How to Evaluate Refinanced Loans on Platforms?
The number of refinanced projects on crowdfunding real estate platforms has been increasing. While loan refinancing has always been a standard business practice, it's crucial to understand the reasons behind it in the context of crowdfunding. When completed properties are sold slower than expected, this can enhance the quality of collateral for investors. However, other reasons may bring associated risks.
According to Greta Zarembiene, the Head of Investor Relations at the crowdfunding platform "Röntgen", there are many myths surrounding loan refinancing. Some non-professional investors believe that refinancing inherently indicates a business's inability to meet its obligations, lack of competence, or other issues.
However, a refinancing project approved by a reputable platform usually indicates that the developer aims to settle with investors on time. Refinancing also shows that the project has successfully undergone a second round of platform scrutiny, offering new investors updated investment conditions that reflect current market realities and often securing more liquid assets with reduced construction risks as collateral.
"In general, phased lending and refinancing on platforms have always been standard due to the specific nature of this segment. Businesses typically seek longer loan terms. However, new-generation lending institutions, such as crowdfunding platforms, unite small and large investors with different interests, whose common denominator is shorter borrowing terms, usually around 6-18 months, to better manage risks and cash flow. It is more convenient for our investors to annually assess conditions, risks, and their goals and decide whether to extend the loan or use the funds elsewhere. This is particularly relevant in today's uncertain environment. Therefore, phases and refinancing on platforms create the desired long-term loan effect for developers, while providing investors with the freedom to decide and conditions that best align with market trends," G. Zarembiene comments.
It is also true that the recent need for refinancing has been driven by slower housing sales. This in itself is not necessarily a risk-increasing factor for investors, especially if the property is already completed. In such cases, investors are in a better position than the developer, as the pledged property could be sold at a larger discount. However, scenarios are also possible where a developer opts for refinancing to avoid paying penalties or, worse, due to serious construction disruptions, errors, or similar issues.
Thus, it is important for investors to choose a platform they trust – the platform operator has the best opportunity to constantly communicate with the developer throughout the loan term, understand the real reasons for the need for refinancing, and openly and transparently provide information to investors.
Higher-quality, unsold properties
Last year, as real estate sales slowed down, more completed but unsold properties due to decreased demand appeared on the market. According to G. Zarembiene, this reason for refinancing is objective and justified, often meaning a more attractive collateral for investors than during the early construction phase.
"A completed and high-quality property pledged to investors in an attractive location would simply be easier and quicker to realize on the market than the same property during construction. It should be remembered that platform investors still have a value reserve of 30-40%, which, if applied, would make the property even more liquid. With such a discount, the vast majority of properties would quickly find a buyer even in unfavorable market conditions. Refinancing such types of projects usually means even stronger collateral and is considered an advantage. Moreover, in the case of refinancing, the 'Röntgen' platform re-evaluates the existing and potential future risks, so investors receive the latest information, including the valuation of the pledged property, and conditions that best match the circumstances," says G. Zarembiene.
One of the latest examples of such a project is the "Santjago" holiday housing complex in Palanga, currently being refinanced by "Röntgen" in its sixth phase. In this project, 39% of the apartments have already been notarized as sold, with an 86% completion rate, with only final landscaping work on the plot remaining. The developer has also repaid more than 2 million EUR of loans from previous phases. However, the developer requires refinancing to extend the loan term: some phases are being repaid on time from housing sales, but others are being refinanced to allow more time for additional sales.
In this refinancing phase, "Röntgen" is raising 600,000 EUR for almost a year with an annual interest rate of 8-10%, pledging an almost completed property with a 40% value reserve for investors, as determined by the January 2023 "Ober Haus" valuation data.
This new loan is intended to refinance the 2022 previous phase, which borrowed 614,000 EUR with an annual interest rate of 6.5-10%, but at that time, the building was only in the stages of facade, roof, electrical, and plumbing work, and there was a high level of external uncertainty due to the start of the war. Moreover, the pledged property had a 31% value reserve at that time.
"Simply put, the first borrowing phases are for building construction, and the last phases are for sales. This always improves the quality of the collateral: instead of a property under construction, an almost completed asset is pledged. Of course, we always recommend investors analyze the property's valuation, similar projects, or the market situation themselves, but generally, a completed property in an attractive location will provide stronger protection than land or a property with just started construction. Especially if, in the event of failure, it is possible to apply a discount of several tens of percent when selling it," says G. Zarembiene.
