They are not actually new-new. They give banks smaller margins than they did in their previous incarnation. They are tightly controlled with very little to no wiggle room on interest rates for most of the duration of the loan.
Yet the central bank’s current offering of housing loan subsidies was met with tremendous enthusiasm at commercial banks, which told Executive that they presented the subsidized loans to their customers within days of the issuance of a Banque du Liban (BDL) circular that announced the terms at which banks could rush to the subsidy pots.
Banque Libano-Francaise (BLF) and Bank Audi are but two examples for the high speed with which the lending programs were rolled out throughout the banking sector. When the central bank issued its circular on January 16, Bank Audi was ready to go within 48 hours, Head of Retail Banking Grace Eid told Executive. BLF also took all of two days to introduce its BDL-subsidized home loan. “We were waiting for this circular so we launched directly,” said Ronald Zirka, BLF’s head of retail and marketing.
Bank of Beirut added an extra incentive to its application of the subsidies, said Antoine Chamoun, the general manager of Bank of Beirut Invest and a top real estate finance expert at the bank. According to him, the bank lowered its interest demand to home loan customers by using financial engineering tools. “The interest rate is fixed according to BDL stipulations, which means the maximum interest rate is 5.44 percent based on the one-year Treasury Bills. Bank of Beirut has offered a special loan based on the 5.44 rate but due to certain manipulations on the amount of the down payment and the loan, the interest rate drops from 5.44 to 2.5 if we are talking a 20-year duration of the loan,” he said.
Old dressed as new
The rapidity with which commercial banks posted the new home loans is a telltale sign that the housing-loan support of the central bank stimulus program is in many ways a reiteration of a previous program, where banks could extend similar offers at comparable interest rates, although under a different funding formula that allowed the banks to tap into their own reserves, rather than use central bank funding as under the new terms.
As a result of the new formula, margins are tighter for banks, said Zirka. He explained that the costs of funds to the banks are today 1 percent instead of zero percent under the BDL program that was launched in 2009. “We can take only 0.3 from the customer, which means our profits are lower by 0.7 points. Having said that, it is still profitable. That is why we launched this product,” he said.
Bank Audi’s Eid emphasized that the new loans augment existing home loan offerings and are addressing different demand profiles than, for example, the loan offerings supported by the Public Corporation of Housing (PCH). “You can’t compare PCH and BDL-subsidized loans; while they are both subsidized, they are addressed to different market segments. The bottom line is, home buyers will be definitely better off if they take these subsidized loans whether the subsidies come from the PCH or the BDL,” she said.
For consumers, the loan subsidies can translate into substantial savings on the financing cost, and some home buyers could save up to 25 percent this year when compared with taking a loan last year that did not benefit from the central bank stimulus package, said Hanadi Saad, head of retail at Credit Bank. “With the new BDL product, we will definitely have more demand, because this is addressed to low to medium-income consumers who will look for products that can help them save a lot, especially since these are long-term products.”
For Credit Bank, this translates directly in higher expectations from the home loan business. “We anticipate housing loans to account for approximately 20 percent of the total retail lending portfolio. This ratio has gone up in 2010 and 2011 but dropped back in 2012 [to 10 percent] from where we expect it to double in 2013,” she added.
BLF, whose target market comprises Lebanon’s mid- to high-end earners, equally expects a boost to its home financing activities. “We want to have a 100 percent increase in the number of housing loans,” said Zirka, telling Executive that BLF had expected the home loans to stay at the levels of last year until the details of the stimulus package were released by BDL.
A level pitch
The ceilings and exclusions in the new home loan program are straightforward and easy enough to understand — the maximum allowable amount is LL800 million ($533,300), down payments are a must and the home buyers cannot combine the BDL-subsidized loan with other bank borrowing, for example.
