Introduction and summary:
I have invested in Estateguru since 2016 and this article shares my thoughts and experiences as a lender/investor. In a previous post I expressed my concerns over crowdfunding and the inherent risks associated with the platforms. Before you continue reading I would recommend reading the article to get a better understanding of why I believe crowdfunding might be riskier than most investors assume:
Most reviews of p2p platforms and crowdfunding focus on returns without considering the risk. Crowdfunding is still a young business and has a lot to prove. As in any new business we will see a lot of consolidation in the coming years and much less fragmentation than we have today. Some platforms will go bankrupt, as some already have, and others will merge or be acquired. Loan volumes are essential for profitability and I believe the “winner takes all” effect to dominate. I have invested some small amounts in several platforms since 2016, and my conclusion is that crowdfunding is an inferior investment compared to the more traditional investments like stocks and real estate (I have previously written a longer article comparing stocks and real estate).
This article focuses solely on Estateguru. Why Estateguru? Of the around 11 platforms where I have invested, Estateguru has so far turned out to be the most credible, in my opinion. However, this article is in no way a recommendation to invest, that is something you need to find out yourself*. If you decide to invest in crowdfunding platforms, I believe any investment should be minor or just one of many (read here to understand the importance of diversification).
The most important question you should ask before an investment in crowdfunding is this: you get no interest from your bank deposit and negative real rates in government bonds, but how can crowdfunding offer returns above 10%? The returns have to be measured against the potential risks:
The most important risk is platform risk:
I believe it’s extremely important to look at management and how the platform makes money.
- What is their operational history?
- Are they profitable?
- What will happen in a cyclical downturn?
- Are the managers trustworthy?
- Are interests aligned?
The longer the history, the better. If the managers are charlatans or the platform goes belly up, the investors will suffer no matter how good the collateral is. UK has the longest crowdfunding track-record and as far as I can see it’s not pretty. The worst case is Lendy which is under administration where customers/lenders stand to lose a substantial amount of the the remaining loan book (I had a small amount of in Lendy). In case of bankruptcy, an administrator will take charge of the loan book, and of course they don’t work for free. Estateguru is a facilitator of loans, and all investment contracts are signed between the borrower and the investor (but all client funds are segregated from Estateguru’s operational funds and can still be accessed in a bankruptcy.)
Estateguru’s financial position:
Estateguru makes money by originating loans with a charge of 3-4% of the total loan amount if a successful funding process. Furthermore, a 0-2% annual administration fee is often in place, paid by the borrower, and recently fees from transactions that occur on the secondary market (source: their FAQ). Management aims to increase the institutional presence which involves a slightly different revenue structure.
Are interests aligned? Estateguru wants high volume, while investors want “secure” loans and collateral. This means interests are not necessarily aligned, except that in the long run they need to underwrite good loans in order to both please investors and borrowers.
Ultimately banking and lending is a highly cyclical business which almost grinds to a halt in recessions (to my knowledge only one crowdfunding platform existed during the GFC in 2008/09). This means a sudden drop in business will have a major impact on Estateguru’s income, further proven during the Covid-19 months of March and April 2020. During the pandemic borrowers were clearly reluctant to invest and Estateguru focused mainly on already existing stage/development loans which would otherwise face a serious liquidity issue if funding dried up.
The table below shows the funding of loans so far in 2020 (in million EUR):
This might be indicative of what might happen in a downturn in the economy.
The audited result of 2019 shows a huge rise in administrative expenses from 1.12 to 2.16 million EUR. 2019 produced a loss of 533k EUR, compared to a profit of 119k in 2018. The average number of employees increased from 10 in 2018 to 17 in 2019. Estateguru has mainly been a Baltic lender, but expansion to Finland, Germany and Spain requires more people and increased costs. Albeit being a scalable business model, any expansion carries inherent risks.
At the same time, at the end of 2019, cash stood at only 170 000. I assume Estateguru’s management had some sleepless nights when the Covid-19 struck. To fund their expansion management decided to go to Seedrs in the middle of the pandemic to fund their operations. Why would anyone seek capital in the middle of a lockdown? I see no other reason than they had to. However, they managed to raise 925k EUR, presumably mainly funded by already existing enders.
The loan book:
The summary since inception is quite impressive:
Estateguru claims no investor has suffered loss of capital, and neither have I thus far.
Estateguru calculates my annual return to 12.05%. I have not verified this myself, but I assume this is in the ballpark. That is of course very good considering all the loans are secured by real estate as collateral. I mainly invest in LTV 60 or lower and no development loans.
Inefficient Baltic banking system?
Why would anyone borrow at 10% or more?
The GFC in 2008/09 significantly reduced the risk appetite of banks, further strengthened by international regulation. The latter makes it very hard for many borrowers to secure funding, and also very bureaucratic. As such, I believe there is an inefficiency which makes borrowers accept pretty high rates. Additionally Estateguru and other platforms are small, flexible and adaptive without any time consuming credit committees.
Personally I’m a bit skeptical about Estateguru’s expansion outside the Baltics. To my knowledge the management has no experience from the Western markets. My gut feeling tells me the banking system is more efficient outside the Baltics, and as such the borrowers might be of less quality.
Social media is dependent on creating the so-called network effect. Estateguru was among the first to offer crowdfunding in Northern Europe, and it has established itself as one of the biggest crowdfunding lenders in the EU. Additionally, it has the advantage of operating out of a region that has substantial lower costs, both in the form of salaries and rent.
The more borrowers Estateguru lends to, the easier it is for the borrowers to return to Estateguru later. I have no numbers, and neither do Estateguru provide them, but many lenders have used the platform for several projects. For example has Nordic Energy Homes acquired funding for ten different projects, so far successfully, before they borrowed a solid 1 million EUR for a project in Spain on the last day of August 2020. Opposite, this might also make Estateguru more fragile as they become dependent on a small base of borrowers. Some months ago I noticed the auto-invest function invested into several Latvian loans by the same company, which obviously is a bad diversification.
Most if not all loans come with a personal guarantee by the chairman. This most likely has no monetary value, but more of a reputational value. If you go bankrupt you simply lose your reputation, thus most developers avoid at length ending up in such a position.
No buyback guarantee:
Several crowdfunding platforms offer buyback guarantees. Estateguru has no such thing. But don’t fool yourself! A “guarantee” only exists on paper. There is no way you can lend at 10% without risk. A buyback guarantee has “hidden” risks and I believe a low LTV backed by real estate collateral are the best “guarantee” you can have.
No investment comes without risk, but as of now I believe Estateguru offers loans with good risk/reward. I suspect the rates come down in the future, and to some extent I believe that is management’s goal in order to attract more institutional interest.
*If you invest you can of course give me a referral: EGU56647.