Why Are Delinquent Loans Increasing on Platforms?
Since the second half of last year, the number of delayed loans in Lithuanian real estate crowdfunding platforms has started to increase. Although the "Röntgen" platform has not encountered such loans so far, the company highlights different causes of this phenomenon and the prevention methods it employs.
According to Martynas Stankevicius, CEO of "Röntgen", when evaluating delays, it is important to distinguish between two scenarios: slower sales of already developed properties and overly aggressively financed projects that are still under construction. In the first case, a slowed market may lead to the need for loan refinancing, while the second scenario could imply more serious problems.
"The first type of projects is common not only to platforms but also to banks, credit unions, or funds. Liquidity in the market has decreased due to the economic situation: we are seeing fewer housing transactions and down payments. But if such a project is responsibly financed, completed, or nearing completion, it will simply be refinanced to settle with the first creditors by offering new lenders attractive property with a value reserve. Such cases have increased on the 'Röntgen' platform as well, but this is a normal business practice at all times," explains M. Stankevi?ius.
A more complicated scenario, he says, occurs when a project under development was financed without properly assessing whether the loan amount would be sufficient to complete the project in changing market conditions. Such projects are typically unfinished, have no value reserve for obtaining a new loan, and may no longer have funds to complete construction. An additional risk factor in such cases is large down payments, which reduce the developer's ability to secure new cash flows during difficult times.
"Such projects, which were financed too opportunistically, can already be seen in the Lithuanian market. Simply put, they no longer have the money to complete the construction, and they are not suitable for either sale or refinancing. It is likely that even in such a case, investors will eventually be able to recover at least the majority of their money, but they may have to accept a partial write-down of the value and, of course, a waiting period," says M. Stankevicius.
However, he notes that most of the overly aggressively financed projects in Lithuania have already come to light, so their number is unlikely to increase significantly in the future.
How does "Röntgen" avoid this?
Despite the challenges in the market, the "Röntgen" platform remains one of the few in the market without delayed loans. According to "Röntgen" Head of Financing Natalja Kozikiene, the platform has adopted a more conservative credit and risk management strategy from the very beginning of its operations. Its value to investors becomes particularly evident during difficult market conditions.
N. Kozikiene explains that the standard risk assessment at "Röntgen" includes criteria such as the developer's experience, the location of the pledged property, loan duration, project profitability, loan-to-value ratio, market trends, market forecasts for the project implementation period, and more. The platform also considers the developer's business plan details, communication professionalism, team reputation, professional competencies in various fields, and other experiences in real estate sales, design, law, and other areas that may be useful in implementing real estate projects. The "Röntgen" team also assesses project profitability, liquidity, construction cost increases, payback risks, conducts so-called "stress" tests, and analyzes cash flow sensitivity and other risks.
"Without context, all these criteria are just a list of terms. Even when evaluating the developer's experience, one can consider the number of completed projects or years in business, but we also analyze the complexity of the projects. For example, a developer's experience is demonstrated by situations such as the ability to change a detailed plan, redesign a plot mass, and thus achieve better liquidity indicators, high-rise or multi-story construction, implementing reconstruction or conversion projects, and vision. The more challenging the real estate business 'school' the developer has gone through, the greater their partner or valuable experience portfolio. The reputation criterion is inevitably subjective, especially since no one in this complex business is immune to surprises. Our team analyzes the developer's business practices and relationships with partners from this perspective. We want to understand how each developer has historically dealt with challenges," says N. Kozikiene.
When discussing the loan duration criterion, she also points to a myriad of variables. For example, platforms generally prefer shorter loans due to the lower interest burden on the developer, but in central parts of Vilnius, where the process of issuing construction permits has slowed, a longer loan duration in a project that already has a building permit is unlikely to be a negative factor. Accordingly, high projected or actual project profitability can be both a positive and a negative factor when providing financing: projects built before the recent raw materials crisis usually have a significant profitability reserve and are highly attractive for financing, but now projects that start as "paper" with high profitability may prove to be overly optimistic in practice.
