Business as usual in property loan markets, says a risk manager - but is this always the case?

The  property market is facing a crisis, even though Real Estate agents will deny this, it  remains truth. Nonetheless, the banks have been warning of a precarious situation in the property market and the Central Bank has said  illusion that property prices never fall has resulted in ‘disaster myopia’.

The Central Bank has warned that the gap between the supply of unsold property in Malta and demand means the dampened property market is unlikely to rebound in the short-term.

Adding more concern for some construction mega-projects was the Bank’s warning that global uncertainty on property prices abroad was curbing interest from foreign buyers, and that this would affect the feasibility of construction projects in Malta targeting the high-end property segment.

MaltaToday talked to Bank of Valletta’s Chief Officer for Risk Management Mario Mallia, who said that property loans make up for just under one-third of the Bank’s loan book.

He points out that while this may seem like a lot, it is important to take into account the fact that the risk associated with home loans differs to the risk connected with the financing of property development.

“In the latter case, the feasibility of the loan being repaid depends on the eventual sale of the property being developed, so there exists a direct link here with the “ups and downs” of the property market. In the case of home loans, repayment is not usually directly related to the value of one’s residence, but rather to the personal financial circumstances of the borrower.”

What this essentially means is that home loan risk increases during times of economic hardship, particularly where employment is affected.

“However, there is no close correlation with a softening property market, and especially when prices fall in the gradual and selective manner which we are seeing in Malta,” Mallia said.

He emphasized how that property loans have to undergo standard evaluation and conform to normal prudent banking practice. “A proposal will only be considered if the Bank is convinced of the feasibility of the project.  This, in turn, depends on the applicant’s track record and experience in the field, the quality and marketability of the property being developed, location, pricing, the contribution which the applicant is willing to put into the project and other factors,” Mallia said.

He also stressed the importance to view property development as a business that exists alongside others, not one that is isolated. “Property development is not a homogeneous business, and a request for the financing of a high-quality development for which there is a ready market will be considered differently from, for example, a speculative development at the lower end of the market.”

Mallia reassures that BOV has always been strict when it came to assessment criteria which deal with property financing.

“But we have been especially careful and selective over the past few years, when it became clear that most sectors of the market were experiencing a property glut. We wanted to ensure that our lending practices were not fuelling an asset bubble. With hindsight, I think we were proved right,” he said.

Furthermore, Mallia was happy to point out that despite economic events which have had a negative effect on the local economy – such as the Libyan crisis – people have not ceased to meet their monthly repayments, pointing out that the residential home is, for most Maltese people, “the investment of a lifetime, and people do not walk away from their asset.”

“Despite occasional market downswings, the residential home will probably always be viewed as the best major long-term investment which the average person can make,” he said.

Asked whether there is a fear in bank circles that supply of properties over the demand is leading to the lowering of property values (and as a consequence diminishing the collateral values in favour of the bank), Mallia said that when the Bank accepts property as collateral for a loan, other than in property development, then the Bank is not relying on that property for repayment of the loan, but on the revenues being generated from the business being financed.

“In this case, the property is only held as a backstop. The primary exposure of the Bank in such cases is not to the property sector, but to the economic sector in which the borrower is engaged, say tourism or manufacturing.

“Nevertheless, such collateral still represents an exposure to the property market, albeit an indirect one. The Bank therefore monitors its exposure to property held as collateral on an ongoing basis, and takes into account the realisable value of such property when assessing the adequacy of capital buffers and loan loss provisions.”

Mallia also finds it important to point out how policies are never set in stone, but “living documents” which are under constant review to best reflect changing circumstances – which is particularly relevant given that the property market is experiencing great difficulties.

“I can however state that no significant changes have been made to BOV’s home loans policies as a result of the current situation of the property market,” Mallia said.