Israel introduces new bank loan regulations for purchasing groups.
Posted on 26. Feb, 2010 by Buy-It In Israel Staff in Israel Real Estate, Mortgages
©iStockphoto.com/Alex Slobodkin
New regulations for the provision of loans to purchasing groups buying land for the construction of new homes in Israel are expected to weigh on the buyers groups’ ability to get cheap lending. Israel’s Banking Supervisor has sent a letter to the country’s banks ordering them to tighten credit to purchasing groups in a way, which reflects the true risk inherent in their business.
Over the past two years purchasing groups, which are organized groups of mostly private individuals, have been joining up to buy land in Israel in order to build one or two buildings mainly for residential purposes amid an expensive property market, financing constraints and a general mistrust of the financial stability of building companies.
According to a recent study by Israel’s Finance Ministry, the value of land purchased by private investors, most of whom were organized in a buyers group, has risen by 168% between 2005 and 2007. The figures showed that last year about a third of all new homes bought in Tel Aviv, were acquired by private individuals acting as part of purchasing groups.
Furthermore the alternative way to directly purchase land for the purpose of construction rather than buying from a contractor or construction company has the advantage of saving some of purchasers’ costs. Experts estimate that if, all saving elements exist in a project, then purchasing an apartment through a buying group could save of up to 20% of the apartment value.
However the cost advantages enjoyed by buyers groups until now opposite contractors may change very soon. Until now, purchasing groups, since they consist of private individuals, could get credit from the banks on conditions of an ordinary Israel mortgage loan for individual borrowers, while contractors take out loans on conditions of commercial loans. The Banking Supervisor’s new instructions for bank lending to buyers groups seeks to change this situation so that credit to these groups would not anymore be provided under the category of a mortgage loan but commercial credit.
The Banking Supervisor argued that the risks inherent in the activity of purchasing groups were much higher than in the provision of ordinary housing credit if it is for members of the group or for the bank financing the activity. Among the risks mentioned were payment failure of some members of a buyers group because of financial difficulties which has a negative impact on the cash flow of the project; disputes or differences of opinion among members of the group causing delays; and additional unexpected costs.
“The fast pace of growth in activity of purchasing groups, the entry to the sector of organizers of groups whose business model has not yet proven itself coupled with the lack of sufficient experience in large failures in a period of falling housing prices, raise serious concerns regarding potential damage to the quality of credit and reputation of the bank,” said the Banking Supervisor in the letter to the banks.
In practice, the planned changes to the conditions of credit availability for purchasing groups means that banks will have to set aside a three times larger capital allocation, which in turn means that they are likely to tighten credit for buyers groups. For ordinary mortgage loans, which until now applied for purchasing groups, banks have to provide a capital allocation of 35 percent, while the capital allocation for a commercial loan for a company is 100 percent. Furthermore, as a result of the change of categorization of loans for buyers groups from mortgage to commercial ones, which is planned to come into force from March 30 this year, banks can be expected to charge higher interest rates on the loans.
Concern for the lack of legal backing in place when purchasing within the framework of a buyers group has last month prompted Israel’s Housing and Construction Minister Ariel Attas to call for a hearing on the subject of buyers groups in an effort to regulate buyers groups and protect purchasers’ and consumers’ monies.
The ministry noted that in light of the ever growing trend of buyers groups in the Israel real estate market, which until now has expanded without any supervision or regulation and the lessons learnt from the Heftziba debacle putting the money of thousands of purchasers at risk, there was a need for regulating the pitfalls in the sector and guaranteeing consumer protection.
© Copyright 2010.
Related articles:
New trend of groups of buyers from kablanim to replace purchasing groups
Related Articles:
