Banks may let other property firms go under after Llanera’s demise

The decision to allow real estate firm Llanera Inmobilaria to go under could mark a shift in the strategy of the banks toward the property sector, which is still struggling to lift its head after a massive bubble burst around the end of 2007 and the start of 2008.

The difference stems from two decrees approved last year requiring Spanish lenders to step up their provisioning for potential losses from exposure to the ailing real estate sector. After having covered for such possible losses, lenders may now be being more selective about which companies they will continue to support.

"Up until now the banks have been refinancing companies, but after the decrees of [Economy Minister Luis de] Guindos last year they have already provisioned for the loss in value of these loans in their balance sheets and from now onward are going to choose which real estate developers they save and which they do not on the basis of the possibility of recovering their loans," the head of valuations for property consultant CB Richard Ellis's Spanish division, Javier Kindelan, said.

Valencia-based Llanera in 2006 acquired an orange grove in Chiva, Valencia province, covering nine million square meters for 186.3 million euros in a deal financed by US investment firm Lehmann Brothers, which itself later went under sparking a global financial meltdown. Before construction began the land itself was valued at 300 million euros.

But things did not go as planned. Just a year later, a company that had started up as a small family business in 1988 and grew to sponsor Valencia CF and Charlton Athletic in England became the first large Spanish developer forced to seek protection from creditors with debts of 746 million euros. It was later followed by Martinsa Fadesa, Habitat and Sacresa.

Among the few that will survive are those that have rental income"

It eventually managed to emerge from receivership, paying 50 cents on the dollar on its debts. "It was the first big receivership case. You have to assess it on the basis of what the situation was like then," sources in the sector said. Even after emerging from receivership, Llanera was unable to meet the schedule for repaying its debts as the sector continued to languish.

The failure of fellow real estate company Reyal Urbis last year was taken as a warning by the sector that the banks were now willing to let developers go under, no matter how big.

The managing director of consultant Irea, Mikel Echavarren, believes that other companies will go down the same road. "The only ones that will survive are those that have rental income, those that have finished developments that can be sold for for more than the amount of their debt, and those that can count on the support of a bank," he says.

The sector booked losses of 3.224 billion euros last year and only managed to shave a quarter off its combined debt, which stood at 24 billion euros as of the end of 2012.

In addition to the problems of meeting the business plans imposed by their lenders in a languishing market, real estate firms face the added irony of having to compete with the banks themselves in selling off assets to meet debt repayment schedules. The seven biggest banking groups in Spain last year sold property assets worth 14.029 billion euros, compared with 384 million by the seven listed real estate firms.