I created an Omaraha account

For a long while I was rather sceptical about Omaraha. Their PR wasn’t the best – many people cited quotes from forum discussions where the owners didn’t communicate to investors in the best of ways and not much analyzable data has been moving around.

adom

Essentially the site works similarly to all other P2P lending sites. People can ask for loans, and the current loan maximums are similar to Bondora – up to 10K, however most loans seem to be on the smaller side of that. Also, of course the volume of loans being moved isn’t comparable to Bondora, and while they expanded to Slovakia a while ago, I’m not sure how well that is going.

What is problematic though, is the lack of information about investment statistics. They have a rather interesting method of earning their money. Investors can bid to be included in loans with two different metrics – loan interest they desire and the “bonus” they are willing to pay to the portal (so I’m assuming it’s straight to the profit line). Also if you are willing to offer money at the same % as someone else, but they are willing to pay a higher bonus rate then they get ahead of you in the queue.

Overall I’d say it’s definitely  a confusing system. Figuring out how log or high to set the percentages can definitely be a challenge and I ended up asking others for their experiences. I’ve played around with them a bit here and there, but at some point it seems like the money stops moving. Currently I’ve managed to invest 500€ into 35 loans, meaning that I’m about on pace to invest the initial 1000€ in a month. I can probably test increasing the interests a bit and see how it works out, since I’m likely to aim for a 500€/month rate of reinvestments.

Definitely an interesting experiment, but a bit more effort than I wanted for tuning the interest rates. After I manage to invest a bit more, I can start running statistics on which groups get more loans sent out, and start increasing those rates slowly. Sadly the statistics part seems to be a bit lacking. However, they do have a warranty fund for defaults, and as the economy might start doing worse, then it’s definitely a nice extra perk to be able to sell defaulted loans, not wait for a very long perspective recovery happening. So far the numbers look like this:

omsofar

If you have any good recommendations, then I’m all ears!

 

The larger scale importance of the LHV bank bond release

One of the most interesting news in the Estonian investing world last month was the fact that one of the more investor focused banks (LHV) released subordinated bonds. (More here). What made the bonds really stand out from all other financial news is the fact that they were accessible to retail investors such as myself – the minimum was 1 bond, meaning with just 1000€ you could become an investor. There is more significance to this than you might think at first glance.

lhv

General access to bonds

When it comes to bonds then Estonia is a somewhat strange country. Unlike most of our nearby neighbours we do not have state bonds. It probably has something to do with our government’s aversion towards having any debt at all, but the result being that investors do not have many long term low risk investing instruments to use. The bond market does exist (there has been about 20 companies that issued bonds in Estonia this year) and the total value of bonds is 60+ million euros, but for most retail investors this is inaccessible since the minimum bid for most bond releases is 50 000€.  This means that if you want to have some reasonable lever of diversification then most retail investors can’t even start looking at bonds until their investment portfolios are at least 500K+. I know some investors pool money with friends to invest into bonds, but it’s still a very inaccessible market. For that reason the fact that the minimum ask for LHV’s bonds was 1K is a truly significant moment.

Social role of bond investments

One of the things we do not really have in Estonia is the idea of purchasing investments as gifts, for example for children in your family. By any metric a steady 10-year bond would be an amazing way of gifting money for any grandparent who cares about the financial future or learning opportunities of their grandchild. Currently if you want to gift money to someone then it’s an awkward process and looking at the liquidity of our stock market then most growth account versions are rather useless (other than LHV’s kasvukonto probably). Overall, I’d say for those people who are keeping large amounts of money in their accounts due to not wanting to risk too much (which is totally reasonable) having access to bonds would be a godsend. I don’t see anyone other than LHV repeating this any time soon, but it’s definitely a good step.

My reasons for investing

Even though my portfolio is reasonably small still, then my current stock account is in LHV and I do value their service. Having the mission of being an investment bank in a country as small as Estonia is impressive to start with, and looking at the levels of competition here then I do believe that LHV will do rather well in the future. For me, since a large part of my investments is in social lending and single stocks then the LHV bond was probably lower risk than most of my portfolio, I wish I had just had more free money during the marking period. Definitely a step in the right direction and I would be very happy to see more lower priced bond releases in Estonia, to make this market accessible to retail investors such as myself who make plans for the long run.

