Interest Rate Difference No Longer Important: Developers Turn to Crowdfunding
Previously, there was a perception that crowdfunding was only pursued when banks were no longer willing to lend. However, with the significant rise in interest rates, even major real estate (RE) developers now see this source as a viable alternative.
According to developers, crowdfunding platforms are attractive due to their flexibility and efficiency. For instance, entrepreneurs report that they can secure funding for projects within a few hours or up to a month.
Igoris Trofimovas, CEO of the real estate development company "Lithome", told VŽ that while they typically finance projects with bank loans, they have occasionally used crowdfunding platforms. He notes that these platforms now sometimes offer simpler terms in certain cases.
"Especially recently, as bank conditions have tightened, this is undoubtedly a good alternative and a reliable financial tool," he says.
However, this type of financing comes with certain nuances. For example, there are certain limits.
Martynas Stankevicius, CEO of UAB "Tre?ia diena", which operates the crowdfunding platform "Rontgen", explains that the current Lithuanian crowdfunding law stipulates that no more than €8 million can be raised for a single project per year, and this limit will decrease in the future.
"Under the new European regulation, which takes effect in the fourth quarter of this year, the maximum amount will be reduced to €5 million over 12 months," says M. Stankevicius.
According to the European Parliament, which adopted these rules, they are designed to harmonize regulations across the European Union, encourage cross-border business financing, and ensure investor protection.
More Expensive Money
M. Stankevicius says that the average interest rate on loans on the "Rontgen" platform in the first half of 2023 was 9.15%, while Monika Len?ickait?, Head of Marketing at UAB "Profitus", which also operates a crowdfunding platform, states that their average rate was 10.2%.
According to data from the Bank of Lithuania, the average interest rates on loans issued by banks and credit unions to businesses in June this year stood at 6.07%.
The CEO of "Lithome" believes that the interest rate difference is not very significant for developers when it differs by just a few percentage points.
"The important thing is to have the opportunity to finance the project. It's better to pay more in interest but build, sell, and complete the project, rather than do nothing at all," he comments.
He predicts that such platforms will fund even more projects in the future.
"I think the tightening of monetary policy will continue. Banks will certainly not lend to all companies; they will lend to those with working capital and a borrowing history. So, it will be easier to negotiate with platforms," he believes.
Not Always Worthwhile
Mantas Galdikas, CEO of the real estate developer "Citus", says that financing projects on platforms is more worthwhile when the value of the pledged property is higher than its cost, as "banks only consider the 'bare' price."
"We consider financing projects through banks when the loan is needed for a longer term and the interest rate becomes more relevant, or when larger guarantees are needed than the platform can provide. For example, for the entire loan amount when financing commercial property and the cost of money is a critical decision factor," he says.
Giedrius Krazauskas, Development Manager at the real estate developer "Rinvest", comments that crowdfunding could account for up to 50% of the group's loans in the next few years.
"Crowdfunding has significant advantages until the first partial completion registration. However, if the project is small, changing the financing method midway, especially now with the rise in EURIBOR, would not yield significant financial benefits," G. Krazauskas comments.
In his view, when the project value exceeds €5 million, developers are left with traditional financing options.
However, M. Galdikas notes that the financing sector in Lithuania is generally small.
"Banks in Lithuania have long held a dominant position, but there aren't many of them, and over the past 5-10 years, their number has decreased further, concentrating the sector. This creates conditions to maintain very low competition, which is unfavorable for business lending. Credit unions, although operating for a long time, do not create significant competition for traditional banks," M. Galdikas says.
The CEO of "Citus" adds that they consider all possible financing methods, but issue bonds less frequently as they are "a relatively expensive financing tool".
Assessing Risk
M. Lencickaite acknowledges that large real estate developers initially looked at crowdfunding skeptically.
The CEO of "Rontgen" argues that skepticism or criticism that platforms take on greater risk is unfounded, as every financier has their own risk assessment policies and measures.
"It would be unfair to say, for example, that if "SEB" didn’t lend but "Swedbank" did, then "Swedbank" is taking on greater risk," he comments, adding that developers themselves decide which terms are best for them in each case.
When asked about risk management measures, he mentions that they closely monitor the use of funds.
"For example, in real estate projects, in some cases, we disburse funds only based on completed work certificates, and sometimes we transfer them directly to the contractor. This means the developer does not have the opportunity to use them for unintended purposes," he says.
Different Portfolios
M. Stankevicius says that most of "Rontgen's" portfolio consists of completed and sold apartment buildings. This is followed by duplexes and individual home developments, B-class commercial properties (offices, warehouses), plots in central locations of the capital, with the smallest part of the portfolio being aviation.
At the "Profitus" platform, according to M. Lencickaite, the majority of projects are residential real estate developments, including townhouses, apartments, and individual homes or their neighborhoods.
"There are also conversion projects, for example, a real estate project in Riga, where a former clinic building is being converted into commercial and residential spaces. This year, we are also seeing more commercial properties. Two years ago, we financed the construction of a kindergarten in the Kaunas region," she says.
