Natalja Kozikiene, Head of Röntgen Platform Finance
Crowdfunding platforms are becoming one of the most popular investment instruments in Lithuania. Last year alone, this market reached EUR 230 million, as secured investments are becoming more and more attractive for the population. However, before making investment decisions, it is important not only to choose the right investment partner - the platform - but also to know how to assess the riskiness of the investment yourself.
Investing in Lithuania is rapidly growing in popularity, but we often observe an unreasonable excitement among some investors to seek the "highest interest rates on the market". In the investment world, higher interest rates usually mean higher risk. Ignoring this rule can turn irresponsible decisions into losses, which is why "homework" is important for every investor.
When deciding on the suitability of a real estate project for the platform, I offer those interested in crowdfunding, or already invested, a simple "primer" that allows them to assess the most important information about an investment project.
Quick analysis
The most important task is to look at the assets pledged as collateral for the investment. And more importantly, whether the value of those assets will be sufficient to cover liabilities quickly in the event of a failure.
The market often uses the term LTV (loan-to-value), i.e. the ratio of the loan to the value of the collateral. It is usually expressed as a percentage, i.e. "70% LTV" means that, for example, an asset worth EUR 100 000 is pledged against a loan of EUR 70 000.
In even simpler terms, a 70% LTV means that if the mortgaged property is sold at a 30% discount, the proceeds will be sufficient to repay the entire loan.
By the way, I did not choose the 70% figure by chance: "The Röntgen platform automatically rejects any higher value, and I would advise inexperienced investors not to invest anywhere with an LTV above 70%.
For simplicity, we would suggest that investors look not (only) at LTV, but at an even lower indicator - the loan per usable square metre of the mortgaged property. Some platforms report this indicator separately, and it is relatively easy to calculate it elsewhere.
It is then easy to ask the question: if the square footage of collateral EUR 3 000 per square metre of the mortgaged property and the loan is EUR 2,1 000 per square metre, would the property be sold quickly at this discount? And is the value of the mortgaged property and the developer's projected sale price realistic at all?
These questions can be easily answered by looking at similar properties for sale and their prices on the classifieds portals, and will not take much time. By focusing separately on the interest rates offered by the investment project, the investment term and the risk rating (or at least the rating) published by the platform itself, the "quick" analysis of the project will already be quite solid.
With more time to decide
If you are in a hurry to make an investment decision, it is worth paying extra attention to other aspects of the investment project.
Project attractiveness. It is important to understand where the mortgaged apartments will be built, what segment they are intended for and what makes them stand out in the market. No part of the city or type of housing is inherently good or bad - it is important that the project meets the needs of the market. For example, expensive housing in an underdeveloped area is likely to be harder to sell, while mid-range apartments in a growing area may be in high demand. Success depends on the ability to adapt the project to, or even surpass, the market context.
Developer's equity. I personally pay close attention to, and recommend that investors consider, the proportion of the developer's own funds invested in the property project. I would aim for at least 25% of the total project - this signals not only a strong commitment from the developer, but also a willingness not to run away from challenges should they arise. Simply put, the more of the developer's own money (as opposed to borrowed money) that is invested, the greater the developer's interest in the success of the project.
Developer experience. The experience of the developer is also important for the analysis of projects: the competence of the team, the reputation of the company, the reputation of the company, the portfolio of projects that have been successfully developed in the past, and the successful repayment of previous loans. Of course, inexperienced market players signal higher potential risks. In turn, well-regarded and experienced developers will not only have more experience or contacts, but will also, for example, be more likely to be able to finance their projects from other sources.
Project stage. It is important at what stage of the project the borrowing is being used: whether for the purchase of land, for the start or completion of construction, or for the refinancing of a completed project. Early-stage projects carry more risks and therefore tend to offer higher interest rates to investors. Each investor needs to assess the appropriate risk/return ratio for himself.
The myth of loan rollovers. Loan rollovers are a common practice that should not be feared. The important thing is that the collateral has a sufficient margin of value to protect investors' interests.
In practice, it looks like this: the construction and sale of a real estate project usually takes about 24 months and the loan is granted for a 12-month term. After this time, and once construction risks have been eliminated, the loan is extended for the sales period. A shorter investment term means that investors can recover their investment more quickly or opt for a loan extension. Shorter maturities and flexibility make the loan more attractive.
Invest, but take your time
One of the most important criteria when making investment decisions is to trust the platform that does the initial selection work for you. However, personal investor analysis not only gives you a better understanding of the risks, but also allows you to maximise the potential of your investment - for example, by choosing the most appropriate project in terms of risk-return ratio, or by reacting more quickly to changes in market conditions. The more an investor knows, the more opportunities he or she has to make profitable and confident decisions.