Will a possible real estate price correction affect the yield of crowdfunding investors?

Greta Zarembienė, Röntgen’s investor relations manager.

Declining housing sales, record inflation and a slowing economy may lead to a correction of real estate prices. This raises questions for those investing in real estate projects through crowdfunding platforms, which have become extremely popular in recent years. Although you should not be afraid, it is necessary to pay special attention to the real value of the real estate pledged for the benefit of investors and its liquidity in the changing market.

Recent quarters have continued to see growth in the crowdfunding market driven by people’s willingness to invest to protect their existing savings. Of course, investors are also attracted by the fixed annual interest of 7-11% and real estate pledged in their favor, the value of which is usually at least 30-40% higher than the amount of the loan. It is this protection mechanism that should amortize the risk of a correction of even several tens of percent.

However, Greta Zarembienė, head of investor relations at the crowdfunding platform “Röntgen”, emphasizes that when new risks arise, investors need to pay attention not only to the ratio of the loan size to the value of the mortgaged property, but also to assess the real liquidity of the property and the “loan per square meter” criterion .

“Crowd financing with real estate collateral is a fixed-income investment vehicle, which is extremely attractive to many retail investors in turbulent markets and a tight economy. However, this may be the first year in history when crowdfunding faces declining home sales, so a price correction scenario should not be completely ruled out either. Therefore, the real estate mortgage, which provides protection and reserve for investors, should be examined more carefully”, comments G. Zarembienė.

Additional ways to assess risks

It is important to know that the interest paid to crowdfunding investors will not change regardless of how much real profit the developer makes. In other words, investors do not claim the real estate developer’s profit from sales, and that is why they are given fixed annual interest and a much higher value than the loan itself.

In Lithuanian crowdfunding platforms, the value of the property pledged to investors usually exceeds the loan amount by 30-40%, and sometimes more. In August, a 2% monthly decrease in prices was already recorded in the market of new apartments – it was mainly caused by new real estate projects appearing on the market, i.e. somewhat increased supply, but analysts agree that they currently see no reason for a more serious correction of the real estate market and speak only of price stabilization.

But even if house prices fell by 10-20% or more, such a change would not dissolve the reserve of value held by investors. Generally speaking, if the developer were to face sales problems, the property mortgaged in favor of the investors could still be sold at a significant discount, which would only increase the base of potential buyers and the liquidity of the property.

However, some important questions arise in this case as well: is the property appraised adequately, how long would it take to sell it, what would happen if market prices fell more drastically? It is here that investors who want to feel even more at ease should do additional homework on their own.

First of all, investors should familiarize themselves with the official property valuation document – how recent its data is and who made it. And a quick comparison of similar properties in the neighborhood on ad portals would help investors at least get an impression of how much such property is actually being sold for.

All platforms indicate the so-called LTV ratio – the ratio of property value to loan. But it would be even more accurate and understandable to check the loan per square meter ratio. If the developer offers sq. The price of m in a popular district of Vilnius is 3 thousand. euros, and the platform investors’ loan per square meter is only 7,000 euros, for those who have invested in such an object, a fourfold decrease in price would not be terrible. After all, the opportunity to sell an attractive home for 700 EUR/sq.m. should result in effective asset realization and settlement with investors.

“It is only important to assess whether the developer’s planned price corresponds to market realities: the aforementioned 3 thousand euros will probably be an overly optimistic expectation on the outskirts of the city. It should also be evaluated what kind of apartments are planned in the project – smaller square footage, 40-60 square meters, are always sold faster and easier. m housing, the most relevant in the hot rental market. The LTV or loan per square meter must look adequate not only on paper, but also in real life,” says Röntgen’s head of investor relations.

So, if the project you are investing in, according to your own and the platform’s calculations, can withstand a 30-40% or more price drop and is objectively attractive and easy to sell, you can basically feel confident. People who are concerned not only with returns, but also with safety, can feel much more at ease in this situation than investors watching, for example, red-hot stock markets. In them, every decrease means a real loss.

Any investment involves risk. Therefore, even with a sufficient and objective value reserve, you may have to accept a certain delay in the loan until the mortgaged property is realized. This can be frustrating when you plan to need this money at a specific time. However, some investors who are not in a hurry even see the delay as an advantage because of the high late fees.

“Fixed return instruments such as government bonds have always been popular. We hear more and more from those who invest in shares that they want to return to such instruments. Also, sound investment instruments such as gold have always been popular. Only he lost part status during the pandemic. Real estate crowdfunding offers a combination of the value of both of the aforementioned instruments – a fixed solid return and a link to a specific asset. Only investors should remain vigilant: diversify the portfolio and independently check the published figures and the quality of information. This is what would lead to real immunity in case of real estate market corrections”, says G. Zarembienė.

About Röntgen

Roentgen” – the first crowdfunding platform in Lithuania for real estate development. This is a space recognized and supervised by the Bank of Lithuania, where developers with quality real estate projects and investors who can provide financing meet.

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