A line investors should not cross
Natalja Kozikiene, Head of Röntgen Platform Finance
Collateralised investing is rapidly gaining popularity in Lithuania. This in itself is welcome - in the event of a problem, the collateral would be sold for the benefit of the investors, which is likely to help avoid losses. However, with the proliferation of investment offers, responsible investors should familiarise themselves with the time-tested and conservative threshold of 70% of the value of the collateral, which should not be crossed.
Secured investing or lending has been around the world for centuries and new technologies have brought this principle to retail investors. For example, on Lithuanian crowdfunding platforms, individuals lend around EUR 300 million a year to businesses, with higher-value assets pledged to investors. This creates greater security - if the loan runs into problems, the collateral is liquidated or otherwise sold, and the money is used to cover the obligations to investors.
The popularity of this investment instrument has led many investors to become familiar with the term LTV - loan-to-value. For example, if a property developer borrowing on the platform pledges EUR 100,000 and borrows EUR 70,000, the LTV would be 70%. This means that, in theory, if the project were to run into difficulties, the value of the pledged assets should be sufficient to cover the liabilities even with a 30% discount.
The LTV can be compared to the initial down payment of a mortgage loan. In Lithuania, banks currently require at least a 15% down payment for a first mortgage and 30% for a second or subsequent mortgage contract. From the bank's perspective, a down payment of 15% or 30% translates into an LTV of 85% or 70% respectively. Banks apply 15% for first homes, realising that the risk of default is the lowest, but for second and third homes, the down payment requirements are already higher due to the higher risks involved.
Coming back to investing, there are now more offers on the market for investors to invest in loans with LTVs of 85%, 90% or even 95%. This means that the amount borrowed by the developer from investors is only 15%, 10% or 5% lower than the value of the collateral. This risk is usually priced at a slightly higher interest rate, which attracts less sophisticated investors in the first place. They often started investing several years ago when interest rates were at their peak. Today, however, the market is in a different phase, with Euribor having fallen sharply and private debt significantly cheaper. Double-digit interest rates can therefore stand out from the market context and represent a much higher risk today than a year or two ago.
It is in this context that investors who do not tolerate higher risks should familiarise themselves with the 70% LTV limit, which is considered a responsible standard and which I do not recommend going beyond.
This threshold is important primarily because the sale of collateral has a price and often flirts with the 20%-30% threshold of collateral value. Even in a rising market, the sale of collateral entails significant administrative costs - fees for lawyers, bailiffs, notaries, brokers, new valuations, etc. Also, if the asset is disposed of through a public auction, the law requires 80% of the asset's value to be set as the starting price at the first auction, which theoretically dissolves two-thirds of the optimal LTV reserve.
Of course, not all of this is based on recovery costs alone. It is easier to sell collateral when the real estate market is growing and the value of the property is increasing day by day, and then even with a higher LTV the collateral can cover the amount of money brought in by investors. However, to invest conservatively, it is also necessary to take into account that the market may fluctuate or slow down and that liquidity may decrease significantly. Regardless of the phase of the property market cycle, not all property will take the same time to sell - a small apartment in the centre of Vilnius or Kaunas will always find a buyer more easily than warehouses on the Lithuanian border.
In a free market there will always be different offers and this is welcome - there must be products for different risk appetites.
However, it is important to remember that the smaller the security cushion, the greater the likelihood of loss. Therefore, for those who are less experienced or who want to grow their capital with less risk, I would recommend not to chase high returns (and higher risks) and to stay within the 70% LTV limit.
A line investors should not cross
Natalja Kozikiene, Head of Röntgen Platform Finance
Collateralised investing is rapidly gaining popularity in Lithuania. This in itself is welcome - in the event of a problem, the collateral would be sold for the benefit of the investors, which is likely to help avoid losses. However, with the proliferation of investment offers, responsible investors should familiarise themselves with the time-tested and conservative threshold of 70% of the value of the collateral, which should not be crossed.
Secured investing or lending has been around the world for centuries and new technologies have brought this principle to retail investors. For example, on Lithuanian crowdfunding platforms, individuals lend around EUR 300 million a year to businesses, with higher-value assets pledged to investors. This creates greater security - if the loan runs into problems, the collateral is liquidated or otherwise sold, and the money is used to cover the obligations to investors.
The popularity of this investment instrument has led many investors to become familiar with the term LTV - loan-to-value. For example, if a property developer borrowing on the platform pledges EUR 100,000 and borrows EUR 70,000, the LTV would be 70%. This means that, in theory, if the project were to run into difficulties, the value of the pledged assets should be sufficient to cover the liabilities even with a 30% discount.
The LTV can be compared to the initial down payment of a mortgage loan. In Lithuania, banks currently require at least a 15% down payment for a first mortgage and 30% for a second or subsequent mortgage contract. From the bank's perspective, a down payment of 15% or 30% translates into an LTV of 85% or 70% respectively. Banks apply 15% for first homes, realising that the risk of default is the lowest, but for second and third homes, the down payment requirements are already higher due to the higher risks involved.
Coming back to investing, there are now more offers on the market for investors to invest in loans with LTVs of 85%, 90% or even 95%. This means that the amount borrowed by the developer from investors is only 15%, 10% or 5% lower than the value of the collateral. This risk is usually priced at a slightly higher interest rate, which attracts less sophisticated investors in the first place. They often started investing several years ago when interest rates were at their peak. Today, however, the market is in a different phase, with Euribor having fallen sharply and private debt significantly cheaper. Double-digit interest rates can therefore stand out from the market context and represent a much higher risk today than a year or two ago.
It is in this context that investors who do not tolerate higher risks should familiarise themselves with the 70% LTV limit, which is considered a responsible standard and which I do not recommend going beyond.
This threshold is important primarily because the sale of collateral has a price and often flirts with the 20%-30% threshold of collateral value. Even in a rising market, the sale of collateral entails significant administrative costs - fees for lawyers, bailiffs, notaries, brokers, new valuations, etc. Also, if the asset is disposed of through a public auction, the law requires 80% of the asset's value to be set as the starting price at the first auction, which theoretically dissolves two-thirds of the optimal LTV reserve.
Of course, not all of this is based on recovery costs alone. It is easier to sell collateral when the real estate market is growing and the value of the property is increasing day by day, and then even with a higher LTV the collateral can cover the amount of money brought in by investors. However, to invest conservatively, it is also necessary to take into account that the market may fluctuate or slow down and that liquidity may decrease significantly. Regardless of the phase of the property market cycle, not all property will take the same time to sell - a small apartment in the centre of Vilnius or Kaunas will always find a buyer more easily than warehouses on the Lithuanian border.
In a free market there will always be different offers and this is welcome - there must be products for different risk appetites.
However, it is important to remember that the smaller the security cushion, the greater the likelihood of loss. Therefore, for those who are less experienced or who want to grow their capital with less risk, I would recommend not to chase high returns (and higher risks) and to stay within the 70% LTV limit.
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"Trečia diena" UAB, which operates the Röntgen platform, is a licensed crowdfunding platform. The platform is governed by the EU Crowdfunding Regulation and is supervised by the Bank of Lithuania in accordance with the law.