Better understanding
According to G. Zarembiene, refinancing on the same platform also indicates that the platform operator knows the developer even better than during the first loan.
"This means we can now verify the project owner's ability to carry out the project according to plan, their communication, sales, and ability to address challenges. Our decision to refinance the loan shows that we have a positive view of the project owner's team and potential, which is a risk-reducing factor for investors," says G. Zarembiene.
Moreover, as the platform expands, more income-generating and pledged properties appear on it – business centers, industrial premises, rental apartments, or offices. The goal of the owners of these properties is not to develop and sell the pledged asset but to leverage it and use the funds for the expansion of other businesses.
"Such properties have been presented to investors for refinancing on our platform for several years now, usually with a 6-18 month term, as this meets the businesses' desire to borrow and the investors' desire to lend with quality collateral. So while the recent increase in refinanced loans is related to slower sales, refinancing has always been a common practice," states the "Röntgen" representative.
Other reasons
Although the "Röntgen" platform usually refinances completed, nearly completed, or already income-generating properties, other scenarios are possible in the market.
In recent years, real estate market participants have noted slower decisions regarding the issuance of construction permits. This could be one of the reasons for refinancing, which is typical for the earliest development stages. In such cases, the "Röntgen" team evaluates and recommends that investors pay attention to the developer's progress, experience, partners, and the arguments of institutions.
However, even riskier reasons for seeking refinancing are possible: developer mistakes, incompetence, problems with partners or institutions, and so on. According to G. Zarembiene, "Röntgen" analyzes all these circumstances, and if the project does not meet the platform's criteria, it is not refinanced. In such a case, penalties would start accumulating for the project developer until they find another solution to meet their obligations.
"Investors must always remain vigilant. However, we have very clear and strict internal tolerance limits, so the refinancing projects we offer will always be better developed, more valuable, and more liquid than in previous stages. So even if the market is currently slow, the main argument for trusting completed refinanced projects is the value reserve. In this case, refinancing is not a risk but a valuable investment opportunity," says G. Zarembiene.
How to Evaluate Refinanced Loans on Platforms?
The number of refinanced projects on crowdfunding real estate platforms has been increasing. While loan refinancing has always been a standard business practice, it's crucial to understand the reasons behind it in the context of crowdfunding. When completed properties are sold slower than expected, this can enhance the quality of collateral for investors. However, other reasons may bring associated risks.
According to Greta Zarembiene, the Head of Investor Relations at the crowdfunding platform "Röntgen", there are many myths surrounding loan refinancing. Some non-professional investors believe that refinancing inherently indicates a business's inability to meet its obligations, lack of competence, or other issues.
However, a refinancing project approved by a reputable platform usually indicates that the developer aims to settle with investors on time. Refinancing also shows that the project has successfully undergone a second round of platform scrutiny, offering new investors updated investment conditions that reflect current market realities and often securing more liquid assets with reduced construction risks as collateral.
"In general, phased lending and refinancing on platforms have always been standard due to the specific nature of this segment. Businesses typically seek longer loan terms. However, new-generation lending institutions, such as crowdfunding platforms, unite small and large investors with different interests, whose common denominator is shorter borrowing terms, usually around 6-18 months, to better manage risks and cash flow. It is more convenient for our investors to annually assess conditions, risks, and their goals and decide whether to extend the loan or use the funds elsewhere. This is particularly relevant in today's uncertain environment. Therefore, phases and refinancing on platforms create the desired long-term loan effect for developers, while providing investors with the freedom to decide and conditions that best align with market trends," G. Zarembiene comments.
It is also true that the recent need for refinancing has been driven by slower housing sales. This in itself is not necessarily a risk-increasing factor for investors, especially if the property is already completed. In such cases, investors are in a better position than the developer, as the pledged property could be sold at a larger discount. However, scenarios are also possible where a developer opts for refinancing to avoid paying penalties or, worse, due to serious construction disruptions, errors, or similar issues.
Thus, it is important for investors to choose a platform they trust – the platform operator has the best opportunity to constantly communicate with the developer throughout the loan term, understand the real reasons for the need for refinancing, and openly and transparently provide information to investors.
