How to Safely Endure a Recession and Protect Your Funds from Depreciation
A significant portion of Lithuanian residents' financial assets is directed towards stocks, which offer no return guarantees and have no collateral. Therefore, it's worth allocating a portion of your investments to safer, collateral-backed instruments. This is especially true given that some of these instruments currently offer returns comparable to long-term earnings from stocks.
According to data from the Bank of Lithuania (LB), at the end of 2022, Lithuanian residents held €66.5 billion in financial assets, with the largest portion allocated to unlisted shares (€24.6 billion). Investments in listed shares amounted to €1 billion, and an additional €421 million was invested in shares through investment funds. Out of the €5.8 billion currently accumulated in the pension system, 70% is also invested in shares. While this is a good investment, in uncertain times, investors – especially small ones – seek safer investments with some form of protection. It's important to diversify your portfolio between risky and less risky investments that have protection mechanisms. Investments in stocks do not guarantee returns, and there is a risk of their value declining.
Government and Corporate Bonds
One of the less risky instruments is bonds or debt securities. According to LB data, at the end of 2022, Lithuanian households had invested €0.5 billion in debt securities. Both governments and companies issue bonds. Investor Algimantas Variakojis emphasizes that when investing in government bonds, it's important to pay attention to their rating, which indicates the bond's reliability. For example, the highest-rated bonds by the "S&P Global Ratings" agency receive a AAA rating. Currently, Lithuania has a long-term A+ rating from "S&P Global Ratings" (with a negative outlook), and bonds become speculative with a rating below B.
Sometimes, even governments default on their debts, as was the case with Russia in 1998, Argentina in 2001, and Iceland in 2008. "S&P Global Ratings" downgraded Iceland's rating from A- to BBB within a month. According to A. Variakojis, if a government defaults, creditors can target the state's assets abroad, such as real estate, accounts, or gold.
Sometimes, bonds issued by weaker states are guaranteed by the International Monetary Fund or another international organization, reducing the bond's risk and interest rate. State bankruptcies are rare; for example, Greece, Italy, and Portugal avoided bankruptcy in 2009 because they were part of the Eurozone.
Corporate bond ratings cannot exceed the government borrowing rating. Corporate bonds may be secured with collateral or unsecured.
"If the project is risky and there is no collateral, convertible bonds may be issued. If the business fails, the debt securities can be converted into company shares," comments A. Variakojis. Information on guarantees provided to lenders can be found in bond prospectuses. According to A. Variakojis, smaller companies in Lithuania currently borrow at 10–15% interest rates, while larger ones pay 5–8% annual interest.
Real Estate Rentals and Deposits
Currently, deposit interest rates at financial institutions have risen to 3.75%. Deposits up to €100,000 are insured by the state. This means that deposits in Lithuania are subject to the country's A+ rating. If the amount exceeds €100,000, it can be divided into several deposits to ensure they are insured. At the end of 2022, households held €21.7 billion in deposits, although their interest rates do not exceed inflation.
When investing in real estate rentals independently, the property itself becomes the collateral. According to "Inreal" group data, rental returns in Vilnius in the first quarter of 2023 ranged from 4% (for a 2-room apartment in buildings constructed before 1940 in the Old Town) to 6.5% (for a 1-room apartment in a residential district). These returns do not include income from value appreciation.
"The safer the investment, the lower the return. This principle is also reflected in real estate investments," notes Tomas Sovijus Kvainickas, Head of Investments and Analysis at "Inreal" group. "Larger properties in Vilnius' Old Town retain their value better, but their rental returns are lower. Older (Soviet-era) properties have higher returns, but their value fluctuation and liquidity risks are greater."
When investing in real estate, it's important to consider the worst-case scenario, such as purchasing property at the peak of the price curve (e.g., in the first half of 2008) and then seeing its value decline. According to the Head of Investments and Analysis at "Inreal" group, in a normal economic environment, one can expect property values in Lithuania to grow along with inflation or even slightly faster, if favorable demographic trends persist.
Investing Through Funds
When investing through funds, the risk and protection measures depend on the fund's investment directions. Lithuanian households had invested €1.2 billion in funds at the end of 2022 (excluding pension funds). According to A. Variakojis, funds typically diversify their and the investor's risk by investing in multiple assets according to their internal rules.
