Investors melt Israeli pensions on land deals

Bloomberg

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Israeli pension funds helped diamond mogul Lev Leviev snap up Manhattan real estate, including the former New York Times building, in 2007. Now they’re sharing in his losses as property prices plunge, dragging down the value of corporate bonds that backed the deals.

Fellow billionaire Yitzhak Tshuva has the same problem after the foray by his Delek Real Estate into British property and roadside restaurants helped force its bonds down 73 percent.

Pension funds and individual investors lost about 20 billion shekels ($5.1 billion), or a quarter of what they had invested in corporate bonds, as yields fell in the four months to November. Now, under threat of a strike by Israel’s biggest union over pension losses, the government is proposing a bailout to help close the savings gap for people near retirement age. Concern that some companies could be wiped out helped drag the Tel Aviv Stock Exchange TA-25 Index down 41 percent in the past year.

"These real estate tycoons imported the global financial crisis to Israel," said Gill Beeri, managing director of Ramat Gan, Israel-based Ayalon Financial Solutions. Its Smadar fund lost 14.1 percent in the first 11 months of last year. "There’s increased concern that these companies may default."

Global ripples
Israel is the latest country to suffer from the collapse of the U.S. subprime mortgage market, which led to an economic crisis in Iceland, currency devaluations in Russia and street protests in Greece and Kuwait. There may be more fallout as the economies of the U.S., Japan and the countries of the European Union contract in 2009.

Global economic growth will slow to 2.2 percent in 2009 from 3.7 percent last year, the International Monetary Fund said Nov. 6. The IMF defines a world recession as expansion of less than 3 percent.

The slowdown is blunting a five-year boom, during which the Israeli economy grew an average of 5 percent annually. It may expand 1.5 percent in 2009, the slowest pace since 2002, the Bank of Israel estimated Nov. 20, when it abandoned a previous forecast of 2.7 percent. Israel’s economy will probably show no growth this year, Merrill Lynch said Jan. 11.

Overseas property purchases helped drive up the amount of corporate debt in Israel over the past five years. The country’s 15 largest real estate companies have about 140 billion shekels in overall debt, more than three times the amount in 2003, according to Dun & Bradstreet Israel.

About 50 billion shekels of that debt is in the hands of those saving for retirement in so-called provident funds, long-term investment vehicles similar to U.S. 401(k) accounts that offer tax-free savings for employees.

Investors are suffering partly because of the billionaires’ property losses and from concern the companies they control won’t be able to pay debts or find refinancing because of the credit crisis.

On the Forbes list
Leviev, 52, made his money as owner of the world’s largest cutter and polisher of diamonds and was No. 227 on Forbes’s list of the world’s richest people last year, with a net worth of $4.5 billion. His charitable activities include helping fund Jewish schools in his native Uzbekistan.

Leviev’s Africa Israel Investments bought the former Times headquarters on Times Square for $525 million. It paid $200 million for the 19th-century Clock Tower building on Manhattan’s lower Broadway, saying it would be converted into 55 apartments designed by Italian fashion company Gianni Versace.

Those overseas deals were backed in part by investors and fund managers who acquired the company’s bonds, rated AA by Standard & Poor’s-Maalot. Leviev, the chairman of Africa Israel, moved to London last year, spending a reported 35 million pounds ($51 million) for a property in the Hampstead neighborhood.

Tshuva is estimated by Forbes to be worth $3.5 billion. As a contractor, he profited from the construction boom during the immigration of Russian Jews to Israel in the 1990s. The 60-year-old took over Delek, Israel’s No. 2 oil and gas company, in 1998.

In April 2007, Delek Real Estate bought 47 hotels in the U.K. operated by Marriott International. It also acquired RoadChef Motorway Holdings, a U.K. operator of highway service stations, for $738 million and owns the building leased to Britain’s Foreign Office.

Israelis hold about 220 billion shekels in provident funds and employee benefit funds, the Finance Ministry said. Through November, provident funds lost an average 17.8 percent. The long-term investments account for about 30 percent of the 200 billion-shekel corporate bond market.

The losses have investors heading for the exits. About 3.5 billion shekels were redeemed from provident funds in October, according to Meitav Investments & Securities.

On Dec. 14, the cabinet approved a plan to guarantee pensions and long-term savings up to 750,000 shekels, or about $193,000, for people age 57 and older. Prime Minister Ehud Olmert said the aim was to provide a monthly income equal to the country’s average wage, which is 8,210 shekels.

The decision came after the Histadrut labor federation, which represents more than a quarter of Israel’s workforce, threatened a nationwide strike.

"There has been a group of businessmen that acted irresponsibly and with great greed," said Avishay Braverman, chairman of the parliamentary finance committee. "Long-term savings have been thrown out of the window."