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Assetsure News 21st September 2007
Credit
Crunch Impact on the Construction of Spanish Holiday Homes
The impact of the
American credit crisis is up continuing this week as
Llanera, the holiday home Property
developer was negotiating its survival with financial institutions
regarding its outstanding liabilities and debts of over 200 million
pounds. Llanera is based in the Spanish region of Valencia and has
built many
holiday home properties and
aggressively marketed them to
overseas property investors at great
expense. This comes at a time when the holiday home market in Valencia
is almost at a standstill due to the ongoing dispute regarding the 'land
grab' and the massive oversupply problem. A reflection of
the downturn in this area is the fact that many local realtors an
estate agents are downsizing or even going bankrupt. Properties lay
unoccupied at huge expense by developers across the region. Therefore,
any unexpected and sudden break in a property developers ability to
pay its suppliers in the short term, may have a devastating impact on its
future value. In addition, prospective customers already dented
confidence in the developers ability to complete and build 'off plan'
property is not helped.
The credit squeeze has affected Llanera's ability to raise liquidity and its
cash flow position, (similar to the predicament Northern Rock found
itself in just last week). The other major European Financial
institutions (such as the Alliance and Leicester and Bradford and Bingley), may also suffer similar fates to Northern Rock, as their
borrowing strategy has relied heavily have on long-term foreign credit
agreements. If panic sets in, broker rumours, twenty four hour media speculation and
customers ability to withdraw savings and sell shares online in
minutes, only
help to speed up the potential 'run' on an institution. The complex interrelationship and dependency between large and
small banks and Spanish property developers (that rely heavily on cash
flow to pay suppliers), means that a major ripple effect is currently
being felt throughout the chain. The European holiday home market has
relied heavily on long-term structural loans to finance ongoing
building program of
millions of new properties for investors buyers and speculators. The existing
oversupply of European housing stock, particularly in Spain, may now
have serious consequences as a result of this credit crunch...
This is particularly true of Spanish banks compared to UK Banks
because their own profits are so heavily reliant on mortgages and
loans provided to Spanish property developers. If smaller banks cannot readily raise liquidity on the international wholesale credit
markets, Spain could see itself plunged into a house price crash in
and even a recession. The Spanish stock market is clearly worried,
with the average share price of Spanish Banks falling by approximately
40 per cent since the spring.
Ironically much of the causes bad debt has been the result of lower
interest rates and
easy credit provided by banks themselves, to mortgage every day
homeowner lenders in America - this has been mirrored in most of
Western Europe including the UK and Spain. The restoration of trust
and confidence in the banking system over the next few weeks,
(particularly by
Central Banks and national regulatory
institutions) will affect how well industries and companies reliant on
debt (like Spanish holiday home developers), survive this current
credit crisis.
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Copyright Assetsure Limited 2007
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