"When choosing funds, it's worth noting whether they are closed-end funds, which you can only exit after a set period, or whether you can withdraw your money at any time," advises the investor.
Crowdfunding
According to LB data, as of December 31, 2022, there were 11 active crowdfunding platforms, through which 2,718 projects were financed in 2022 – an 80% increase from 2021, with the financed amount growing from €114 million to €161 million. Greta Zarembiene, Head of Investor Relations at the "Röntgen" real estate crowdfunding platform, notes that real estate crowdfunding, unlike some other popular investment instruments, has a clear protection mechanism – the primary collateral, which is real estate worth 30–40% more than the loan, pledged for the benefit of investors.
In the event of insolvency, creditors acquire the right to liquidate the pledged asset, whether it's a developed or under-development project, land, or other real estate. Currently, the returns offered on the "Röntgen" platform range from 7–11%, comparable to long-term returns from stocks, which have no guarantees.
"Although there can be challenges in liquidating the asset in the current economic environment, a significant value reserve, given proper asset valuation, creates conditions to sell the pledged object even at an attractive discount, with the proceeds still sufficient to repay the loan and pay interest with penalties," explains G. Zarembiene. In certain cases, additional protection measures such as guarantees, company share pledges, etc. are offered when investing through "Röntgen".
"The possibility of losing funds in collateral-backed real estate crowdfunding is more hypothetical. The real risk in real estate crowdfunding is loan delays or partial loss of funds, but these cases are very rare and are usually the result of improper project evaluation," notes G. Zarembiene.
According to her, due to the rise in EURIBOR, platforms have become highly competitive compared to banks, funds, or other credit institutions. This allows platforms to attract increasingly high-quality projects and larger developers. Today, crowdfunding is already regarded as a capable, mature, and predictable financing alternative, enabling businesses to borrow efficiently, while investors, with solid protection measures, can participate in real estate projects previously accessible only to a narrow circle of professionals.
Additional Safeguards
Even before the current market turmoil, the project selection practices applied by "Röntgen" ensured that the platform is one of the few crowdfunding operators with no delayed projects. However, new circumstances have created the need for additional safeguards when evaluating real estate projects offered to investors: both for new constructions and refinancing cases.
"We are now more closely examining factors such as the developer's experience, business plan, cash flows, project location, asset liquidity and market demand, collateral value, pre-sales, and the risks of construction costs and sale prices," emphasizes G. Zarembiene.
Although the market may appear slower at first glance, there are very attractive investment opportunities, according to G. Zarembiene. Such opportunities include projects in the final stages of construction or already completed, which incurred most costs before the recent inflation and raw material crises. Unique projects aimed at crisis-resistant buyers in the premium segment are also interesting during such times. Interest in luxury real estate objects is usually stable, with market fluctuations having little impact.
"The markets are expecting a reduction in base interest rates as early as next year, so a real estate project with a few years' perspective developed by an experienced developer can also be a sustainable investment," G. Zarembiene notes.
Activity Remains High
There is currently high activity on platforms – investors are eager to protect their funds from inflation. For example, on the Rontgen platform, investors raised €7 million for real estate project financing in just May, a figure the platform used to achieve in six months.
"One of the reasons for the high activity is the opportunity to invest in projects with solid collateral and secure a stable fixed return. Simply put, collateralized assets on platforms can be sold at a significant discount in case of failure, and the proceeds would still be sufficient to cover all obligations. Property in a desirable location would definitely find a buyer even in a slower market," notes the Head of Investor Relations.
Private lending may offer slightly higher returns than crowdfunding. In this case, the investor must independently assess the existing collateral and all risks, including the fact that private individuals may be more vulnerable than businesses during a recession.
The Balance Between Security and Return
"Real estate crowdfunding offers an attractive risk-return ratio. However, even in this case, investors should familiarize themselves with project information, the practices, and results of the platform's administrative company, and also remember to diversify their portfolio," concludes G. Zarembiene.
It is also worth paying attention to the platform through which you invest. It should be a reliable investment partner, ensuring both quality project selection and efficient loan administration. The platform should also ensure that the information provided is as complete as possible so that investors have sufficient data to make confident decisions.
