The FINANCIAL — In recent years many economists have recognized that price growth on real estate can be a significant barrier to investment in many developing countries. In most societies, rich or poor, a significant fraction of the total wealth are not able to purchase real estate on cash.
“Increased interest rates on credits in Georgia were conditioned by the growth tendency obvious in the global market. Since international resources became more expensive the local commercial banks were forced to increase interest rates. The other factor in this respect could be the growth demand on credits in the local market, which is directly linked to increased interest rates,” David Amaglobeli, Acting President of National Bank of Georgia, told The FINANCIAL.
According to the National Bank of Georgia (NBG), the overall amount of mortgage loans issued by the commercial banks in Georgia was GEL 882 million.
There are 22 commercial banks registered in Georgia.
According to Giorgi Tsutskiridze, Executive Director of the Association of Banks of Georgia (ABG), 15-20% of the total volume of loans issued by the commercial banks in Georgia in 2007, were mortgage loans.
“Concrete information on the mortgage loans issued by the commercial banks in Georgia is confidential. It’s up to the particular bank to name the figures. ABG’s only capable of revealing approximate shares of mortgage loans within the overall loan volume,” Tsutskiridze told The FINANCIAL.
According to Amaglobeli, NBG has been running a strict monetary policy by increasing interest rates on the main policy rates, which was transferred to the interest rates of the commercial banks.
“That’s the way NBG is trying to lower the dynamic of increasing interest rates (which has been too high over the last few years) and is attempting to help increase deposits (as interest rates are increasing on deposits as well). Hence, we’re committed to setting a limitation to the money supply growth and making an influence on retail prices, which is a major priority for NBG,” said Amaglobeli.
Commercial banks in Georgia have started a competitive aggressive campaign in terms of mortgage loan offers.
“HSBC will be the first bank in Georgia to offer a floating interest rate on personal mortgage/construction loans. A floating rate changes periodically in line with economic and monetary conditions; an HSBC customer will be able to benefit from falling interest rates and avoid being locked into a fixed rate, long-term lending contract,” Tony Turner, HSBC Georgia CEO, told The FINANCIAL.
In terms of mortgage lending, HSBC expects its terms to be very competitive within the Georgian market, with secured USD loans priced at 14% p.a., or even less depending on the precise terms (occasionally as low as 12%).
According to Armen Mathevosian, Advisor of Bank Republic Directorate Board, BR is one of the most active banks in mortgage lending.
“The bank’s market share last year increased more than three times. Presently BR offers its clientele advanced European standard mortgage loans with maturity up to 25 years and from 15% annual interest rate,” said Mathevosian.
According to Vakhtang Butskhrikidze, General Director of TBC Bank, TBC Bank started issuing mortgage loans in 2002.
“The bank was one of the first to implement mortgage loans in the Georgian market. The bank has refined loan conditions over these six years and today TBC Bank offers renewed terms on mortgage loans. The maximum loan term was 3 years, while the maximum term today is 30 years. Mortgage loan delivery terms are noticeably simplified,” Butskhrikidze said.
“We are cooperating with several construction companies and a customer can get a mortgage loan with an ID card. During 2002-2007 the interest rate was reduced from 24% to 13%. It was a good way of competing with rivals. Though from 2008, Georgian banks have been obliged to increase interest rates on mortgage loans by 3-4%, according to the created conditions on the world’s global financial market. TBC Bank tried to increase the rate minimally for its customers and today our mortgage loan rate ranges from 15.9-19%. The bank besides the standard mortgage loans offers its clients additional special conditions to reduce interest rates. It is called Offset possibility,” Butskhrikidze added.
According to Zurab Kananashvili, Head of the Retail Department of Standard Bank, the bank has a system of mortgage loans.
“These loans are for purchase, repair and construction of a house or any other real estate property. The minimum monthly income to afford a mortgage loan in JSC Standard Bank is GEL 500. Unfortunately in 2008 our bank has not disbursed any loans. The mortgage lending portfolio in 2007 compared to the year 2006 was increased approximately 400%. Standard Bank plans to develop sources of distribution of selling mortgage loans coordinating with construction companies,” Kananashvili added.
