Minister of Finance Moshe Kahlon, Minister of Housing and Construction Yoav Galant, and others in the Israeli government have announced programs to bring about a significant rise in residential construction, with building starts crossing the 60,000, or even 70,000 units annually, considerably above the figures for recent years.
Besides the usual complaints about a shortage of manpower, however, the real estate industry is currently no less concerned about a shortage of money. The various banks have already reached the utmost they can do in granting credit. The Israel Builders Association warns of a credit squeeze, the banks don't deny it, and the Bank of Israel has no intention at present of changing the existing restrictions.
"We receive approaches from contractors who go to the banks and don't receive finance. 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 big banks, which are the main financers of real estate projects, have already reached the credit limit set by the bank of Israel. The smaller ones are around the 15% mark, and have themselves decided not to go as far as the 20% threshold."
At the banks, the real estate sector is not just residential construction. 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 has actual credit reached the limit.
"Today, everyone rushes to bank quickly to secure finance," says Amit Gotlib, VP of Gotlib Responsible Building Ltd., which builds in Ramat Gan, "It came as a surprise. Interest rates and commissions had been much lower. Now there's a rise of 35-4-% 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."
VAT won't be enough
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 buying insurance from overseas 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 reduce sufficiently. The analysis was done on the basis of growth to 60,000 building starts in 2016, and growth to 70,000 starts, the targets the government aims at. An additional 10,000 building starts (to a total of 60,000) will mean that credit will exceed the limit by some NIS 11.5 billion, 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 NIS 6.8 billion.
A senior banking source told "Globes", "Apart from the sector limit, there is also the regulatory provision requiring the big banks to raise their capital adequacy by 1% by the end of 2016. The need of the system as a whole to meet these challenging targets is forcing the banks to reduce substantially the supply of credit to the real estate and infrastructure sector, and, unfortunately, the effect of these factors on growth is very 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 guarantee 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 had better talk to 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 the 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 the building targets from being met, and sources there say that the market will find ways of obtaining the credit despite the limits.
Some banks have already put part of the guarantee financing out to external insurance. In the past, an attempt was made to exclude all the credit for these guarantees (which are very low risk) from the limit. The previous Supervisor of Banks, David Zaken, agreed that this amount would be excluded from the capital adequacy calculation, but not that it would 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 to the insurance companies will make room within the sector limit. The Israel Builders Association says that if this goes ahead, it will have a dramatic effect: "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."
Published by Globes [online], Israel business news - www.globes-online.com - on June 14, 2016
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