Another one bites the dust: Barcelona-based developer Renta Corporación has followed Reyal Urbis into the arms of court-appointed administrators, whilst a respected industry insider predicts a “tsunami of developer bankruptcies in the next two years.” That has implications for investors looking to take advantage of the market.

With 185 million Euros of debts, 23 million with the Spanish tax authorities alone, Renta Corporación has voluntarily asked the courts for protection from its creditors, unable to meet its obligations.

Court administration, known in Spain as a concurso de acreedores, is often the first step towards liquidation. Some companies emerge successfully from administration, but only if they have a core value proposition that makes them viable concerns. Otherwise they just continue rewarding incompetent managers and destroy more value.

Renta Corporación is the latest in a string of stock-market listed developers to go to the wall, starting with Martinsa Fadesa back in 2008. Reyal Urbis collapsed just a few weeks ago.

Trading in Renta shares was suspended at a price of €0.57/share, down from a peak of around €39/share just before the bubble burst. Equity investors have been wiped out.

Renta Corporación, who always claimed to be an “innovative company with an original business model,” say they “understand the insolvency procedure as a transitional phase and will continue defending the continuity of the company.” But it is difficult to imagine a bright future for them in a falling market with debts of 185 million Euros.

There are great opportunities in this market, but only for nimble companies with no debts and access to cash.

When the market first turned down, Renta Corporacion were fond of saying they would be protected by their business model of fast rotation. But their business model proved toxic when the tide went out, and they were left holding over-valued assets acquired at the top of the market with borrowed money. Their creditors have finally pulled the plug.

Tsunami of developer bankruptcies to come

Renta won’t be the last Spanish developer to go into administration before this industry shakeout is complete, predicts Mikel Echavarren, head of the consultancy Irea, and a respected industry insider. He says there will be a “tsunami of developer bankruptcies in the next two years,” as banks stop their policy of pretend and extend towards zombie developers.

In comments to Bloomberg he explained that, thanks to recent changes in regulations governing provisions, banks no longer have an incentive to refinance the debts of developers with no future. The banks now have to recognise the losses anyway, so they might as well stop throwing good money after bad.

According to R.R. de Acuna & Asociados, another consultancy, more than half of Spain’s 67,000 developers can be categorised as zombies, with negative net assets (balance sheet insolvency).

Implications for Spanish property investors

The Spanish property market is starting to offer great opportunities to cash buyers, but investors should take care with new projects where troubled developers can cause a problem, for example by not finishing the promotion, not paying community fees, or by pulling the plug on key features such as golf courses and hotels. Due diligence is more important than ever, even when buying property for sale in Barcelona.