Risk levels of real estate crowdfunding

With the (arguably) impending crisis, many people have started to look into the risk levels of their investments with a bit more diligence. I asked Loit Linnupõld (Crowdestate) and Marek Pärtel (Estateguru) a few questions about how risk is managed in their investment portals.

realestate

How to assess the risk of crowd funding real estate?

The problem with many hybrid ways of investing is that evaluating the levels of risk associated with it becomes difficult due to how some risks may help balance out others while some may actually compound and create additional risk. Some things to keep in mind:

  • All real estate projects, crowd funded or no, follow the ups and downs of the market. If the market falls out from underneath you, then this will influence you whether you are in rental real estate, business real estate or crowd funding projects.
  • Crowd funding adds both a level of certainty (wisdom of the crowds) and a level of unreasonable enthusiasm (others are investing, so it must be good). You should still base your decisions on your own analysis, not on what others are doing.
  • (Real estate) crowd funding is still a new enough investment that we don’t have significant historical returns to base our thoughts on. Then again, past returns don’t predict future returns anyways. We can however ‘ballpark’ based on existing data in similar fields.

What do the portals do to manage risk?

I asked both Loit (CE) and Marek (EG) about how they manage risks, and how they hope to prevent problems from happening in their portfolios.

In case of a real estate crisis do you feel that crowd funding real estate & real estate loans are overall more or less risky to own than individual pieces of real estate? (Let’s assume a reasonably diversified portfolio).

Loit (CE): It really depends on a specific property, it’s cash flows and financial leverage. Technically, property is property regardless of whether it has been acquired directly or through crowdfunding. Nevertheless, I believe crowdfunding adds a new layer of common knowledge and if we combine that with crowdfunding platform’s due diligence (if they do it), that can significantly reduce the risk of picking wrong assets. Crowd is much smarter than any single individual alone and it is quite remarkable, that the wisdom can be shared and spread digitally between crowdfunders.

Marek (EG): To be prepared for a potential real-estate crises, smart investors should watch out not only for high returns but also for low and diversified risks. Every investment is a risk and once you accept this fact, then next thing that comes into play – it is how well you understand those risks and what measures you take to control them.  One of the best things to control risks is diversification. Individual investors can’t typically buy several pieces of land or properties, to diversify their risks. If you bought a flat you still depend on developments in vicinity of your property. Its price may go down even without a crisis.

EstateGuru p2p lending platform gives you the possibility to significantly diversify your portfolio, splitting your money into smaller pieces between different types of loans (flip, bridge, buy to let, mezzanine, commercial, land, residential etc), in  different locations by different borrowers and in the future also even in different countries.

One should understand the difference between investing in property crowdfunding (investment into equity and no security to investors given) and crowdlending platforms (investment secured by mortgage). We would suggest investors to do always their own stress tests- what happens to their investment if market goes down 20% (predicted m2 price of  is not 2000 but 1600). In case of, say a 20% market decline, do investors  earn some profit still, do they get back their invested money in some portion or lose it all- it largely depends on the capital structure of the project – what obligations the Borrower or Developer needs to fullfill before paying to platform investors.

Today we see clearly from UK, Europe and US statistics (altfi.com, Lendit.co) that institutional investors prefer lending platforms over crowdfunding ones as safer bet when making their capital allocations.

How has Crowdestate/Estateguru prepared for potential economic downturn scenarios? What kind of defences are in place to keep oversight of the projects and protect the investors’ money?

Marek (EG): First of all, all investments on EstateGuru platform are protected with 1st or in some cases 2nd charge mortgage. Not all Crowdfunding platforms have this security in the first place and with any fluctuations in Economy, their investors will be hit first. Smart looking business plans and fancy projects are not sufficient when property prices go down. But at EstateGuru we implemented second level protection – LTV at our projects is never higher than 75%, normally its around 60-69%, which means that even if property prices go down 25% we would still be able to recover our investors’ funds in case the borrower fails to repay the loan. In addition to the mortgage EstateGuru often asks the Borrower for a personal guarantee as extra security in order to make his EstateGuru loan repayment the top priority.In addition our partners have years of experience in Real Estate and we are able to foresee bad signs much in advance, so we will start working with Borrowers (refinancing, sale of assets etc.) much earlier to prevent Investors from litigation process and from potential partial loss.