“Precise statistics do not exist, but approximately no less than 30% of all real estate transactions in Georgia happen with the help of mortgage loans. Usually the segment of customers which benefit from mortgage loans service are the upper-intermediate and upper class of Georgia’s population,” said Mathevosyan.
“Unfortunately, the increased prices on real estate has reduced the numbers of even those customers who were able to purchase real estate with mortgage loans. People who could afford to purchase 2-3 room apartments before, are now obliged to be satisfied with one room apartments. At the same time the rich segment of the population and Georgian people who live abroad have the ability to purchase real estate in Georgia quite easily,” Butskhrikidze said.
“Basically such people buy more than one flat and this creates the climate at the real estate market. Accessibility to real estate has been reducing in Georgia for the last two years and is becoming available only for elite customers. It must be noticed that the quality of real estate has grown, but prices have grown far more rapidly. This tendency can not be stopped with simplifying mortgage loan terms. Mostly customers get mortgage loans for purchasing cottages and multiple repairs, as these are far more cheap compared to purchasing real estate in the city. The quantity of issued mortgage loans is still very few in Georgia. There does not exist exact statistics in this field, but I can say that totally 20 thousand people have applied for such loans. This does not even represent 1% of the capable working population,” Butskhrikidze added.
According to Mathevosian, presently there is a world crisis on mortgage markets, which has caused a liquidity crisis in many western countries. This has already negatively influenced the Georgian banking system and many local banks are experiencing severe liquidity problems.
“Money supply is low and apparently interest rates are on a growth pattern. In such conditions there is no logical reason for the banks to decrease rates as this will hamper profitability in conditions when the cost of money is increasing worldwide,” Mathevosian claimed.
“Today deposits underwent growth and rose to 15% in Georgia. According to this, mortgage loans with 10-19% are logical and can even be regarded law. Competition, which is very high in the banking sector, can not oblige banks to lower credits. It is a natural phenomenon in the commercial structure,” Butskhrikidze declared.
“Besides the high interest rate, there is a great demand on mortgage loans and banks are not able to satisfy customers. This is one of the reasons why the interest rate is growing. A new player’s coming to the Georgian banking market is absolutely timely and suitable. It will regulate the terms of issuing mortgage loans. As for HSBC’s decision to offer loans at a very low rate it is the banks strategy to become stronger in the Georgian market. A new player must always attract its customers’ attention, in this case a mortgage loan seems to be a very sensitive aspect and doubtlessly this aspect will be taken into notice by customers,” Butskhrikidze added.
According to Mathevosian, HSBC is as respected a member of the leading international banking community as Societe Generale.
“I do not think that purely local banks will stand such competition in the coming years, but we as an SG Group member surely will, as our group is far more successful in the whole Central and Eastern European region. We have the widest network and the best banks all over Europe. We are ready to compete on the market and offer the best universal banking solution and high quality service to Georgian society,” Mathevosian noted.
In Mathevosian’s words Bank Republic’s mortgage lending portfolio is already increased more than 6 times compared to the previous year.
“The trend continues – we are attractive to our clientele as we are the most stable and reliable and predictable bank in the Georgian banking system. We offer our customers our reliability as we are a mature bank and look forward to cooperating with mature clientele – a segment which is fast emerging in Georgia,” Mathevosian declared.
TBC Banks’ mortgage lending portfolio has increased 100% compared to the previous year. The volume of mortgage loans consisted of GEL 166 million in June. By the beginning of 2007, the portfolio has increased by GEL 30 million.
“A decrease of the interest rate on loans is not planned in 2008. But supposedly in a year and a half the interest rate index will come to a starting level. Additional rates increasing on mortgage loans is not expected,” Butskhrikidze said.
“Bank Republic plans to continue as we do. We will closely follow the market and continue implementation of our strategy as of a universal banking institution. We will not have any stop-and-goes, we will have only stable and systematic forward movements. We are like an ice-breaker ship – we move on, maybe not with the fastest speed, but firmly and surely and there can be no obstacle which will prevent us from doing so,” Mathevosian said.
Written by Natia Taktakishvili
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