Many in the Israeli public, especially among young couples, have in the past year hastened their intention to purchase an apartment. In light of the lack of supply compared to the demand and the feeling that the rise in interest rates will further increase the price of mortgages, the move to the apartment increased the banks’ income from mortgages, and at the same time caused them to enter competition for credit to developers.
The result of the market eReal Estate The boiling point is that the credit risk in the banking system for the construction and real estate industry has increased compared to the end of 2020 and is reflected in some banking corporations in an accelerated increase in credit balances and credit risk characteristics. Credit is adjusted for risk in new transactions.
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In his annual review for 2021 reveals The Supervisor of Banks The Bank of Israel states that the balance sheet credit for the construction and real estate industry in Israel grew by a year and a half, from the end of June 2020, in the five largest banks by an average of 35% and amounted to NIS 217 billion.
Leumi is the bank that increased its total credit at the highest rate and it stood at NIS 76 billion at the end of last year, a jump of 43%. Leumi reports by the way reveal that it increased the total credit to the field by an additional NIS 7.5 billion in the first quarter of the year. Hapoalim and Mizrahi Tefahot increased the total credit by 40% each, but while in Mizrahi it is a nominal increase from NIS 19 billion to NIS 26 billion, in Poalim the increase is much more significant, from NIS 50 billion to NIS 70 billion. At Discount and International the tumors were much more cautious, 18% and 16% respectively.
Simultaneously with the increase in credit balances, competition increased between 2021 between the entities financing each new transaction – between the banks themselves and between the banks and the non-banking system, ie, insurance companies, institutions, bonds, private investment funds, and more. “In the credit balances to the industry, in increasing the risk appetite and in easing the underwriting conditions, and consequently in the increase in the level of risk and in the decrease in the credit spreads of the new transactions,” the Bank of Israel explained.
According to the Supervisor of Banks, the demand for apartments has led to a change in the banks’ perception of risk. “Due to the small number of failures in accompanying projects and the continuing rises in housing prices, the risk has been predicted by the financing bodies as low and they are willing to take greater risks than before. Companies that were previously considered high risk by banks The banks feel comfortable providing them with credit in high volumes and on easier terms compared to those that were customary in the past. “
Banks are ready to absorb a very large decline in housing prices
Thus, the easing of the underwriting of the new transactions is reflected in a series of measures that were not customary in the past and made the banks much more generous towards the contractors.
The first relief concerns the financing rates for land acquisition. “There is considerable competition between the banks in the financing rates for new land. The usual financing rates have reached 75% -70% in the past, but as of the end of 2020 there is an upward trend from a maximum financing rate of 85% to 90% financing rates and in some cases even financing rates. Of almost 100% of the cost of the land, “the Bank of Israel explained.
At the same time, the requirement for equity capital in closed projects decreased from an order of magnitude of 20% -15% to a minimum of 10%. As for the absorbency of projects (which expresses the maximum possible rate of decrease in the sale prices of apartments, without the bank incurring losses from the project), a trend of easing the absorbency required in new projects has begun, so new deals for good borrowers are approved even when the project absorbs 30%. only. This is compared to the requirement for a minimum absorbency of 40% -35% that was practiced in the past.
In addition, the Supervisor of Banks explains that it is customary to establish rules within the framework of which projected surpluses in the project can be released to the contractor. The rules for releasing the surplus are intended to ensure that the release of the surplus is carried out only when there is a high level of certainty for the existence of surpluses. Thus, the higher the rates of progress in the execution of the project and in the sale of the apartments, the higher the level of certainty for the existence of surpluses. “Some borrowers are given the option to release surpluses from the project in the early stages of the project compared to rules that were previously accepted,” the inspectorate noted.
They also wrote that in recent times there has been a rising trend in the provision of Maznin loans to finance part of the equity in projects by the banks. These loans are intended to finance equity (in whole or in part) and are priced at significantly higher interest rates than those of project credit. It should be noted that some entrepreneurs also supplement equity through non-bank credit (which usually charges a higher interest rate than the banking system). This phenomenon increases the risks of Moral Hazard, as the risk for the entrepreneur decreases. “This is a moral hazard – the lower the equity rate invested in the project, the borrower is not directly exposed to the risk but only to the chance of the project’s success and therefore may prefer to increase its exposure to risk,” the Bank of Israel explained.
It was further explained in the review that the banks are also easing with the developers in everything related to the rate of sale of apartments. For example, when there is a gap between execution rates and sales rates. “There are projects where the execution rate significantly exceeds the sales rate. This is not necessarily due to project difficulty, but in some cases the developer avoids compromising on project prices based on the estimate that over time, they will continue to increase and profitability will increase accordingly. The developer was unable to sell all the inventory of apartments in the project that ended, the banks provide credit for periods of one year and sometimes even more against the inventory of unsold apartments, until their sale is completed. “
Banks are required to capitalize more on high-leveraged projects
Against the background of the increase in credit risk to the construction and real estate industry, the Supervisor of Banks sent letters to the banking system in August and December 2021, in which banking corporations were required to take a series of actions. Focusing on new credit transactions at increased risk and examining the need to set internal limits on collection; Ensure that adjustments are made in the group provision for credit eulogies for the construction and real estate industry, and in particular to allocate additional capital for high-leveraged land financing, when the financing rate is higher than 75% of the value of the land.