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What is happening there? Let's put legal issues aside. The city replaces an area that UNRWA used to prepare aid for the West Bank with a school (right now, later also community center, etc.) for the (Arab) people of Kafr Aqab. What's behind this, apart from a general Israeli dislike of UNRWA?
What we call "East Jerusalem" is a large swatch of land Israel has annexed of the West Bank in 1968. Its residents carry a ("blue") Israeli ID card, but almost all of them are not Israeli citizens (Some new Jewish neighbourhoods were also built there, but it is very clear which part is Jewish and which is Arab, with minor exceptions). However, Jerusalem has remained as the unofficial center of the West Bank. However, Israel considers Jerusalem (all of it) as its capital, and ever since the 1990s acted against moves by Palestinians that demonstrated Jerusalem (as a whole, or parts of it) to be the capital of Palestine.
In 2002, following a wave of bombings, Israel decided to build the Separation Wall to set a clear border between Israel Proper and the West Bank. In Jerusalem the wall all of a sudden separated between most of Arab parts of East Jerusalem. Parts of East Jerusalem, including Kafr Aqab, were left behind that wall.
The economy of East Jerusalem crashed due to this disconnection. In the past 20 years it has gone through a painful process of adapting. This mostly meant integrating into the Israeli economy. This is mostly about lower-paying jobs such as shop clerks and security guards. But Suleiman Maswadeh is a better role model.
Just to be clear: it is a reluctant integration. Arabs in Jerusalem are very much discriminated against, in countless of ways. Arabs are roughly 40% of the population but avoid voting to the city council, Still it is clear that generally Arabs prefer living in East Jerusalem than moving to the West Bank, as life is much harder there, and being able to mostly move and works freely inside Israel helps.
Kafr Aqab and similar quarters have become sort of "no man's land", as they were not well-controlled by Israeli authorities, but Israel would not allow the Palestinian Authority to assume control there. So, for instance, building that rise as high as water could be pumped (14 floors?) with dodgy quality. A disaster waiting to happen.
At some point in the 2010s some of the Israeli authorities (mostly the City of Jerusalem) started noticing this process and stopped the automatic "Arab [specifically in Jerusalem] is bad and should be crushed" mentality and realized it is useful and should be encouraged. 10 years ago all schools in East Jerusalem were teaching according to the Palestinian curriculum with graduates getting the Palestinian #Tawjihi certificate. And then figuring out it is useless in West Jerusalem and ended up working in construction.
The city started encouraging schools to convert their curriculum to a modified Israeli one (including teaching Hebrew: Jews hardly speak Arabic, Arabs tend to learn Hebrew), and even building new schools that teach it. Currently 38% of Arab students learn the Israeli curriculum. And many more attend and graduate the Hebrew University or some academic colleges in Jerusalem, that require an Israeli #Bagrut certificate instead.
So in that sense this action is remarkable, because it shows the city acting beyond the Separation Wall. The city can raid UNRWA as much as it wants, but if people of the neighborhood don't want this school, there's really not much in the way of police to protect it.And yes, the City confiscated a resource UNRWA used to help people in the West Bank and converted it for a resource used for the benefit of the people of East Jerusalem. The City does not care that much about people in the West Bank (according to a definition in which East Jerusalem is not part of the West Bank).
Does this mean people of East Jerusalem are becoming increasingly Israeli? In some senses: yes. In others: no. One indication is the municipal elections. Last ones were in 2024. East Jerusalem Arabs still avoided voting there.