A high-profile Spanish developer has run out of cash – but what does that mean for Britons who have invested in Spanish property?

Sunday Times Home Section, 21 October 2007

When Llanera, an up-and-coming Spanish property developer, struck a four-year, £6.6m sponsorship deal with the football club Charlton Athletic in December 2005, it seemed an ideal way to pitch its properties to British buyers. Fernando Gallego, the firm’s president, talked of the “many similarities between our two businesses”.

Gallego was right, though perhaps not in the way he intended. After a disappointing season, Charlton were relegated to the Championship, last May. Llanera, meanwhile, has proved even more of a loser. The firm recently announced that it has run out of money and is seeking protection from its creditors – much to the alarm of those Charlton supporters tempted by its projects.

Llanera has – or perhaps I should say had – grand plans. The company’s aim was to develop affordable holiday homes for British buyers in the Murcia and Valencia regions of southeast Spain. Its flagship project was Nature Caravaca de la Cruz, a golf development near the inland town of Caravaca de la Cruz, in Murcia, where it planned to build 3,000 homes in a joint venture with other investors. Llanera also borrowed heavily to buy rural land, hoping to get it reclassified for residential development.

The company’s problems emerged when planning permission for the scheme took longer than expected, and the Spanish property boom started to turn sour. What really did it, though, was this summer’s credit crunch, brought on by the American sub-prime mortgage crisis. Rather like Northern Rock – which sponsors Newcastle United, a team doing somewhat better than Charlton – Llanera saw its access to short-term loans dry up, and it ran out of cash.

The latest figures show that by the end of last year, Llanera had debts of £522m – £104m of them with the American investment bank Lehman Brothers – yet it had notched up only £4.2m in sales last year.

At least Llanera was not selling properties without planning permission at Nature Caravaca – unlike some unscrupulous developers. Instead, it took only reservation deposits of £2,100 from British buyers interested in purchasing once licences had been obtained. Nature Caravaca Golf, a joint venture between Llanera and a number of other investors, says that it intends to proceed without Llanera, and has pledged to refund reservations in full if requested.

Llanera’s woes highlight a broader problem that is likely to become more acute as the Spanish property boom of the first half of this decade runs out of steam. But are the factors that brought it down unique, or could they afflict other developers?

It’s an important question for anybody thinking of buying in Spain, especially on an off-plan development that has yet to be built.

Nobody wants to hand over their savings to a developer that goes bankrupt.

“Llanera is a special case, because of its borrowing,” says Javier Illera, a director of Grupo i, a Spanish real-estate research and consultancy firm. “Other developers may see their profits squeezed, but there will be no crisis.”

Yet there are grounds for concern.

Grupo i’s latest report puts annual demand for new holiday homes in Spain at about 90,000, yet 140,000 are built each year, which means the stock of unsold properties must be growing. Furthermore, 80% of developers recently surveyed by Grupo i reported that sales were worse or much worse, while 77% had a negative or very negative outlook.

Average sale times are on the rise, and government figures show that average price increases during 12 months to the end of June fell to 2.1% in Alicante (Costa Blanca), 3.9% in Malaga province (Costa del Sol), 6% in the Canaries, 7.1% in Girona (Costa Brava), 7.8% in the Balearics, 8.7% in Tarragona (Costa Dorada) and 9.5% in Murcia – a far cry from the double-digit rises of just a few years ago.

Even these figures may be an overestimate, according to agents in popular areas such as the Costa del Sol and Murcia, who say that prices have been stagnant or falling for some time. “It is not a crisis, it is a market reaching maturity,” Illera says – but you don’t need an MBA to work out that some developers must be under increasing strain as sales fall and borrowing costs rise.

So, what do you do if your developer goes bust before completion? It depends if they have guaranteed all your payments with a bank or insurance company. This is a legal requirement in Spain, but, since it costs money, not every developer does it.

“If you have a guarantee, you should claim your payments from the guarantor through your lawyers,” says Brian Marson, the head of Legal Answers, a firm of solicitors in Marbella. “It is important not to leave this too late, as there is normally a deadline for making claims. If some or all of your payments are not guaranteed, then you have to stand in line with the other creditors.” Needless to say, you should never buy from a developer that does not provide guarantees from an authorised financial institution.

The problem is that many developers take months to arrange guarantees. “There is a real problem with developers dragging their heels over guarantees,” Marson explains. “It’s not like in the UK, where all payments are covered automatically by the National House-Building Council system.”

Does this mean that buying off-plan is now off limits? Far from it. The slowdown will force serious developers to up their game. In the short term, I also expect a flight to quality: the best developments will grab increasing market share, creating unexpected opportunities for investors.

The risks are growing, though, so, before buying, find out how long the developer will take to provide a guarantee, and be wary of those who say it will be longer than a couple of weeks. Ideally, your payments should be guaranteed the moment you make them, but I have yet to meet a developer who can do this.

© Mark Stucklin (Spanish Property Insight)