Summary
- Pandemic shown how lack of digitalization in public services impacted real estate market: 5x crowdlending volume difference we’ve discovered between Spain and Estonia.
- Market is already recovered in terms of crowdlending volumes in Baltics, even with the restrictions still in place.
- Case from EvoEstate’s customer with 130% XIRR confirmed that every crisis provides opportunities for every business, crowdfunding in particular.
Premature optimism
Once the
European lockdown began in March, we, at EvoEstate, conducted a series of short
interviews with key stakeholders of European real estate crowdfunding platforms
to hear their opinions. Surprisingly, most of them were very optimistic and
were convinced that the lockdown would take only a month or two. They didn’t
really imagine the magnitude of COVID-19.
However, the opinions did vary greatly in other respects. This is due to a
single reason that Europe is very fragmented and the public policy can differ
significantly. In some states, real estate development had to be paused, while
other EU states allowed the development work outside.
Lack of digital infrastructure
This pandemic
has also shown that some EU states are behind in terms of digitalization of
public services. They couldn’t originate the deals, as mortgaging the asset
against the loan required a physical meeting at the notary.
The Baltic states, known for their innovation, were quick at responding to the
changing environment. Baltic crowdfunding platforms found a way to continue
running their operations without having to go to the notary physically.
However, it wasn’t the same with Spain. We’ve seen a 5x lending volume difference between the Spain and Estonia. It is a huge number if we take into account that Spain’s population is 35 times larger.
The Black Swan
Since EvoEstate was established, we have always believed that the safest type of real estate crowdfunding available in the European market is short-term rental properties. The belief was based on 40-year data. It showed that short-term apartment rentals in Spain were relevant even in times of huge economic recessions such as the 2008-2009 crisis. Short-term rentals in a mid-price segment, which are 20-40% cheaper than hotels, didn’t experience much of an impact on their occupancy.
However, over
the last 40 years, there hasn’t been a single event, which could cripple the
global tourism industry for such a long period of time. During the lockdown,
properties were generating a 0% yield. But the good news was that they haven’t
lost money and required further investment to cover the fixed fees. A
buy-to-let investment strategy consists of rental yield and capital growth,
where the latter can really increase the attractiveness of the opportunity.
It’s yet too early to say what will be the capital appreciation in the
following years, but we still don’t see a significant price drop in this
property segment.
Recovered volumes
It didn’t take long for some platforms to recover in terms of the lending volumes. In August, some of them recorded their all-time highs. Unsurprisingly, all of those platforms were Baltic-based. There are a few main reasons for that. First of all, the Baltic countries have reported low numbers of COVID-19 cases. Secondly, the quality of loans and underwriting standards have improved.
We’ve also learnt that those platforms received more queries for financing than prior to COVID-19. Many of the borrowers used alternative financing just to feel safe and raise relatively small amounts.
Quantitative easing
The long-term effect on the European property market is yet to be seen. But due
to intensive quantitative easing, the outcome of the projects is not indicating
a significant downturn on residential properties. However, retail investors shouldn’t
get too excited. The European Investment Bank is distributing low-interest
credit lines to non-banking lenders who are likely to venture into the real
estate financing market. This will ignite competition between the platforms and
non-banking lenders.
In this situation, the winner is clear — it’s the borrower. The investors, on the other hand, will have to get used to dropping interest rates, which may not fully indicate a lower risk of real estate projects. Lastly, those who have invested in fixed-interest loans or bonds will naturally have their returns decreased due to the growing inflation.
“Never let a good crisis go to waste”
Just as this quote of Winston Churchill suggests, the pandemic has brought great returns to the bold and brave, who have invested in fixed-interest loans. Lars Wrobbel, a client of EvoEstate, who is also Germany’s largest publisher on crowdfunding and lending, started building his portfolio during the pandemic. Instead of making most of his positions in the primary market, he turned to the secondary market featuring multiple sell orders with 10-15% discounts on the principal value. He got one full-bullet investment in Spain, with a 15% discount. It was repaid in August and generated a 130% XIRR return for Lars.