How to Safely Endure a Recession and Protect Your Funds from Depreciation
A significant portion of Lithuanian residents' financial assets is directed towards stocks, which offer no return guarantees and have no collateral. Therefore, it's worth allocating a portion of your investments to safer, collateral-backed instruments. This is especially true given that some of these instruments currently offer returns comparable to long-term earnings from stocks.
According to data from the Bank of Lithuania (LB), at the end of 2022, Lithuanian residents held €66.5 billion in financial assets, with the largest portion allocated to unlisted shares (€24.6 billion). Investments in listed shares amounted to €1 billion, and an additional €421 million was invested in shares through investment funds. Out of the €5.8 billion currently accumulated in the pension system, 70% is also invested in shares. While this is a good investment, in uncertain times, investors – especially small ones – seek safer investments with some form of protection. It's important to diversify your portfolio between risky and less risky investments that have protection mechanisms. Investments in stocks do not guarantee returns, and there is a risk of their value declining.
Government and Corporate Bonds
One of the less risky instruments is bonds or debt securities. According to LB data, at the end of 2022, Lithuanian households had invested €0.5 billion in debt securities. Both governments and companies issue bonds. Investor Algimantas Variakojis emphasizes that when investing in government bonds, it's important to pay attention to their rating, which indicates the bond's reliability. For example, the highest-rated bonds by the "S&P Global Ratings" agency receive a AAA rating. Currently, Lithuania has a long-term A+ rating from "S&P Global Ratings" (with a negative outlook), and bonds become speculative with a rating below B.
Sometimes, even governments default on their debts, as was the case with Russia in 1998, Argentina in 2001, and Iceland in 2008. "S&P Global Ratings" downgraded Iceland's rating from A- to BBB within a month. According to A. Variakojis, if a government defaults, creditors can target the state's assets abroad, such as real estate, accounts, or gold.
Sometimes, bonds issued by weaker states are guaranteed by the International Monetary Fund or another international organization, reducing the bond's risk and interest rate. State bankruptcies are rare; for example, Greece, Italy, and Portugal avoided bankruptcy in 2009 because they were part of the Eurozone.
Corporate bond ratings cannot exceed the government borrowing rating. Corporate bonds may be secured with collateral or unsecured.
"If the project is risky and there is no collateral, convertible bonds may be issued. If the business fails, the debt securities can be converted into company shares," comments A. Variakojis. Information on guarantees provided to lenders can be found in bond prospectuses. According to A. Variakojis, smaller companies in Lithuania currently borrow at 10–15% interest rates, while larger ones pay 5–8% annual interest.
Real Estate Rentals and Deposits
Currently, deposit interest rates at financial institutions have risen to 3.75%. Deposits up to €100,000 are insured by the state. This means that deposits in Lithuania are subject to the country's A+ rating. If the amount exceeds €100,000, it can be divided into several deposits to ensure they are insured. At the end of 2022, households held €21.7 billion in deposits, although their interest rates do not exceed inflation.
When investing in real estate rentals independently, the property itself becomes the collateral. According to "Inreal" group data, rental returns in Vilnius in the first quarter of 2023 ranged from 4% (for a 2-room apartment in buildings constructed before 1940 in the Old Town) to 6.5% (for a 1-room apartment in a residential district). These returns do not include income from value appreciation.
"The safer the investment, the lower the return. This principle is also reflected in real estate investments," notes Tomas Sovijus Kvainickas, Head of Investments and Analysis at "Inreal" group. "Larger properties in Vilnius' Old Town retain their value better, but their rental returns are lower. Older (Soviet-era) properties have higher returns, but their value fluctuation and liquidity risks are greater."
When investing in real estate, it's important to consider the worst-case scenario, such as purchasing property at the peak of the price curve (e.g., in the first half of 2008) and then seeing its value decline. According to the Head of Investments and Analysis at "Inreal" group, in a normal economic environment, one can expect property values in Lithuania to grow along with inflation or even slightly faster, if favorable demographic trends persist.
Investing Through Funds
When investing through funds, the risk and protection measures depend on the fund's investment directions. Lithuanian households had invested €1.2 billion in funds at the end of 2022 (excluding pension funds). According to A. Variakojis, funds typically diversify their and the investor's risk by investing in multiple assets according to their internal rules.
"When choosing funds, it's worth noting whether they are closed-end funds, which you can only exit after a set period, or whether you can withdraw your money at any time," advises the investor.
