Why are so many developers going bankrupt?
Sunday, August 10, 2008 @ 8:44 PM
Every week we read stories of developers in Spain going into administration or falling into financial difficulty. This gives little or no confidence for those of us looking to buy in Spain. Reality shows it is the same story in UK and US - we just need to look at recent examples of Taylor Wimpey and their financial difficulty in the UK.
But who is too blame? Obviously, recent market conditions (high interest rates, high prices, currency exchange rates,tougher lending conditions and Spains rediculous attempt to improve the planning laws) have played their part, resulting in fewer buyers purchasing off-plan or new properties. As a result, many developers have struggled to maintain a decent enough cash flow to maintain operations - ie: pay the banks back on the mortgage financing they had in place with their banks while paying their contractors to finish off the building works.
Essentially, during the boom times the banks were all too keen and quick to lend money, and as a result many of the developers are now over-leveraged, and cannot afford to pay back on their loan commitments. The developers 2 to 5 years ago would have paid a premium for the land, and that in turn got translated into high prices for the buyer.
Where does this put us as the buyers? In short, given the current market climate, it is best for buyers to look at buying something which is built and established, rather than taking a risk at something which may or not be finished. However, for those of you who are not risk averse and are willing to take a punt and long term view, it may be a good time to negotiate a good deal with most developers. My advice would be stick to what you can touch and see (something that is built with ALL licences in place)...If not walk away!
Essentially the Government and the Banks are to blame for this mess in what we could call a mixture of 'bad' urban planning laws and a lack of regulation coupled with unethical lending. Spanish banks however continue to post decent results, but I fear the reality will hit home to some of them who have over exposed themselves to developers whose business plans were not thoroughly scrutinised.
Anyway who likes playing the market, and is willing to research which banks may be over exposed to these problems, may stand to make a profit by shorting the shares. However, I am no stock market investment guru, so we should leave that to the pros.
Hasta pronto