Spanish developers de-capitalised by shareholders during boom

The owners of many of Spain’s developers used the boom to load their companies with debt whilst taking out capital, suggests a new report from the Spanish Savings Banks Foundation FUNCAS. That left developers ill-prepared for the downturn, which is turning out more severe as a result.

Despite a decade of fat profits during the 1997 – 2007 boom, the owners of many developers squandered the chance to prepare for the inevitable change in the cycle. Instead of re-investing profits, shareholders withdrew capital and replaced equity with a mountain of debt. Weak balance sheets and over-indebtedness on the part of developers partly explains why the crash has been so severe.

“Using leverage increased returns to shareholders, who obtained substantial dividends thanks to cheap borrowing,” says the report. Shareholders weren’t satisfied with healthy profits; they wanted even more.

Between 1995 and 2007, residential mortgage credit increased by 9, whilst loans to developers increased by 25. By Q3 of 2009 developers owed a combined total of 324 billion Euros – around 30% of Spanish GDP –according to the Spanish Mortgage Association (AHE).

As a result, Spain’s biggest, listed developers (Metrovacesa, Renta Corporación, Quabit, Colonial, Martinsa-Fadesa, Reyal Urbis, Realia, Testa and Vallehermoso) have combined debts of around 27 billion Euros. Add in a few others, both in and out of bankruptcy, like Sacresa, Habitat, Tremón, Nozar, and Restaura, you get to more than 30 billion Euros in debt held by the biggest developers in Spain. According to a report last year from the AHE, the sector is “bankrupt”.

But pillaging equity and excessive borrowing are not the only reasons why the present crash is turning out to be so severe. The inordinate length of the last boom is also to blame, say FUNCAS.

Compared to previous cycles, the boom went on for much longer than normal, with prices rising for 5 consecutive years. That created expectations of permanently rising prices, “which lead to a rise in speculative demand and encouraged over-investment in the sector.”

If the boom was off the charts, there’s a good chance the bust will be too.