Some Thoughts On Estateguru (Review)
Introduction and summary:
I have invested in Estateguru since 2016 and this review shares my thoughts and experiences as a lender and investor on their marketplace. I have a very small investment on this platform.
Estateguru was established in 2014 in Estonia and provides bridge loans, business loans and development loans for borrowers. Normally, there are several investment opportunities per week. To my knowledge, Estateguru is the biggest provider of property-backed loans in Continental Europe. Most loans are short-term, maturing within a maximum of 24 months. You can invest manually or use the auto-invest function. The auto-invest feature enables you to set criteria for which property loans you would like to invest in.
Real estate investments involve risks, and the purpose of this Estateguru review is to look at the potential pitfalls of investing in Estateguru and similar investment platforms.
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 (look at the UK), and others will merge or be acquired. Loan volumes are essential for profitability and I believe the “winner takes all” effect to dominate.
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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:
Estateguru and recessions:
Please keep in the back of your mind that crowdfunding is a new business that has never been truly tested in a recession. The Covid-19 recession was short, and I believe the lending business more or less came to a halt for two months, but quickly picked gained momentum again. Moreover, lending is a highly cyclical business. Always make sure you diversify your eggs in several baskets and keep a margin of safety.
Is Estateguru legit and safe?
Only time will tell.
Of the around 11 investment platforms where I have invested, several of them real estate platforms, Estateguru has so far turned out to be the most credible, in my opinion. Unfortunately, that is no guarantee something bad turns up around the next corner.
(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 a crowdfunding platform 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?
- Are the borrowers trustworthy? Keep in mind that many p2p platforms lend to many projects that have the same borrower(s). Diversification is not as good as it seems.
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.
The 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 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 property-backed loans, and all investment contracts on the investment platform 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/lenders and borrowers.
Ultimately banking and lending is a highly cyclical business that 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 any loss of capital, and neither have I thus far. But inevitably, losses will sooner or later hit, and I suspect it might look like the ketchup effect.
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.
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 that 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 substantially 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. The problem is, you as a lender have to trust the due diligence process of Estateguru. It turns out many loans are in practice given to the same borrower:
For example, Nordic Energy Homes has acquired funding for ten different projects on Estateguru. When you have the same borrower, the diversification is poor. If you use the auto-invest function, you automatically invest in many loans by the same borrower. This is obviously a risk as you don’t want to be liable to just one borrower.
(Update November 2021: It seems like this risk has finally happened. Many, if not all, of the loans to Nordic Homes have defaulted to my knowledge.)
This might also make Estateguru more fragile as they become dependent on a small base of borrowers. What of the borrower is a crook? 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 is the best “guarantee” you can have.
Estateguru reviews on Trustpilot:
Estateguru scores 4.4 of 5 on Trustpilot, to my knowledge the highest score among any crowdfunding platform. However, be careful of putting too much reliance on the “reviews” there. Do your own due diligence!
Low LTV and no development loans reduce risk:
One way to minimize risk is obviously to minimize the LTV (loan to value) and avoid development loans. Low LTV is pretty self-explanatory. If a building is valued by a third party valuer at 300 000, a 200 000 loan has an LTV of 66%. The lower LTV, the less risk of capital loss.
Moreover, avoiding development loans might further lower the risk. A development loan is a loan that is often paid out in stages or tranches. For example, if a developer has a land plot where he wants to build an apartment block, the lender wants to lend in tranches to lower the risk. Why? Because development takes time and involves several stages: First the developer needs to acquire the land, then arrange permissions and planning, later excavate the property, and only then can the construction of the building start. The lender wants to make sure all stages are done properly and according to rules, regulations, and agreements before the next stage starts. A lot can go wrong in the process, perhaps the worst being a recession in the economy. Development loans are inherently riskier than for example bridge loans.
There is the risk that the lenders simply don’t lend in the middle of the development, which easily happens if the trust in the lender (Estateguru) is impaired or if the economy turns south. This happened to the UK lender Lendy. The developers found themselves without funding in the middle of the development. Remember, lenders are under no obligation to commit to future tranches. Thus, construction might grind to a halt. And the value of a property that is only half done, is highly questionable and uncertain. Make sure you understand how the LTV is valued when you invest in development loans.
During 2020 Estateguru has lent more to development loans than in previous years, something that is of concern.
Personally, I only lend at 60% LTV or less and hardly any development loans at all. This is my way of reducing risk.
No investment comes without risk, but as of now, I believe Estateguru offers loans with good risk/reward as long as you keep LTV low and avoid development loans. However, as this Estateguru review hopefully has explained, is that crowdfunding is an “unproven” business and involves a lot of risk, usually pretty hidden until they pop. Hence, play safe and make sure you don’t risk capital you can’t afford to lose. You never know what kind of risk might pop up around the next corner. I treat p2p like an experiment.
I suspect the rates come down in the future, and to some extent, I believe that is exactly the management’s goal in order to attract more institutional interest.
Disclosure: I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion – they are not suggestions to buy or sell any securities.