Real estate platform investors, just like banks, can enjoy stricter investment selection and higher returns
Today’s significantly increased interest rates are putting pressure on mortgage holders. However, those investing through real estate crowdfunding platforms find themselves playing the role of the bank: they can enjoy higher returns and even stricter selection of real estate projects.
Over the past year and a half, Euribor rates have risen from negative territory to over 4%—the highest level since 2008. Changes in Euribor alone have increased the cost of servicing an average apartment loan in Vilnius by several hundred euros.
Rising interest rates have also impacted other debt markets: it’s now more expensive not only for individuals to borrow, but also for businesses and governments. Accordingly, interest rates have also increased for real estate developers borrowing through crowdfunding platforms. This means higher returns for investors. For example, in 2021, the conservative Röntgen platform offered an average annual return of 7.5%, which grew to 8.5% last year, and this year it has reached around 9.15%, with the maximum interest rate cap rising to 12%.
“If the increased Euribor is a significant inconvenience for mortgage holders, for platform investors it means higher earnings. Both individuals and professional investors are keen to take advantage of the higher-priced loans because they receive greater returns from the interest paid by developers. This is also reflected in Röntgen statistics – over the first 10 months of this year, Röntgen raised €40.9 million in loans, more than twice as much as in the same period last year. While last year many wanted to protect their money from inflation, today’s motivation is also driven by the increased interest rates,” comments Greta Zarembiene, Partner and Head of Investor Relations at Röntgen.
Stricter Project Selection
As with banks, the slowdown in the real estate market has led to stricter selection of projects financed by Röntgen. While lending at higher interest rates is pleasing to investors, many may not necessarily know how to assess the reliability of investments and the quality of the pledged real estate.
According to G. Zarembiene, Röntgen's criteria and safeguards have become stricter in the last one and a half years - the company now expects developers to have a more substantial share of own funds, more significant collateral value reserves, and construction speeds (if they have already started) that keep pace with the schedule. Additional points are currently awarded to projects with factors such as exceptional locations, available bank financing offers, clear market demand, or non-aggressive financing needs.
On the other hand, the “Röntgen” team negatively views and rejects projects that are financed solely with borrowed funds, have received and used significant advances, lack reserve funds, have issues with construction documentation or even legal disputes, have debts to suppliers, or have disproportionately large outstanding amounts.
“We also conduct so-called stress-testing, i.e., we evaluate scenarios to determine how much the selling price would need to decrease for the value of the collateral to fully cover the loan and interest. We include these calculations in our presentations to investors, especially for projects where construction is complete and only the sales phase remains. While I wouldn’t compare our competencies and analytical capabilities to those of banks, the sustainability of “Röntgen” team’s selection principles is illustrated by the fact that among our investors are banks that trust our selection process, as well as funds and high-net-worth individuals,” says G. Zarembiene.
More Investors Switching from Rental Apartments to Crowdfunding Platforms
By the way, some of this year's new Röntgen investors are people who have previously invested in rental apartments. Even before the rise of Euribor, the attractiveness of investment housing in Lithuania has been declining in recent years due to time-consuming administration, unexpected costs, reduced prospects for appreciation, and real yields that today rarely exceed 5-6%.
"Over the last dozen years, in Lithuania, rental property has been the most profitable investment if we consider the huge appreciation of property values. When buying an investment property with a bank loan instead of your own funds, this business model is no longer rational at all nowadays due to the increase in Euribor, because today's rental market is not ready to compensate for the several hundred euro increase in bank premiums. Therefore, the increase in Euribor has become another incentive for residents to discover the crowdfunding market", says G. Zarembiene.
Real estate platform investors, just like banks, can enjoy stricter investment selection and higher returns
Today’s significantly increased interest rates are putting pressure on mortgage holders. However, those investing through real estate crowdfunding platforms find themselves playing the role of the bank: they can enjoy higher returns and even stricter selection of real estate projects.
Over the past year and a half, Euribor rates have risen from negative territory to over 4%—the highest level since 2008. Changes in Euribor alone have increased the cost of servicing an average apartment loan in Vilnius by several hundred euros.
Rising interest rates have also impacted other debt markets: it’s now more expensive not only for individuals to borrow, but also for businesses and governments. Accordingly, interest rates have also increased for real estate developers borrowing through crowdfunding platforms. This means higher returns for investors. For example, in 2021, the conservative Röntgen platform offered an average annual return of 7.5%, which grew to 8.5% last year, and this year it has reached around 9.15%, with the maximum interest rate cap rising to 12%.
“If the increased Euribor is a significant inconvenience for mortgage holders, for platform investors it means higher earnings. Both individuals and professional investors are keen to take advantage of the higher-priced loans because they receive greater returns from the interest paid by developers. This is also reflected in Röntgen statistics – over the first 10 months of this year, Röntgen raised €40.9 million in loans, more than twice as much as in the same period last year. While last year many wanted to protect their money from inflation, today’s motivation is also driven by the increased interest rates,” comments Greta Zarembiene, Partner and Head of Investor Relations at Röntgen.
Stricter Project Selection
As with banks, the slowdown in the real estate market has led to stricter selection of projects financed by Röntgen. While lending at higher interest rates is pleasing to investors, many may not necessarily know how to assess the reliability of investments and the quality of the pledged real estate.
According to G. Zarembiene, Röntgen's criteria and safeguards have become stricter in the last one and a half years - the company now expects developers to have a more substantial share of own funds, more significant collateral value reserves, and construction speeds (if they have already started) that keep pace with the schedule. Additional points are currently awarded to projects with factors such as exceptional locations, available bank financing offers, clear market demand, or non-aggressive financing needs.
On the other hand, the “Röntgen” team negatively views and rejects projects that are financed solely with borrowed funds, have received and used significant advances, lack reserve funds, have issues with construction documentation or even legal disputes, have debts to suppliers, or have disproportionately large outstanding amounts.
“We also conduct so-called stress-testing, i.e., we evaluate scenarios to determine how much the selling price would need to decrease for the value of the collateral to fully cover the loan and interest. We include these calculations in our presentations to investors, especially for projects where construction is complete and only the sales phase remains. While I wouldn’t compare our competencies and analytical capabilities to those of banks, the sustainability of “Röntgen” team’s selection principles is illustrated by the fact that among our investors are banks that trust our selection process, as well as funds and high-net-worth individuals,” says G. Zarembiene.
More Investors Switching from Rental Apartments to Crowdfunding Platforms
By the way, some of this year's new Röntgen investors are people who have previously invested in rental apartments. Even before the rise of Euribor, the attractiveness of investment housing in Lithuania has been declining in recent years due to time-consuming administration, unexpected costs, reduced prospects for appreciation, and real yields that today rarely exceed 5-6%.
"Over the last dozen years, in Lithuania, rental property has been the most profitable investment if we consider the huge appreciation of property values. When buying an investment property with a bank loan instead of your own funds, this business model is no longer rational at all nowadays due to the increase in Euribor, because today's rental market is not ready to compensate for the several hundred euro increase in bank premiums. Therefore, the increase in Euribor has become another incentive for residents to discover the crowdfunding market", says G. Zarembiene.
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