Interest Rate Difference No Longer Important: Developers Turn to Crowdfunding
Previously, there was a perception that crowdfunding was only pursued when banks were no longer willing to lend. However, with the significant rise in interest rates, even major real estate (RE) developers now see this source as a viable alternative.
According to developers, crowdfunding platforms are attractive due to their flexibility and efficiency. For instance, entrepreneurs report that they can secure funding for projects within a few hours or up to a month.
Igoris Trofimovas, CEO of the real estate development company "Lithome", told VŽ that while they typically finance projects with bank loans, they have occasionally used crowdfunding platforms. He notes that these platforms now sometimes offer simpler terms in certain cases.
"Especially recently, as bank conditions have tightened, this is undoubtedly a good alternative and a reliable financial tool," he says.
However, this type of financing comes with certain nuances. For example, there are certain limits.
Martynas Stankevicius, CEO of UAB "Tre?ia diena", which operates the crowdfunding platform "Rontgen", explains that the current Lithuanian crowdfunding law stipulates that no more than €8 million can be raised for a single project per year, and this limit will decrease in the future.
"Under the new European regulation, which takes effect in the fourth quarter of this year, the maximum amount will be reduced to €5 million over 12 months," says M. Stankevicius.
According to the European Parliament, which adopted these rules, they are designed to harmonize regulations across the European Union, encourage cross-border business financing, and ensure investor protection.
More Expensive Money
M. Stankevicius says that the average interest rate on loans on the "Rontgen" platform in the first half of 2023 was 9.15%, while Monika Len?ickait?, Head of Marketing at UAB "Profitus", which also operates a crowdfunding platform, states that their average rate was 10.2%.
According to data from the Bank of Lithuania, the average interest rates on loans issued by banks and credit unions to businesses in June this year stood at 6.07%.
The CEO of "Lithome" believes that the interest rate difference is not very significant for developers when it differs by just a few percentage points.
"The important thing is to have the opportunity to finance the project. It's better to pay more in interest but build, sell, and complete the project, rather than do nothing at all," he comments.
He predicts that such platforms will fund even more projects in the future.
"I think the tightening of monetary policy will continue. Banks will certainly not lend to all companies; they will lend to those with working capital and a borrowing history. So, it will be easier to negotiate with platforms," he believes.
Not Always Worthwhile
Mantas Galdikas, CEO of the real estate developer "Citus", says that financing projects on platforms is more worthwhile when the value of the pledged property is higher than its cost, as "banks only consider the 'bare' price."
"We consider financing projects through banks when the loan is needed for a longer term and the interest rate becomes more relevant, or when larger guarantees are needed than the platform can provide. For example, for the entire loan amount when financing commercial property and the cost of money is a critical decision factor," he says.
Giedrius Krazauskas, Development Manager at the real estate developer "Rinvest", comments that crowdfunding could account for up to 50% of the group's loans in the next few years.
"Crowdfunding has significant advantages until the first partial completion registration. However, if the project is small, changing the financing method midway, especially now with the rise in EURIBOR, would not yield significant financial benefits," G. Krazauskas comments.
In his view, when the project value exceeds €5 million, developers are left with traditional financing options.
However, M. Galdikas notes that the financing sector in Lithuania is generally small.
"Banks in Lithuania have long held a dominant position, but there aren't many of them, and over the past 5-10 years, their number has decreased further, concentrating the sector. This creates conditions to maintain very low competition, which is unfavorable for business lending. Credit unions, although operating for a long time, do not create significant competition for traditional banks," M. Galdikas says.
The CEO of "Citus" adds that they consider all possible financing methods, but issue bonds less frequently as they are "a relatively expensive financing tool".
Assessing Risk
M. Lencickaite acknowledges that large real estate developers initially looked at crowdfunding skeptically.
The CEO of "Rontgen" argues that skepticism or criticism that platforms take on greater risk is unfounded, as every financier has their own risk assessment policies and measures.
"It would be unfair to say, for example, that if "SEB" didn’t lend but "Swedbank" did, then "Swedbank" is taking on greater risk," he comments, adding that developers themselves decide which terms are best for them in each case.
When asked about risk management measures, he mentions that they closely monitor the use of funds.
"For example, in real estate projects, in some cases, we disburse funds only based on completed work certificates, and sometimes we transfer them directly to the contractor. This means the developer does not have the opportunity to use them for unintended purposes," he says.
Different Portfolios
M. Stankevicius says that most of "Rontgen's" portfolio consists of completed and sold apartment buildings. This is followed by duplexes and individual home developments, B-class commercial properties (offices, warehouses), plots in central locations of the capital, with the smallest part of the portfolio being aviation.
At the "Profitus" platform, according to M. Lencickaite, the majority of projects are residential real estate developments, including townhouses, apartments, and individual homes or their neighborhoods.
"There are also conversion projects, for example, a real estate project in Riga, where a former clinic building is being converted into commercial and residential spaces. This year, we are also seeing more commercial properties. Two years ago, we financed the construction of a kindergarten in the Kaunas region," she says.
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