One of the criteria most relevant to investors is LTV (loan-to-value) or the ratio of the property's value to the loan amount. According to N. Kozikiene, "Röntgen" avoids overly "leveraged" properties because a lower loan-to-value ratio leaves room for maneuver, allowing for protection against rising construction and financial costs or the impact of declining property sale prices. Additionally, conservatively pledged property allows the developer to more easily realize the housing in a slowed market and refinance the loan, rather than quickly and cheaply selling the properties if the lender does not agree to extend the loan term.
"We also carefully assess the developer's financial motivation or the share of own funds. If the developer has invested a significant, 10-30% share of their own funds in the project, then they will make every effort to complete the construction and sales. When market conditions change, and sales prices fluctuate, such a developer will make considered and logical decisions regarding the sale of the property, ensuring not only loan repayment but also profit and the return of their own funds since lenders are first in the credit line. However, a financially unmotivated developer may decide that if the sales revenue is only enough to cover the loan, there is little reason to continue, and they may withdraw from the project, even taking part of the collected advances with them," reveals N. Kozikiene.
She also points out that obvious risk-increasing factors in a project include ongoing construction without the necessary permits, discrepancies between actual and intended land use, and very large advances collected from buyers who have signed preliminary agreements. On the other hand, even if a project has challenges or difficulties that have arisen in the past, but the developer has completed the construction work, and the property is ready for sale or is in the final stages of development, then after understanding the essence of all the problems and evaluating their complexity, a positive decision on financing may be made.
According to N. Kozikiene, the initial information for project evaluation is provided by the developer. After analyzing the business plan, estimates, and other initial information, the "Röntgen" team conducts checks in public registers, market analysis, compares planned sale prices with the pricing of existing platform clients and the average of completed transactions. The market valuation of the property itself is carried out by independent licensed real estate appraisal companies. In separate cases, when the project is more complex and legal challenges arise during its implementation, "Röntgen" seeks additional consultation from professionals in that field. This additional risk assessment provides the opportunity to understand all potential risks and objectively assess their impact on the project's liquidity.
"Of course, the development phase after the funds have been raised is very important. Here, our main concern is to ensure that the funds are used according to their intended purpose and that the value of the pledged property for investors continues to increase. When we finance larger budget and longer-term projects, we understand that there may be deviations from the initial construction schedule: initial plans can be adjusted by volatile weather conditions, fluctuating construction costs, the need to change specific construction work projects during the process, and so on. These circumstances can cause deviations, most often leading to a longer project duration. But they do not affect the successful completion of the project. Another important indicator of successful project development is pre-sales of apartments, with a constantly increasing number of preliminary apartment sale agreements. Based on the prices of preliminary agreements, one can get an impression of the property's liquidity, and significant amounts of advances prove the strong commitment of buyers to acquire the property. When the developer has already signed preliminary agreements for 30-40% of all apartments being sold after the construction work is completed, this is a good indicator, and then partial loan repayment begins immediately after the building is 85% complete," says N. Kozikiene.
However, according to the "Röntgen" Head of Financing, any project can be delayed if the lender and developer do not find common ground at any stage of the project's development. Therefore, it is essential for all parties to understand the changed circumstances and quickly find a solution to the problem. In this regard, platforms are more flexible than traditional credit institutions and can assist the developer who has provided proper documentation and clearly explained their needs.
What to expect next?
N. Kozikiene states that the entire lending market is currently slowed down. Developers of new projects are observing the market and postponing decisions until spring or even autumn, aiming to wait for at least a slight increase in demand before starting development. Meanwhile, traditional lenders are currently inclined to increase margins, reduce loan-to-value ratios, adjust the share of the portfolio dedicated to real estate financing – commercial long-term rental projects are gladly financed, but the financing of residential real estate has slowed down.
On the other hand, there are also buyers in the market waiting for discounts, investors looking to secure a better margin, and developers who have just completed construction and want to secure profits without waiting.
"So there is a clear redistribution in the market right now. Probably this whole year will be characterised by waiting, watching, reallocating capital and refinancing existing loans. The markets are not expecting a fall in interest rates until the end of the year or next year. Western economies seem to have managed to avoid a "hard landing" scenario, and for those investing through platforms, now may be a good time to lock in higher interest rates. At least for the time being, the situation remains fragile and investors need to look even more carefully at the increased risks and the financial sustainability of projects under development. However, real estate projects that are free of the discussed risks, have a solid value reserve and are liquid will remain an attractive investment option even in this period," summarises N. Kozikiene.
