The Bank of Israel has informally but clearly told the banks to tighten their financing terms for real estate developers, in a move that could frustrate Prime Minister Benjamin Netanyahu's affordable housing plan.
Banking sources confirmed to "Globes" that the Bank of Israel told the banks to review their real estate portfolios and conduct sensitivity tests on the basis of various scenarios. The instruction was verbal, not written, and the banks were told to keep it confidential.
The Bank of Israel told the banks to examine the consequences to their guarantees and to new projects' feasibility if home price fell by 15%. The banks say that the unofficial but clear message: for their own good, the banks should tighten lending terms for developers.
The Bank of Israel said in response that it gave no order to halt the granting of credit for real estate projects.
Some banks are feverishly discussing how to comply with the Bank of Israel's guidelines. Sources believe that, in response to the Bank of Israel's demand, the banks will substantially increase their equity demands from developers, their liens, and the cost of credit on loans.
One banker said, "If the Bank of Israel is worried about real estate, we obviously will not be flexible on terms."
Sources said that one large bank has already decided in principle to reduce new credit for small and mid-sized contractors. Other large bank has already notified developers that will have to provide larger equity as a condition for the financing of projects. A third bank is considering the effect of a 25% drop in home prices on its portfolio, and intends to demand equity from developers accordingly.
The real estate industry is highly indebted. Developers are among the most leveraged companies in the country and no contractor begins a project without securing bank financing until the apartments are handed over to their buyers. For this reason, the banks' decision to reduce financing and tighten terms will affect developers' ability to build homes.
Credit to the real estate industry currently amounts to NIS 280 billion, of which NIS 143 billion is balance sheet credit (risky properties). Real estate is the banks' largest sector: it accounts for 22% of Bank Leumi's (TASE: LUMI) credit portfolio and 20% of Bank Hapoalim's (TASE: POLI) portfolio.
It is no secret that the banks are worried about high home prices. Several weeks ago, Mizrahi Tefahot Bank (TASE:MZTF) CEO Eli Yones told "Globes", "We haven’t agreed to finance projects because of land prices for a very long time. We refused to finance a developer because we thought he paid far too much. We only participated in the financing after he brought his own money to lower the price per unit."
Published by Globes [online], Israel business news - www.globes-online.com - on July 27, 2011
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