Lawyers lick lips as developer “washout” arrives

As we know, developer Ralan has collapsed, via The Australian:

The collapse of the prolific east coast suburban apartment developer Ralan Group, headed by British-born William O’Dwyer, owing creditors at least half a billion dollars has highlighted the fragile state of the high-rise property market.

…The private Ralan Group specialised in high rise developments with a workbook of more than 3000 suburban apartments, but problems in the sector are widespread with Melbourne-based Stellar Group also put in receivership last month.

…Finance house Wingate told investors it had “a number of open debt positions” with Ralan but its position was secured by charges and mortgages over real property.

So, shadow banking losses are about to lift spreads for other developers and the crash get worse as it shakes out other over-leveraged players.

And there is another problem, last week at the AFR:

Hundreds of buyers who bought apartments off-the-plan from failed developer Ralan could lose deposits of as much as $70,000 or more, after they were used by the collapsed group to pay expenses, including interest on unsecured loans.

Joint Ralan administrator Said Jahani from Grant Thornton said the “majority” of purchasers of apartments in Ralan’s $2 billion Ruby and Sapphire projects on the Gold Coast and Sydney’s The Orchid in Arncliffe had entered into “side agreements” with two Ralan subsidiaries (controlled by founder William O’Dwyer) where their deposits were released “either in full or mostly in full” as unsecured loans to the developer.

“At this initial stage, we believe that the majority, if not all, of the deposits released to RCI [Ralan Capital Investments] have been used to fund the expenses of the group including payment of interest on unsecured loans,” said Mr Jahani.

Depositors rank below a Westpac secured loan and the Wingate unsecured loan. As this news filters out into the market what idiot is going to buy off the plan henceforth? This is a doom loop.

Now, lawyers are licking their lips at the rich pickings of failure as a”washout” of leveraged developers transpires, according to Baker McKenzie, also at the AFR:

…”Why? Because a lot of them are holding residual or unsold apartment stock, which impacts on cash flows and their ability to repay debt and press on with other new projects,” he said.

“Auditors will be saying to these developers: you have to revalue this residual stock right down, leaving their balance sheets a smouldering mess…Some developers may then find they are in breach of financial covenants, pushing them into a stress or distress quickly.”

…”Builders don’t get paid and are the first to go broke. They owe money to all their subcontractors and so the distress spreads,” Mr Walter said.

Given the size of the boom, the crushed margins owing to astronomical land prices, the exposure to offshore loose hands, and the integral role played by greedy but inexperienced shadow banks, it is fair to say that the “washout” is going to resemble a tsunami.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Did you know the MB International Shares Fund has returned an average of 17.1% per annum and the Tactical Growth Fund an average of 10.4%? Register below to learn more:

Latest posts by Houses and Holes (see all)

Comments are hidden for Membership Subscribers only.