Israeli banks are close to Real Estate Sector limitations

Published by Globes [online], Israel business news – www.globes-online.com


The Government of Israel specifically the Minister of Finance Moshe Kahlon and the Minister of Housing and Construction Yoav Galant, have announced new programs to establish a significant rise in residential construction, by over passing the construction of 60,000, or even 70,000 units annually, considerably higher figures for recent years.


Besides the usual criticism about a shortage of manpower, the real estate industry is currently even more concerned about a shortage of capital. Several banks have already reached their limit in granting credit, as the Israel Builders Association warns of a credit squeeze. The banks have not opposed this news, and even more so the Bank of Israel has no intention of changing the existing restrictions.


“We have been approached by contractors who were denied financial investments. There are bank branches right next to the Association’s building, and they come straight here after the meeting. It has recently turned into a phenomenon, and we have seen it grow beyond normal proportions,” says Israel Builders Association president Roni Brik, “The major banks, which are the main financiers of real estate projects, have already reached their credit limit set by the bank of Israel. The smaller ones are around the 15% mark, and decided not to go as far as the 20% threshold.”


The banks’ credit limit covers all areas of real estate: residential, guarantees under the Sale (Assurance of Investments of Purchasers of Apartments) Law, commercial real estate, income-producing real estate, work for the government, and heavy infrastructure. The Bank of Israel’s decision to limit credit to any one sector to 20% of the total credit portfolio is not new and applies to all sectors of the economy, but only in the real estate sector the credit limit has actually been reached.


“Today, everyone rushes to bank quickly to secure finance,” says Amit Gotlib, VP of Gotlib Responsible Building Ltd., which has construction sites in Ramat Gan. “It came as a surprise. Interest rates and commissions had been much lower and now there’s a rise of 3.5-4-% in the banks’ commissions and interest rates. In the end it has to be rolled over onto apartment prices, while there are whole projects that simply won’t be built.”


The contractors and the Ministry of Finance are trying to promote a new idea, in which the Sale Law guarantee component will be excluded from the credit allocation by purchasing insurance from global insurance companies.


One solution to the problem is already in the legislative pipeline: excluding the VAT from the Sale Law guarantee. Since the guarantee is counted towards the credit limit, freeing up 15% of it should release a few billion Shekels for financing the industry. A draft government bill on the matter was recently circulated, but current figures on the credit shortage show that this measure will probably not solve the problem.


A financial model formulated by Israel Builders Association economist Ziv Lazar, indicates that even if the VAT component of the Sale Law guarantee is offset, the credit excess will not be reduced sufficiently. The analysis was done on the basis of the government’s expectation of 60,000 units that will begin in early 2016 to 70,000 units. An additional 10,000 units (to a total of 60,000) will mean that credit will exceed the limit by 11.5 billion NIS, that is to say, this is the money that the banking system will not be able to provide. If the VAT component is offset, the excess will be 6.8 billion NIS.


A senior banking source told “Globes”, “Apart from the sector limitation, there is also the regulatory provision requiring the larger banks to raise their capital adequacy by 1% by the end of 2016. The concern for a system to meet these challenging targets as a whole, is forcing the banks to reduce the substantial supply of credit for the real estate infrastructure sector. Unfortunately, the effect of these factors on growth is great and creates a complex picture for the Israeli economy.”


Offsetting the Sale Law guarantee VAT component, and the possibility of excluding the Sale Law guarantee entirely from the equation through the purchase of insurance, should release a considerable amount of credit, but it will take time for the regulator to approve it.


A senior banker said, “The officials in Jerusalem should communicate with one another and create some correlation between the government’s plans for raising the supply of new homes and the regulation on the banking system.” The Bank of Israel and the Ministry of Finance are aware of the credit squeeze figures and are “dealing with this matter.”


Among other things, they are examining incentives for financial institutions to enter into financing for real estate projects. Nevertheless, the Ministry of Finance is not concerned that the credit shortage will prevent them from reaching their goal and that they will find other ways of obtaining the credit despite the limitations.


Some banks have already re-insured their housing bonds portfolio to global (Re)insurers. In the past, an attempt was made to exclude all the credit for these guarantees (which are very low risk). The previous Advisor of Banks, David Zaken, agreed that this amount would be excluded from the capital adequacy calculation, but it would not be excluded from the sector limit. This does not release credit for real estate, but for all sectors equally. The proposal now under discussion is that devolving the credit risk related to the guarantees for the insurance companies to make room within the sector limit. The Israel Builders Association states that if they proceed with this effect, it will have a dramatic outcome: “If the banks all insure their Sale Law guarantee portfolios, it will free up some NIS 30 billion, which could give the industry considerable breathing room.”

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