Why Are Delinquent Loans Increasing on Platforms?
Since the second half of last year, the number of delayed loans in Lithuanian real estate crowdfunding platforms has started to increase. Although the "Röntgen" platform has not encountered such loans so far, the company highlights different causes of this phenomenon and the prevention methods it employs.
According to Martynas Stankevicius, CEO of "Röntgen", when evaluating delays, it is important to distinguish between two scenarios: slower sales of already developed properties and overly aggressively financed projects that are still under construction. In the first case, a slowed market may lead to the need for loan refinancing, while the second scenario could imply more serious problems.
"The first type of projects is common not only to platforms but also to banks, credit unions, or funds. Liquidity in the market has decreased due to the economic situation: we are seeing fewer housing transactions and down payments. But if such a project is responsibly financed, completed, or nearing completion, it will simply be refinanced to settle with the first creditors by offering new lenders attractive property with a value reserve. Such cases have increased on the 'Röntgen' platform as well, but this is a normal business practice at all times," explains M. Stankevi?ius.
A more complicated scenario, he says, occurs when a project under development was financed without properly assessing whether the loan amount would be sufficient to complete the project in changing market conditions. Such projects are typically unfinished, have no value reserve for obtaining a new loan, and may no longer have funds to complete construction. An additional risk factor in such cases is large down payments, which reduce the developer's ability to secure new cash flows during difficult times.
"Such projects, which were financed too opportunistically, can already be seen in the Lithuanian market. Simply put, they no longer have the money to complete the construction, and they are not suitable for either sale or refinancing. It is likely that even in such a case, investors will eventually be able to recover at least the majority of their money, but they may have to accept a partial write-down of the value and, of course, a waiting period," says M. Stankevicius.
However, he notes that most of the overly aggressively financed projects in Lithuania have already come to light, so their number is unlikely to increase significantly in the future.
How does "Röntgen" avoid this?
Despite the challenges in the market, the "Röntgen" platform remains one of the few in the market without delayed loans. According to "Röntgen" Head of Financing Natalja Kozikiene, the platform has adopted a more conservative credit and risk management strategy from the very beginning of its operations. Its value to investors becomes particularly evident during difficult market conditions.
N. Kozikiene explains that the standard risk assessment at "Röntgen" includes criteria such as the developer's experience, the location of the pledged property, loan duration, project profitability, loan-to-value ratio, market trends, market forecasts for the project implementation period, and more. The platform also considers the developer's business plan details, communication professionalism, team reputation, professional competencies in various fields, and other experiences in real estate sales, design, law, and other areas that may be useful in implementing real estate projects. The "Röntgen" team also assesses project profitability, liquidity, construction cost increases, payback risks, conducts so-called "stress" tests, and analyzes cash flow sensitivity and other risks.
"Without context, all these criteria are just a list of terms. Even when evaluating the developer's experience, one can consider the number of completed projects or years in business, but we also analyze the complexity of the projects. For example, a developer's experience is demonstrated by situations such as the ability to change a detailed plan, redesign a plot mass, and thus achieve better liquidity indicators, high-rise or multi-story construction, implementing reconstruction or conversion projects, and vision. The more challenging the real estate business 'school' the developer has gone through, the greater their partner or valuable experience portfolio. The reputation criterion is inevitably subjective, especially since no one in this complex business is immune to surprises. Our team analyzes the developer's business practices and relationships with partners from this perspective. We want to understand how each developer has historically dealt with challenges," says N. Kozikiene.
When discussing the loan duration criterion, she also points to a myriad of variables. For example, platforms generally prefer shorter loans due to the lower interest burden on the developer, but in central parts of Vilnius, where the process of issuing construction permits has slowed, a longer loan duration in a project that already has a building permit is unlikely to be a negative factor. Accordingly, high projected or actual project profitability can be both a positive and a negative factor when providing financing: projects built before the recent raw materials crisis usually have a significant profitability reserve and are highly attractive for financing, but now projects that start as "paper" with high profitability may prove to be overly optimistic in practice.
