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Does this large property developer collapse signal the start of a recession?

A large property developer called Ralan has gone into administration, could this signal the start of a recession?

The Australian Financial Review has reported that one of the country’s biggest private developers, Ralan Group, has gone into administration owing around $500 million to creditors including Westpac Banking Corp (ASX: WBC).

It had a building pipeline of 3,000 residential units in the construction or pre-sale stage. The AFR quoted one of the Grant Thornton administrators, Said Jahani, “At this stage we can reveal that the [Ralan] directors felt the company was in a stressed financial situation and decided that voluntary administration was the best path forward as the companies were either insolvent or likely to become insolvent.

“We are still conducting our initial investigation – however there are a range of small to large creditors. The total value of creditors is still to be confirmed but initial indications are around $500 million owed across the group.”

Obviously this is bad news for any creditors who aren’t going to get their money back, so Westpac may have just seen a painful bad debt materialise.

But it also seems there could be a lot of painful confusion for property buyers with developments which are yet to commence but have been pre-sold.

Ralan is the second major developer to go under in less than a month. One of the main problems is that buyers have seen the value of their off-the-plan apartments fall before they have been settled and then the bank isn’t willing to loan as much due to a lower valuation, so the buyer has to stump up more money or walk away.

Sadly, this type of thing could have a knock-on effect to other property developers who are now competing with businesses going through fire sales. Construction workers and banks like Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) could also be ones to be affected.

We’ve already seen Adelaide Brighton Ltd. (ASX: ABC) downgrade its earnings expectations, leading to a large share price fall. 

Foolish takeaway

This certainly doesn’t signal that a recession is starting. However, individually, it shows things are tough for property developers at the moment and collectively property developers going down could have larger implications for the rest of the economy.

It’s conditions like this which make me glad my portfolio is full of great ASX dividend shares like these for their defensive attributes.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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