The new Crowdestate project shows how spoiled investors are

This week, the Estonian real estate crowd funding site, Crowdestate listed a new terraced houses project, which differs from other projects in many ways. First being that the hope is to run the whole project without a bank loan, giving CE more freedom then usual since you’re not pressured by the bank to sell the project to pay back the loan. Secondly, the predicted returns are lower than other projects so far, and investors are behaving somewhat strangely.

cenewproject

The sum needed for the project is about 500K€, which is a bit more than usual, but nothing that the investors can’t put together. What is strange however, is that the project hasn’t filled up yet when most others filled up in a matter of hours. Looking at the discussions I’ve seen in many forums, then the main reason for that being the opinion that 10-12% predicted net return is “too low”.

Let me repeat that, many people aren’t choosing not to invest not because of risks associated or the fact that they don’t like the project (most people don’t do too much due diligence on the projects anyway), the main reason is that 10% interest earned on a passive real estate investment isn’t high enough to bother.

Expected returns?

Most people are going to have their bubble burst in a painful manner at some point. Due to social lending and crowdfunding becoming more popular and successes of some projects, private investors have ended up with a completely unrealistic expectation of how much money investments should make. To put it into perspective, when it comes to mostly passive investments:

12% return – Very good and optimistic in the long run

5% return – Pretty good, beats inflation

0% return – Yay! You aren’t losing money

Overall, I’d say if the project doesn’t fill up it would create an interesting precedent – people have a lot of money available but they’re not willing to invest it for an expected 10% return. This opens several possible options – 1) people who have money will be able to pick up good stable projects more easily, 2) investors hoping for super good returns will forever be stuck in analysis paralysis and wait for the “best” deal, 3) market will have to rebalance in terms of the scale of projects due to people being unwilling to lock down money, 4) it might turn out that CE has completely missed something in the risk valuation of this project. It will be interesting either way!

12 thoughts on “The new Crowdestate project shows how spoiled investors are

    1. I did invest into this project. Main reason being that I really want this project to succeed – it’s an interesting precedent to have such a project happen without an additional bank loan, it could completely flip the idea of how real estate development is done (esp considering how much money people have at hand currently.)

      1. “I did invest into this project. Main reason being that I really want this project to succeed”

        Wouldn’t that directly contradict rationality in investing? Shouldn’t you invest in something you have rational basis to believe that will succeed rather than what you want to support?

        1. I do have rational basis to believe that it will succeed – I don’t think the market will take a downwards turn yet, I see Peetri still as a very popular area (even more-so once Ülemiste starts to gear up more as an alternative city centre), as someone who’s looking for a new home I have a relatively OK grasp of what’s being developed and I don’t see this project being much worse off than multiple current developments. The fact that I like the idea itself is just a bonus, not the only reason :) I mean, in the end there are multiple places where I would invest and if I didn’t like Crowdestate I’d just put my money elsewhere – Bondora, stocks etc.

    2. I have not yet decided. I like the location (although a bit larger plot would be better), I like the idea that the development is done without a bank loan, I like the return, but the only thing that is holding me back at the moment is the current/future real estate market uncertainty, the margin of error is very small. I have also not invested into any real estate development loans for a while now. Fortunately, the offer is not filling very fast at the moment and I have some time to decide.

    1. I’m mostly referring to discussions on Facebook (Finantsvabadus & Naisinvestorite klubi) & some private conversations where I had people e-mail & ask whether I was investing since the projected returns were “low”.

  1. When the last projects again filled up in a few hours – faster than most of the people could actually dig into the details of the project – I mentioned that it looks like people are making irrational investment decisions, but was told that it doesn’t seem like it.

    Now with this project there are three main possibilities:
    a) investors are rational, but they have a higher risk appetite than this project is offering, so it doesn’t fit with their strategy, or
    b) they could achieve a better risk-adjusted return elsewhere, in other words, this project is mispriced, or
    c) investors are making irrational investment decisions mainly based on highlighted return figures, without understanding the associated risks.

    Your title and comments seem to indicate the c) option? and I’m actually leaning towards that pretty heavily as well. If it’ll only hurt in the way you mentioned that they’ll be sitting on their cash because return levels are too low for most investments, then it’s great.

    I’m quite certain though that in the long-term it will hurt in the way that some project(s) will fail/loans will default (on other platforms) and people will lose part or all of their invested money (some people still don’t understand the necessity of diversification unfortunately). Even worse though, they didn’t expect that this could happen since they didn’t actually consider what the risk level is when return is 20-30%.

    1. You said that your opinion leans toward option 3 based on also the comments. As at this point I have only said anything about investing into it or not. I wanted to clarify that I have not invested into Crowdestate projects for a 8 months now. Last project I participated was Raua 25 (that is fixed 13,7% loan and not related to sales performance, quite low risk I think).

      Still I agree with you and also lean towards option c). Godspeed to all who have taken the risk and I hope they don’t get hurt.

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