One of the criteria most relevant to investors is LTV (loan-to-value) or the ratio of the property's value to the loan amount. According to N. Kozikiene, "Röntgen" avoids overly "leveraged" properties because a lower loan-to-value ratio leaves room for maneuver, allowing for protection against rising construction and financial costs or the impact of declining property sale prices. Additionally, conservatively pledged property allows the developer to more easily realize the housing in a slowed market and refinance the loan, rather than quickly and cheaply selling the properties if the lender does not agree to extend the loan term.
"We also carefully assess the developer's financial motivation or the share of own funds. If the developer has invested a significant, 10-30% share of their own funds in the project, then they will make every effort to complete the construction and sales. When market conditions change, and sales prices fluctuate, such a developer will make considered and logical decisions regarding the sale of the property, ensuring not only loan repayment but also profit and the return of their own funds since lenders are first in the credit line. However, a financially unmotivated developer may decide that if the sales revenue is only enough to cover the loan, there is little reason to continue, and they may withdraw from the project, even taking part of the collected advances with them," reveals N. Kozikiene.
She also points out that obvious risk-increasing factors in a project include ongoing construction without the necessary permits, discrepancies between actual and intended land use, and very large advances collected from buyers who have signed preliminary agreements. On the other hand, even if a project has challenges or difficulties that have arisen in the past, but the developer has completed the construction work, and the property is ready for sale or is in the final stages of development, then after understanding the essence of all the problems and evaluating their complexity, a positive decision on financing may be made.
According to N. Kozikiene, the initial information for project evaluation is provided by the developer. After analyzing the business plan, estimates, and other initial information, the "Röntgen" team conducts checks in public registers, market analysis, compares planned sale prices with the pricing of existing platform clients and the average of completed transactions. The market valuation of the property itself is carried out by independent licensed real estate appraisal companies. In separate cases, when the project is more complex and legal challenges arise during its implementation, "Röntgen" seeks additional consultation from professionals in that field. This additional risk assessment provides the opportunity to understand all potential risks and objectively assess their impact on the project's liquidity.
"Of course, the development phase after the funds have been raised is very important. Here, our main concern is to ensure that the funds are used according to their intended purpose and that the value of the pledged property for investors continues to increase. When we finance larger budget and longer-term projects, we understand that there may be deviations from the initial construction schedule: initial plans can be adjusted by volatile weather conditions, fluctuating construction costs, the need to change specific construction work projects during the process, and so on. These circumstances can cause deviations, most often leading to a longer project duration. But they do not affect the successful completion of the project. Another important indicator of successful project development is pre-sales of apartments, with a constantly increasing number of preliminary apartment sale agreements. Based on the prices of preliminary agreements, one can get an impression of the property's liquidity, and significant amounts of advances prove the strong commitment of buyers to acquire the property. When the developer has already signed preliminary agreements for 30-40% of all apartments being sold after the construction work is completed, this is a good indicator, and then partial loan repayment begins immediately after the building is 85% complete," says N. Kozikiene.
However, according to the "Röntgen" Head of Financing, any project can be delayed if the lender and developer do not find common ground at any stage of the project's development. Therefore, it is essential for all parties to understand the changed circumstances and quickly find a solution to the problem. In this regard, platforms are more flexible than traditional credit institutions and can assist the developer who has provided proper documentation and clearly explained their needs.
What to expect next?
N. Kozikiene states that the entire lending market is currently slowed down. Developers of new projects are observing the market and postponing decisions until spring or even autumn, aiming to wait for at least a slight increase in demand before starting development. Meanwhile, traditional lenders are currently inclined to increase margins, reduce loan-to-value ratios, adjust the share of the portfolio dedicated to real estate financing – commercial long-term rental projects are gladly financed, but the financing of residential real estate has slowed down.
On the other hand, there are also buyers in the market waiting for discounts, investors looking to secure a better margin, and developers who have just completed construction and want to secure profits without waiting.
"So there is a clear redistribution in the market right now. Probably this whole year will be characterised by waiting, watching, reallocating capital and refinancing existing loans. The markets are not expecting a fall in interest rates until the end of the year or next year. Western economies seem to have managed to avoid a "hard landing" scenario, and for those investing through platforms, now may be a good time to lock in higher interest rates. At least for the time being, the situation remains fragile and investors need to look even more carefully at the increased risks and the financial sustainability of projects under development. However, real estate projects that are free of the discussed risks, have a solid value reserve and are liquid will remain an attractive investment option even in this period," summarises N. Kozikiene.
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