Banks Tighten Lending to Real Estate Developers as Demand Falls

Israeli banks are reporting a significant decrease in demand for credit from construction and real estate companies in the third quarter, alongside an increase in the cost of such loans. This trend, continuing from the second quarter, means developers face higher financing expenses while navigating a slower sales environment. The Bank of Israel's survey of credit officers indicates a persistent decline in business credit demand, with the building and real estate sectors showing particular weakness. Banks anticipate this trend of reduced financing needs in these sectors to continue into the fourth quarter.

Despite the overall slowdown in new loan applications from developers, the total volume of business debt in the economy continued to grow in the first half of the year, partly through bank credit. This suggests that companies with existing substantial debt are maintaining it, while interest in new borrowing wanes. The cost of capital is also rising for developers, as banks have increased the interest rate margins charged to real estate and construction firms, regardless of risk profile. These increased margins, added to the base interest rate, can significantly inflate the effective cost of loans over the long duration of development projects, impacting expected profits.

This tightening credit environment for developers is creating opportunities for non-bank financial institutions. For instance, WeSure recently launched services to finance developers and contractors, offering products for land acquisition, housing inventory, and guarantees. This move comes as the real estate sector struggles with apartment sales.

In contrast, the credit landscape for households has eased. Banks reported further reductions in margins for low-risk household loans, driven by competition among lenders. Small and medium-sized businesses also saw some margin relief in lower-risk categories. However, larger corporations are experiencing the opposite, with increased margins on both high-risk and well-rated loans.

Mortgage demand remained stable in the third quarter, with minimal changes in credit margins. Banks, however, expect an increase in housing loan demand in the final quarter of the year, following approximately 10.3 billion shekels in new mortgages in September. Meanwhile, the inventory of unsold apartments remains high, and apartment prices have seen a slight annual decrease. The divergence between developers seeking less credit and homebuyers potentially seeking more highlights a growing gap between well-capitalized developers and those reliant on bank financing, a critical factor in a market with high inventory and rising holding costs.