Comparing the terms of 20 or 30 BDL-subsidized home loan offerings of Lebanese commercial banks may hardly yield more than minimal variances in interest rates and fees. However, this is an advantage rather than a disadvantage for lenders with a smaller franchise than the top five retail banks, said Credit Bank’s Saad. “When you have a fair game where the conditions are the same, your know-how and expertise and personalized service come to play a greater role,” she said.
On the other hand, the overall growth of the housing loan segment in Lebanese banking has not been felt positively by Iskan Bank (also known as Banque Habitat), which used to be one of two specialized providers in the home loan segment. According to a senior official at Iskan Bank, who declined to be identified, until 2010 the bank used to be, next to the PCH, one of the country’s two natural addresses for home buyers to seek finance. However, as a small bank with this specialization it today faces overwhelming competition from the big lenders. This is “better for the country,” because competition makes banks offer more flexible rates, but not necessarily better for Iskan Bank, he said.
Feeding the bubble
For developers, the loan subsidies come at a time when the engines of property demand are sputtering worse than at any time in the past five years. While half-year figures suggest that 2012 may still have generated substantial-enough borrowing from home buyers to keep the year’s issuance of new home loans at respectable rates, when seen within the five-year trend, 2013 could have been trending toward frigid climates for banks, borrowers and developers, had there not been the giving hands of the central bank.
Sampling the main trading floors in the property market, meaning developers and real estate intermediaries, the new financing opportunities are naturally and definitely welcome, but will not necessarily have a direct impact for all.
In the premium areas of Beirut, where real estate intermediary Ramco does most of its business, the lending ceilings of subsidized loans mean that few properties will be eligible.
Focused on apartment sizes of at least 150 to 180 square meters with prices at $4,000 per square meter (sqm), a minimum budget to buy an apartment will be around $600,000, said Ramco director Karim Makarem.
He was appreciative of the likelihood that the BDL-subsidized loans will incentivize some buyers but pointed out how buyers in general face other barriers before they come to the annual interest rate hurdle. “Incomes are limited so the big question is if people can afford the down payment,” he said.
Another developer focused on Beirut, a niche player with a foible for the unusually located flat, saw little demand since the beginning of the year but asserted “the first question is about a subsidized loan” when people are interested in buying a unit.
Georges Zard Abou Jaoude, the developer of the BeitMisk project said that the stimulus package will be helpful, but within the restrictions of a recent drop in demand.
So what’s new?
A main difference between the current stimulus package and the previous edition in 2009 seems to be that the first round of BDL-subsidized lending was fueling demand in a period of overall expansion of the Lebanese economy. The 2013 package is more a response to tough economic times and its stimulus of home loans signals possible redemption for professions that rely on the real estate market’s vibrancy, from developers and construction-related professionals right down to advertising agencies and real estate media.
“It is a very good initiative by Banque du Liban and will help developers which have finished their projects and need to sell them,” said Chahe Yerevanian, chairman and chief executive of Sayfco.
Early signs from the 2013 subsidies are positive and banking players told Executive that they encountered expanding demand for home loans from their customer bases. “The home loan product, whether subsidized or non-subsidized, is very important for the community, the bank and the individual,” emphasized Bank Audi’s Eid. “What the central bank did this year was make funds available to banks in order to build momentum in the economic cycle where real estate and apartment sales are a key factor.”
Jad Abi Haidar, financial analyst at Credit Libanais bank, whose research department publishes a number of real estate reports, said figures on the weak performance in property transactions this January are not indicative of the impact of the new BDL subsidies and results from the stimulus package should materialize over the course of 2013 and more clearly in 2014.
He cautioned, however, that the market’s decisive influences are not economic. “If the political situation worsens, the stimulus effect may not be as large as expected. But on the other hand, if the political situation improves dramatically the impact of the stimulus plan may be magnified,” he said.
The well-established vagaries of the current market notwithstanding, Bank of Beirut’s Chamoun blew a horn for optimism. “I think it is a great time to apply for a home loan, because the market is very slow now and prices did neither decrease nor increase. Now is a moment to buy and a moment to give loans.”