Crowdfunding
According to LB data, as of December 31, 2022, there were 11 active crowdfunding platforms, through which 2,718 projects were financed in 2022 – an 80% increase from 2021, with the financed amount growing from €114 million to €161 million. Greta Zarembiene, Head of Investor Relations at the "Röntgen" real estate crowdfunding platform, notes that real estate crowdfunding, unlike some other popular investment instruments, has a clear protection mechanism – the primary collateral, which is real estate worth 30–40% more than the loan, pledged for the benefit of investors.
In the event of insolvency, creditors acquire the right to liquidate the pledged asset, whether it's a developed or under-development project, land, or other real estate. Currently, the returns offered on the "Röntgen" platform range from 7–11%, comparable to long-term returns from stocks, which have no guarantees.
"Although there can be challenges in liquidating the asset in the current economic environment, a significant value reserve, given proper asset valuation, creates conditions to sell the pledged object even at an attractive discount, with the proceeds still sufficient to repay the loan and pay interest with penalties," explains G. Zarembiene. In certain cases, additional protection measures such as guarantees, company share pledges, etc. are offered when investing through "Röntgen".
"The possibility of losing funds in collateral-backed real estate crowdfunding is more hypothetical. The real risk in real estate crowdfunding is loan delays or partial loss of funds, but these cases are very rare and are usually the result of improper project evaluation," notes G. Zarembiene.
According to her, due to the rise in EURIBOR, platforms have become highly competitive compared to banks, funds, or other credit institutions. This allows platforms to attract increasingly high-quality projects and larger developers. Today, crowdfunding is already regarded as a capable, mature, and predictable financing alternative, enabling businesses to borrow efficiently, while investors, with solid protection measures, can participate in real estate projects previously accessible only to a narrow circle of professionals.
Additional Safeguards
Even before the current market turmoil, the project selection practices applied by "Röntgen" ensured that the platform is one of the few crowdfunding operators with no delayed projects. However, new circumstances have created the need for additional safeguards when evaluating real estate projects offered to investors: both for new constructions and refinancing cases.
"We are now more closely examining factors such as the developer's experience, business plan, cash flows, project location, asset liquidity and market demand, collateral value, pre-sales, and the risks of construction costs and sale prices," emphasizes G. Zarembiene.
Although the market may appear slower at first glance, there are very attractive investment opportunities, according to G. Zarembiene. Such opportunities include projects in the final stages of construction or already completed, which incurred most costs before the recent inflation and raw material crises. Unique projects aimed at crisis-resistant buyers in the premium segment are also interesting during such times. Interest in luxury real estate objects is usually stable, with market fluctuations having little impact.
"The markets are expecting a reduction in base interest rates as early as next year, so a real estate project with a few years' perspective developed by an experienced developer can also be a sustainable investment," G. Zarembiene notes.
Activity Remains High
There is currently high activity on platforms – investors are eager to protect their funds from inflation. For example, on the Rontgen platform, investors raised €7 million for real estate project financing in just May, a figure the platform used to achieve in six months.
"One of the reasons for the high activity is the opportunity to invest in projects with solid collateral and secure a stable fixed return. Simply put, collateralized assets on platforms can be sold at a significant discount in case of failure, and the proceeds would still be sufficient to cover all obligations. Property in a desirable location would definitely find a buyer even in a slower market," notes the Head of Investor Relations.
Private lending may offer slightly higher returns than crowdfunding. In this case, the investor must independently assess the existing collateral and all risks, including the fact that private individuals may be more vulnerable than businesses during a recession.
The Balance Between Security and Return
"Real estate crowdfunding offers an attractive risk-return ratio. However, even in this case, investors should familiarize themselves with project information, the practices, and results of the platform's administrative company, and also remember to diversify their portfolio," concludes G. Zarembiene.
It is also worth paying attention to the platform through which you invest. It should be a reliable investment partner, ensuring both quality project selection and efficient loan administration. The platform should also ensure that the information provided is as complete as possible so that investors have sufficient data to make confident decisions.
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UAB Trečia diena, valdanti platformą Röntgen, yra licencijuota sutelktinio finansavimo platforma. Platformos veiklą reglamentuoja ES Sutelktinio finansavimo reglamentas, o veiklos priežiūrą įstatymų numatyta tvarka vykdo Lietuvos bankas.