financial vehicle. Like mushrooms after the rain have popped up fund-like vehicles which offer high returns at “low” risk to finance these TAMA 38 projects.

To be quite honest, I never took any of them seriously. Nothing offering 15+% and stating low risk, when interest rates are zero, should be taken seriously. But when my 80-year-old mother-in-law asked me what I think because to her it looked great, I realized that I should share my concerns with others.

The vast majority of TAMA 38 projects are just complex real estate deals. If a builder asked you for a loan for a project because he cannot obtain finance, would you consider it as an investment? Investing in a TAMA fund is much the same…but worse.

These projects are generally built at very low profit margins. If this fund is paying its investors 16% it is charging at least 20% to the developer. A short delay is enough to cause the project to go from profit to loss just because of finance costs. And we all know what happens when a builder feels he is losing money.

This type of project is relatively new and the unknowns are huge. When you start peeling away at an old building and digging down at its foundations, it is more than possible that you will end up having to do far more work than planned, if not having to knock down the whole edifice. A little like going to a dentist with a rotten molar.

Banks are lending to good TAMA 38 projects. A project which is forced to borrow from a fund is one which the banks turned down. It is true, banks are not the epitome of openhandedness with their money, but from scratch the private funds lend to tier 2 projects.

It is ok to advertise high risk high yield investors. History has taught us that if it looks too good to be true, it probably is. Any financial vehicle requires transparency on an ethical level and a full prospectus on a legal level. I recommend extreme caution when considering these products.

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“Mr. Barkat – these are not ‘ghost’ apartments; actually they keep your city alive.”

An idea, like a ghost, must be spoken to a little before it will explain itself.
                                                                                                                Charles Dickens

Jerusalem’s rich and colorful folklore includes several interesting tales about the capital’s haunted houses and buildings. The Clal building on Jaffa street with its corpse in the foundations; the House of Death on Ben Maimon Street; The Health Ministry Building in Machane Yehuda. These are but a few of a list of properties where the ghosts of Jerusalem’s bleary past sojourn.

Jerusalem also has around 10,000 apartments, bought as investment properties by overseas buyers. Some of these are rented out, some are used as short-term rentals to supplement the shortage of hotel rooms. Some are used by their owners several times a year and lie empty for the rest of it.

The Mayor of Jerusalem, in an uncharacteristic populist act, is about to double city taxes on these properties. He has declared that “The addition of thousands of ghost apartments to the market will dramatically increase the supply of apartments available for rent by young people, and will lower rent prices in the city.”

Mr Mayor, I have news for you. Not one of the apartments which you name as “ghost” apartments will be rented to four students to share. Nor do the students want to rent these apartments. They can’t afford the city taxes on them let alone the rent.

This new decree may, however, backfire. These very same investors are also coming four times a year and spending more money in the City of Jerusalem than does the average Israeli spend all year round. They are the same investors who are backing the City’s largest developments and invest in the City’s hi-tech hubs. Because they see Jerusalem as a second home and one close to their hearts.

Few cities in the world belong to the prestigious club of cities where foreigners want to own second homes. New York, London, Paris and Hong Kong are members of this elite; so is Jerusalem. There may be side effects to the local market, but these should be solved by building affordable homes in perimeter neighborhoods and providing suitable transportation to make these neighborhoods attractive.

It is no secret that the main hurdles to swift and efficient planning lay in the haunted corridors of The City Halls. If Safra Square would pay double Arnona for every unused or ineffectively used cubicle, how much would be raised towards affordable housing?