Higher-quality, unsold properties
Last year, as real estate sales slowed down, more completed but unsold properties due to decreased demand appeared on the market. According to G. Zarembiene, this reason for refinancing is objective and justified, often meaning a more attractive collateral for investors than during the early construction phase.
"A completed and high-quality property pledged to investors in an attractive location would simply be easier and quicker to realize on the market than the same property during construction. It should be remembered that platform investors still have a value reserve of 30-40%, which, if applied, would make the property even more liquid. With such a discount, the vast majority of properties would quickly find a buyer even in unfavorable market conditions. Refinancing such types of projects usually means even stronger collateral and is considered an advantage. Moreover, in the case of refinancing, the 'Röntgen' platform re-evaluates the existing and potential future risks, so investors receive the latest information, including the valuation of the pledged property, and conditions that best match the circumstances," says G. Zarembiene.
One of the latest examples of such a project is the "Santjago" holiday housing complex in Palanga, currently being refinanced by "Röntgen" in its sixth phase. In this project, 39% of the apartments have already been notarized as sold, with an 86% completion rate, with only final landscaping work on the plot remaining. The developer has also repaid more than 2 million EUR of loans from previous phases. However, the developer requires refinancing to extend the loan term: some phases are being repaid on time from housing sales, but others are being refinanced to allow more time for additional sales.
In this refinancing phase, "Röntgen" is raising 600,000 EUR for almost a year with an annual interest rate of 8-10%, pledging an almost completed property with a 40% value reserve for investors, as determined by the January 2023 "Ober Haus" valuation data.
This new loan is intended to refinance the 2022 previous phase, which borrowed 614,000 EUR with an annual interest rate of 6.5-10%, but at that time, the building was only in the stages of facade, roof, electrical, and plumbing work, and there was a high level of external uncertainty due to the start of the war. Moreover, the pledged property had a 31% value reserve at that time.
"Simply put, the first borrowing phases are for building construction, and the last phases are for sales. This always improves the quality of the collateral: instead of a property under construction, an almost completed asset is pledged. Of course, we always recommend investors analyze the property's valuation, similar projects, or the market situation themselves, but generally, a completed property in an attractive location will provide stronger protection than land or a property with just started construction. Especially if, in the event of failure, it is possible to apply a discount of several tens of percent when selling it," says G. Zarembiene.
Better understanding
According to G. Zarembiene, refinancing on the same platform also indicates that the platform operator knows the developer even better than during the first loan.
"This means we can now verify the project owner's ability to carry out the project according to plan, their communication, sales, and ability to address challenges. Our decision to refinance the loan shows that we have a positive view of the project owner's team and potential, which is a risk-reducing factor for investors," says G. Zarembiene.
Moreover, as the platform expands, more income-generating and pledged properties appear on it – business centers, industrial premises, rental apartments, or offices. The goal of the owners of these properties is not to develop and sell the pledged asset but to leverage it and use the funds for the expansion of other businesses.
"Such properties have been presented to investors for refinancing on our platform for several years now, usually with a 6-18 month term, as this meets the businesses' desire to borrow and the investors' desire to lend with quality collateral. So while the recent increase in refinanced loans is related to slower sales, refinancing has always been a common practice," states the "Röntgen" representative.
Other reasons
Although the "Röntgen" platform usually refinances completed, nearly completed, or already income-generating properties, other scenarios are possible in the market.
In recent years, real estate market participants have noted slower decisions regarding the issuance of construction permits. This could be one of the reasons for refinancing, which is typical for the earliest development stages. In such cases, the "Röntgen" team evaluates and recommends that investors pay attention to the developer's progress, experience, partners, and the arguments of institutions.
However, even riskier reasons for seeking refinancing are possible: developer mistakes, incompetence, problems with partners or institutions, and so on. According to G. Zarembiene, "Röntgen" analyzes all these circumstances, and if the project does not meet the platform's criteria, it is not refinanced. In such a case, penalties would start accumulating for the project developer until they find another solution to meet their obligations.
"Investors must always remain vigilant. However, we have very clear and strict internal tolerance limits, so the refinancing projects we offer will always be better developed, more valuable, and more liquid than in previous stages. So even if the market is currently slow, the main argument for trusting completed refinanced projects is the value reserve. In this case, refinancing is not a risk but a valuable investment opportunity," says G. Zarembiene.
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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.