BANKS AND REAL ESTATE LOANS Issues and Prospects International Conference on the Real Estate Development in Albania Tirana, May 2008 Dr. Elvin MEKA ALBANIAN ASSOCIATION OF BANKS

2 ELVIN MEKA  An ever-increasing type of loan;  Loans, the primary source of real estate funding;  The biggest loan item within the banking system’s balance sheet; balance sheet;  Only 24.3% of extended real estate loans in domestic currency (ALL); the rest in foreign domestic currency (ALL); the rest in foreign currency (~70% in EUR, 5% in US$); currency (~70% in EUR, 5% in US$);  More than 63% of real estate loans (end-2007) extended to individuals. extended to individuals. BANKS AND REAL ESTATE LOANS Issues and Prospects General

3 ELVIN MEKA General BANKS AND REAL ESTATE LOANS Issues and Prospects

4 ELVIN MEKA  the volume of non-performing real estate loans, compared to the volume of outstanding non-performing loans in the banking system, is still considered to be low,  the quality of actual real estate loan portfolio remains good. General Source: Bank of Albania BANKS AND REAL ESTATE LOANS Issues and Prospects

5 ELVIN MEKA PERIOD:  Minimum: 5 years  Average: 15 years;  Maximum: 25 years GRACE PERIOD:  Up to 12 months LOAN-TO-ASSET VALUE (financing limit):  From 60% to 100% of the market value of the collateral collateral Main features BANKS AND REAL ESTATE LOANS Issues and Prospects

6 ELVIN MEKA ADMINISTRATIVE FEE:  1-2% (Min. EUR 150) INTEREST RATE:  Loans in domestic currency: Minimum: 12m T-Bills + 3% - 5% Minimum: 12m T-Bills + 3% - 5% Maximum: 12m T-Bills + 7% - 9% Maximum: 12m T-Bills + 7% - 9%  FX Loans: Minimum: EURIBOR/LIBOR + 2.5% - 3.5% Minimum: EURIBOR/LIBOR + 2.5% - 3.5% Maximum: EURIBOR/LIBOR + 7% Maximum: EURIBOR/LIBOR + 7% Main features (2) BANKS AND REAL ESTATE LOANS Issues and Prospects

7 ELVIN MEKA TYPE OF COLLATERAL:  Physical collateral: The purchased house; The purchased house; The house of borrowers' relatives; The house of borrowers' relatives; Unfinished buildings (rarely); Unfinished buildings (rarely); Shop on a residential building; Shop on a residential building; Land. Land.  Other Guarantees: bank guarantee; bank guarantee; cash collateral; cash collateral; Treasury Bills. Treasury Bills. Main features (3) Source: Bank of Albania BANKS AND REAL ESTATE LOANS Issues and Prospects

8 ELVIN MEKA General economic and social issues:  Informal economy and employment;  Fragile sustainability of the economic development, not clear projections for the coming years;  High job circulation and turnover;  Urban infrastructure still under improvement. Issues BANKS AND REAL ESTATE LOANS Issues and Prospects

9 ELVIN MEKA Legal issues:  Frequent changes and loopholes in the land-related legal framework and regulatory basis;  Uncertainties over ownership lack of clear ownership and countable cases of property’s overlap (expected to be resolved within 2009);  Property disputes, the most common cases in Albanian Courts; 40-50% of court cases involve property dispute;  Long-lasting and problematic process of restitution and compensation of the properties expropriated by the communist regime; Issues (2) BANKS AND REAL ESTATE LOANS Issues and Prospects

10 ELVIN MEKA Property’s registration issues:  The property’s registration with the Real Estate Registry Office, still a bumpy ride; lack of a digital register;  Long-lasting and time-consuming procedures (mainly at Bailiff’s Office), for collateral enforcement, in case of defaulted loans and respective foreclosures;  Difficulties in having a temporary registration and a respective mortgage on this temporary registration;  Rare usage of under-construction-buildings as collateral;  Pre-signed (entrepreneurship) contracts not an eligible document for temporary mortgage. Issues (3) BANKS AND REAL ESTATE LOANS Issues and Prospects

11 ELVIN MEKA  Speeding up the process of resolving land-related issues;  Setting up a digitalized data system at RERO, gathered from different state institution, such as Bailiff’s Office, courts, social insurance, tax office, RERO office, attorney general etc;  Banks’ access to the above digital register;  Shortening the time for collateral enforcement;  Extensive usage of under-construction-buildings as collateral; Prospects & Recommendations BANKS AND REAL ESTATE LOANS Issues and Prospects

12 ELVIN MEKA  Closer monitoring of the market, implementing regional and international experience;  Credit rating and risk assessment models to be based upon to Albanian market conditions;  More efforts to develop a vibrant real estate secondary market;  More capacity building within RERO and Bailiff’s Offices;  Assessing the possibility to implement financial innovation in the real estate market, by linking it with capital markets. Prospects & Recommendations (2) BANKS AND REAL ESTATE LOANS Issues and Prospects

13 ELVIN MEKA Contacting AAB URL: BANKS AND REAL ESTATE LOANS Issues and Prospects

14 ELVIN MEKA THANK YOU! BANKS AND REAL ESTATE LOANS Issues and Prospects