Investment Firm Warns of Rising Risks in Israel's Construction Sector

Leader Capital Markets has issued a stark warning regarding the growing disparity between weakening apartment sales and a significant increase in financing for real estate developers and contractors in Israel. The investment house's review highlights that bank exposure to the construction sector has reached NIS 511 billion, with total credit increasing by over NIS 100 billion in the past year alone.

Alon Glazer, a banking and insurance analyst at Leader, stated that as banks continue to expand credit, the potential future damage could be substantial. This surge in credit from both banks and non-bank financial institutions is occurring against a backdrop of stagnant apartment sales in the real estate market. Leader cautions that this situation heightens systemic risk, and a larger bank exposure could lead to greater losses if these risks materialize.

"The chance of seeing risks materialize has significantly increased," Glazer wrote, attributing this assessment to the weakness in the housing market, characterized by declining sales, falling prices, and a large supply of apartments. He reiterated that the more banks increase credit amounts, the greater the potential future impact.

Leader's primary concern is the pace of credit growth. Their review indicates that banks' risk assets related to developers and contractors, including credit and guarantees, grew by NIS 79 billion over 12 months to NIS 511 billion. This represents more than a doubling since the end of 2020, when the exposure was only NIS 220 billion.

Beyond banks, Leader estimates that insurance companies' credit portfolios for developers and contractors have approached NIS 20 billion. Institutional investors have also increased credit by tens of billions of shekels. Public non-bank credit companies have added approximately NIS 4.5 billion in credit to the sector in the past year, reaching about NIS 20 billion, with private companies providing an estimated additional NIS 5-10 billion. In total, Leader estimates credit to developers and contractors has grown by over 20% or more than NIS 100 billion in one year.

Despite the urgent tone, Leader does not claim the construction sector is currently in a credit crisis or that construction companies are facing collapse. The review suggests this credit expansion, often at high interest rates without significant provisions for credit losses, is currently boosting bank profitability. However, Leader questions the sustainability of such rapid credit growth with minimal loss provisions while the housing market weakens. The Supervisor of Banks currently does not view the credit growth as a risk requiring intervention, but Leader maintains that underlying risks are growing significantly.