Israeli Banks Tighten Lending Terms for Real Estate Developers

Israeli banks are adopting a more stringent approach to financing the construction and real estate sectors, extending tighter credit conditions to both high-risk and low-risk developers. A survey by the Bank of Israel for the third quarter of 2026 indicates that banks are increasing credit margins for these sectors. Concurrently, demand for credit from the industry continues to decline, a trend banks anticipate will persist through the final quarter of the year. This development occurs amidst a challenging real estate market where developers face a surplus of unsold apartments, significant financing costs, and difficulties converting construction volume into actual sales. The cost of credit is now reflecting increased caution from lenders.

The current survey reveals a shift from the previous quarter, where banks had already noted a decrease in credit demand and had tightened margins for high-risk borrowers, while easing them for low-risk ones in most segments. The latest findings show increased margins for both risky and non-risky borrowers in construction and real estate, as well as for large businesses. Conversely, small and medium-sized businesses experienced eased credit margins for low-risk borrowers. An increase in the credit margin means borrowers pay more, even if the base interest rate remains unchanged, significantly impacting large-scale projects.

This tightening is partly a response to the substantial exposure of the banking system to the real estate sector, which constitutes about 39% of all business credit and 21% of total balance sheet credit to the public. During 2025, credit to the sector grew by approximately 14% among the five largest banking groups. Notably, cash credit for residential construction projects surged by about 40%, from approximately NIS 49 billion at the end of 2024 to NIS 69 billion by the end of 2025. However, this growth was partly attributed to slower transactions, rising construction costs, and developers offering incentives, including deferred payment plans, which increase the developers' immediate financing needs.

Data from the end of 2025 showed that the overall exposure of the five major banking groups to projects where construction progress outpaced sales reached 44%, a nine-percentage-point increase year-on-year. The average absorption capacity ratio, which measures the ability to withstand a drop in apartment prices, decreased by about 12 percentage points to approximately 58%, though still considered to have significant safety margins by the Bank of Israel.

The real estate market continues to grapple with a large inventory of unsold new apartments, estimated at about 857,000 units as of late August, representing 26.7 months of supply at the current sales pace. Over half of these are in the Tel Aviv and Central districts. Developers are still using financing incentives to boost sales, with 30% of free-market contractor sales in August reporting financing benefits for deals with delivery dates at least a year away. This dual pressure of offering buyer incentives and facing higher bank lending costs squeezes developer profitability and cash flow.

In contrast, the mortgage market has not seen the same tightening. Demand for housing credit remained stable in the third quarter, with no changes in credit margins. Banks anticipate increased mortgage demand in the fourth quarter, while demand from the construction and real estate sectors is expected to continue falling. Although September mortgage data showed a 20.5% decrease in loan volume compared to August, this is partly attributed to fewer working days during the High Holidays, and year-to-date mortgage volume is up 12% compared to the same period last year.