Loit (CE): We continue to do our proper due diligence, picking only the best and business wise reasonable investment opportunities. Someone has pointed out, that most of the profits are earned at the moment of purchase and a our due diligence is focused on eliminating the odds of opening a bad project for crowdfunding.

Regular meetings with Sponsors (i.e. developers) and pre-agreed reporting formats ensure we have adequate information on project’s progress.
As the real estate related bank lending becomes less and less available, there will probably be a decrease in new projects started and we might see some of its effects in next 12 – 18 months.
What is the absolute worst case scenario of what can happen to the projects in your portfolio?

Loit (CE): There are several absolute worst case scenarios, that might happen, and they all end up with real estate becoming worthless (Russian tanks invading Estonia) or completely illiquid (like in the end of 2008 to mid 2009, requiring the major global economic crisis hitting employment and income).  Both scenarios might probably lead to partial or complete loss of the investment, depending on the specifics of the project (location, timing, leverage, demand etc). Its all about project’s cash flow – if you are able to generate cash either through even slow sales or leasing the property out, you will probably survive. Collateral is not the replacement of cash flow.

Marek (EG): A sharp decline in property prices (say 50%) lack of overall demand for property and in case of default longer than expected litigation time could be the worst case scenarios. Since our projects are diversified between residential and commercial, in different locations and are on top of that protected with 1st Charge Mortgage (this means our investors  will have 1st claim on the money received from property sale) and LTV of no higher than 75 (currently average is 60% at EstateGuru) – we feel that all above mentioned measures make our investments one of the best protected on the market and give best risk/return ratio.


As you can see, both portals have given significant thought to what might happen in case of an economic downturn. I do agree fundamentally that a retail investor can never diversify to the extent that is possible with crowdfunding. However, it is important to keep in mind that you don’t stop analysing projects even while you are still diversifying – it’s better to not take in a bad project even when you aren’t really diversified yet.
In addition to that, I like that Loit also pointed out the wisdom of the crowd and Marek emphasised that all investors should stress test their own portfolios to make sure they are making correct investment decisions for their own risk levels.
Thanks to Marek (Estateguru) & Loit (Crowdestate) for answering!

My Bondora portfolio (2015, October)

There has been a significant amount of drama happening around Bondora this month.The new passive portfolio manager caused a fair bit of controversy and the API is still in testing so many investors have at least temporarily reduced investments. For me, the old PM is still active and can give out about 4K worth of loans, so I’m hoping that will tide me over until you can use the API to invest. This means that all the money I transferred into social lending this month went into Moneyzen and Estateguru. However, my Bondora portfolio is big enough that it just does its own thing even without adding in money.

octoberinvestments

Due to not adding much money into Bondora for the last couple of months, you can see the 60+ defaults becoming a more significant part of my portfolio. There are two reasons for this – firstly that the loans from the big growth months from last year are now defaulting, and the loan pieces that are defaulting at this point are starting to be the 15-25€ pieces as opposed to the 5€ pieces that used to default earlier. However, despite the continuously increasing defaults this was another record month for me in terms of interest earned:

octoberinterestearned

Total interest earned for October ended up being 108,29€, meaning that this year is likely to end at 110€/month from Bondora, so I’m quite happy with the overall result already due to how much less I’ve invested into Bondora this year compared to what I had originally planned. Adding in Estateguru and Moneyzen, my P2P monthly earnings come just close to 125€.

bondoraocttotal

I plan to add just a bit more money into Bondora this year to finish December with a total of 5K euros in deposits. My account will turn 3 years old in December and I guess I’ll have to write a longer overview into returns from Bondora and whether or not it’s been performing as I wished it to.

octoberrecovery

Another topic that’s starting to become more and more interesting as my portfolio ages is the recovery rate. I see pretty decent movement from recovery every month, and at this point I’m waiting for my monthly recovery to reach 20€/month. Should probably realistically happen mid-way through next spring. Recovery for last months looks like this:

recoverystatsoct

Overall, I’d say, keep calm and wait for the API. I’ll probably be looking into it soon as well, once other third parties have made their solutions accessible. Overall, I was thinking about it a bit and I don’t even need anything super complex. I’d probably set my PM to just what I had now – AA, A, B &C loans OR any kind of Estonian loan. Not rocket science, so I’d assume that with the help of some friends working in IT it should be doable once more details about how the API works come apparent (like how exactly do the loans get distributed between bids!)