Monday, March 31, 2008

Buying Property Off The Plan In Spain

Spanish property developer Llanera goes bust

Charlton Athletic fans should recognize the name Llanera because it is emblazoned across the front of their team's shirt. The name might not mean much to them, as the shirt doesn't give much away, but it doesn't matter now anyway because Llanera has just gone bust. Charlton hasn't had much luck on the pitch, having been relegated from the premier league, nor off the pitch with sponsors, the last two of which have gone under.

Llanera (pronounced ya-nera) is, or perhaps I should say was, a Spanish property developer with grand plans for the British market. Unfortunately for Charlton, not to mention the fans who decided to buy a Spanish holiday home from the club's sponsors, Llanera has run out of money, and has been forced to seek protection from its creditors. When an unheard of Spanish developer spends 6.6 million quid sponsoring an English club, you can assume that cash flow problems won't be far behind. Football sponsorship is a mug's game best left to household names that the British can pronounce, like Northern Rock!

Of course sponsoring Charlton wasn't Llanera's only mistake. The company, whose strategy was to develop affordable holiday homes in Murcia and the Valencian Region for British buyers, also borrowed heavily to buy rural land in the hope of getting it reclassified for residential development. In a recent statement Llanera has admitted the error of borrowing short term to fund uncertain long term projects. By the end of 2006 Llanera had 750 million Euros in debts, 150 million of them with the US investment bank Lehman Brothers, and only 6 million Euros in sales.

Llanera's flagship project was a golf development in Murcia called Nature Caravaca, near the inland town of Caravaca de la Cruz, where it planned to build 3,000 homes in a joint venture with other investors. Problems emerged when planning permission took longer than expected, and the Spanish property boom started to turn sour. But what really did it for Llanera was this summer's credit crunch after the US subprime mortgage crisis. Rather like Newcastle United's sponsors Northern Rock, Llanera's access to short term loans dried up, and the company ran out of cash.

Whatever its other faults, at least Llanera doesn't appear to have been selling properties without planning permission at Nature Caravaca. Llanera only took reservation deposits of 3,000 Euros from British buyers interested in purchasing when licences were obtained, and the company Nature Caravaca Golf, which will now proceed without Llanera, say that reservations will be refunded in full if requested. Llanera's problems do, however, highlight the risk of developers running into financial problems in a difficult market.

What makes this case alarming is that Llanera was one of the rising stars of the Spanish property business. With an aggressive expansion plan financed by debt, the company took full advantage of the Spanish property boom in the first half of this decade, and emerged from obscurity as a small player in the Valencian Region to become one of the biggest names in the holiday home sector.

The big question is, are Llanera's problems an isolated case, or a sign of things to come? It's an important question for anyone thinking of buying in Spain, especially on a new development, as handing over a chunk of your life's savings to a developer who goes bankrupt is the last thing you want.

"Llanera is a special case because of its borrowing," argues Javier Illera, a director of Grupo i, a Spanish real estate research and consultancy firm that produces reports on the holiday home sector. "Most other developers may see their profits squeezed, but there will be no crisis."

But given the present state of the market there are certainly grounds for concern. According to Grupo i's latest report annual demand for new holiday homes in Spain is around 90,000, but 140,000 are built each year, so the stock of unsold properties must be growing. Furthermore 80% of developers recently surveyed by Grupo i report that sales are worse or much worse, and 77% have a negative or very negative outlook. Average sales times are on the rise, and official figures from the government show that average price increases over 12 months to the end of June fell to 3.9% in Malaga province (Costa del Sol), 2.1% in Alicante (Costa Blanca), 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 - on the whole a far cry from the double digit rates of just a few years ago. And government figures probably flatter the situation, as the agents I have spoken to in several popular areas like the Costa del Sol and Murcia say that prices have been stagnant or falling for some time. "It is not a crisis, it is a market reaching maturity," says Illera, 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 the developer has guaranteed all your payments with a bank or insurance company, as required by Spanish law, though some developers flout the law as arranging a guarantee costs money. "If you have a guarantee, then you should claim your payments from the guarantor through your lawyers," explains Brian Marson, head of Legal Answers, a firm of solicitors based 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 who does not provide stage payment 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," explains Marson. "It's not like in the UK, where all payments are automatically covered by the National House Building Council system."

Does this mean that buying off-plan is now off-limits? Far from it. The advantages of buying off-plan still suit many people, and I expect a difficult market to improve standards. It will force serious developers to become more competitive, and focus on adding value for their clients. And in the short run I expect a flight to quality, as the best developments grab an increasing share of the market, which could create unexpected opportunities for investors.

Nevertheless the risks are on the rise, so before you buy from a developer find out exactly how long they take to provide a guarantee, and be wary of those who take 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.

October 2007


This article was written by Mark Stucklin, author of the Spanish Property Doctor column in The Sunday Times, and head of the Spanish Property Insight website.

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