.png)
October 30, 2024
Traditionally, real estate development companies in Israel have been accustomed to a customer lifecycle spanning from a few months up to five years. This cycle commences when a customer signs a purchase agreement and culminates with the handover of the apartment keys. Post-handover interactions are typically limited to payments, addressing defects, and customer service issues.
Consequently, once the keys are handed over, the primary means for companies to maintain a positive relationship with customers has been through upholding their reputation. However, the ability to command a premium based on brand reputation alone has been relatively limited in Israel.
All of this is set to change. The advent of the long-term rental market necessitates a paradigm shift in several core perceptions within development companies.
According to recent reports, approximately 30% of residential apartments in Israel are rentals, compared to 50% in Western countries. Of these rentals, a staggering 95% are privately owned, serving as investment properties for individual owners.
Various theories attempt to explain Israel's preference for homeownership, including the historical and cultural significance of having a "home" for the Jewish people and prevailing consumer culture. However, beyond psychological analyses, the dominance of privately owned rental properties and the absence of comprehensive rental agreement regulations place tenants at a significant disadvantage. Tenants often lack basic certainty throughout their rental agreement's duration, affecting everything from rent stability to property maintenance.
In such an environment, it's logical that a natural preference for purchasing homes has developed. This trend has contributed to the recent surge in property prices, with increases reaching unprecedented percentages. Simultaneously, numerous cases have emerged where landlords refuse to adequately repair and maintain their properties.
Enter the long-term rental market—a solution offering tenants the certainty akin to homeownership without the need for substantial equity or long-term mortgage commitments. This model allows tenants to enjoy stable living conditions and reliable property maintenance, alleviating many of the traditional concerns associated with renting.
With development companies becoming property owners for periods of no less than 15 years, many of their traditional practices are set to evolve.
Firstly, the approach to construction quality and material selection will undergo significant changes. Companies must recognize that only after 15 years will these apartments be released for sale. At that point, they aim to market and sell the units, achieving substantial entrepreneurial profits and benefiting from tax advantages associated with government programs for long-term rentals or approved enterprises.
Previously, the use of premium materials served primarily as a marketing tool to position new projects, often based on plans rather than completed structures. Now, developers have a vested interest in ensuring that the building's quality—including its systems and interior finishes—remains intact over the long term. This shift encourages the use of more durable materials and higher construction standards to maintain property value over the extended ownership period.
Another area of change lies in service agreements with suppliers. Historically, development companies sought the lowest possible prices for amenities such as air conditioning system sand elevators, sometimes achieving cost savings by shortening service periods or limiting coverage.
However, with the responsibility for maintenance remaining with the development companies, there is a newfound need for comprehensive coverage and extended service periods. This requirement will prompt companies and suppliers to develop new service packages that cater to long-term needs.
Perhaps most significantly, the customer lifecycle will expand dramatically. Development companies will need to maintain ongoing relationships with tenants throughout the rental agreement's duration. Unlike private landlords who might neglect tenant requests or property upkeep, companies must provide responsive customer service, including call centers equipped to handle inquiries, address maintenance issues, and manage routine upkeep.
This extended relationship opens up intriguing opportunities. As the number of tenants renting from these companies grows—potentially reaching thousands or even tens of thousands—there is potential to offer additional services beyond just rent and management fees.
Development companies can explore supplementary income sources by offering packages that include furniture, appliances, interior design services, and even end products. They can provide tenants with internet services, streaming subscriptions, and electricity—leveraging their purchasing power to profit from these offerings.
Moreover, partnerships with market players willing to create tailored products and services for tenants present additional avenues for profit sharing. It's conceivable that development companies may increasingly resemble operators of assisted living facilities, providing a broad spectrum of services directly to tenants.
In the future, the long-term rental market is expected to grow substantially. We will likely witness greater disparities between projects within the same neighborhood, favoring those where development companies effectively implement these new strategies. Companies that adapt will enjoy enhanced reputations and higher profitability.
Historically, residential projects have been relatively similar, with only minor differences. However, as companies begin to offer a diverse array of complementary products and services—and varying levels of customer service—significant distinctions between them will emerge.
Tenants will be willing to pay higher rents within the same neighborhood for apartments of identical size, based on the renting company's reputation and the additional products and services it provides. Consequently, development companies that deliver superior and efficient customer service stand to gain faster and more substantial profits than ever before.
The rise of the long-term rental market in Israel is set to revolutionize the real estate industry. Development companies must adapt to this new landscape by enhancing construction quality, extending customer relationships, and exploring new revenue streams. Those that do will not only improve their profitability but also contribute to a more stable and tenant-friendly housing market.