First look into Viventor

There are new P2P lending platforms popping up like mushrooms. In many ways this is good – you have more platforms to choose from and a way to both manage risks and find an instrument most suited to your profile. On the other hand, it’s becoming difficult to keep up with all the different sites – if you’re Estonian you now have at least 10 P2P sites to choose from. So, to get a look into what the Latvian P2P site Viventor is about I got to ask some questions from their Operations Officer, Toms Niparts.

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Viventor profile:

  • Loans secured by mortgages
  • ~6-7% estimated returns p.a.
  • Buyback guarantee
  • Minimum investment 10€
  • 2,8 million euros in loans so far

Q&A

What is Viventor’s main focus (what type of loans, which markets? do you have future expansion plans?)

Our main focus at this point is to offer high quality secured investments that carry very low levels of risk. As we move further, we are planning to add various other products with different levels of risk, as well as get into large scale real estate projects. We are aiming to serve investors from all over Europe, but it will obviously take some time to reach this goal. Currently, we see the most interest from Southern and Western Europe.

What do you feel is your competitive advantage when compared to other platforms on the market?

One thing is definitely the extremely low risk levels of loans. I don’t know any other platform that offers secured loans with LTV being between 20 and 40%, plus with a Buyback Guarantee. We are also putting a major focus on seamless investing experience and design of the platform, so that using it would be obvious also for people not very familiar with web products.

I noticed that you have a buyback guarantee – could you explain further on which terms it works and why you decided to have a buyback guarantee? (since many sites do not)

If a loan is 60 or more days delinquent, the loan originators will offer to buy back the investment at the face value (=price that investor paid to purchase the stake). The investor also has the right to refuse, and wait for the debt to be recovered, simultaneously accruing delayed interest and late fee payments.
Since we are a new platform without a known brand name, we have to build our image, and show that we, as well as our loan originators have skin in the game 100%. Buyback Guarantee is only one of the ways of doing it. All of the loans are also 100% pre-funded, and the originators have the first charge on the mortgages should a borrower default.

When looking at the loan listings – 6%-7%, why do you feel that this interest is competitive? (What are your historical returns & how do delayed/bankrupt loans get handled?)

We believe that 6-7% is a very good return for the deal offered. Keeping in mind the already mentioned low LTV levels, another major factor is that all the mortgages are located in Spain, which obviously speaks about their liquidity.
About the historical returns – there is not a whole lot of data so far, since we started out only less than two months ago. The weighted-average return of our loan book, for example, is 6.82% p.a. Fixed. About non-performing loans: the loan originators have debt collection partner companies for this purpose.

Anything that you want to add, that you wish investors knew about?

Apart from low levels of risk, Buyback Guarantee and the noteworthy collaterals, we also offer fixed interest, which only a few platforms on the market offer. This means that you receive the same amount of interest every month, instead of diminishing interest payments.
We have a plenty of loans available that reach the maturity within 12 months or less, so this means that an investor is not locking up his money for a long period of time. The Secondary market is coming soon, as well as a number of other loan products with different levels of risk and returns. Currently, Viventor is available in English, German, Russian and French, but we will be adding a few other languages in 2016.

First impressions

A lot of investors feel that one of the key issues of P2P lending is the risk, so for them mortgage backed loans with low LTV would clearly be something interesting. However, looking at returns currently offered by other P2P platforms, it’s an issue of risk vs reward, but for people with a lower risk tolerance I can see these returns being attractive.

Of course they have a somewhat uphill battle ahead of them, since there are many P2P portals on the market offering different products even in the same niche (EG in Estonia, Mintos in Latvia). Hope they do well – the market could always use good competition.

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!

Taxes 2014, mortgage

There are only a few tax cuts available for individuals in Estonia. The three most common being the tax cut you get for having a child under the age of 18, for having paid some sorts of school fees or the tax cut you get on interest paid on your home loan.

The usefulness of this tax cut

Essentially the mortgage tax cut means that the interest you pay towards your mortgage is tax free, meaning you get back 21% (2014 income tax rate) from the government. This is essentially seen as a way for the government to help citizens in getting their own homes. I’m somewhat ambivalent on this tax cut. While it is of course nice, then it’s not really what will make it or break it if you’re actually looking into buying a home.

This tax cut is the one most likely to disappear as well, there’s been quite a lot of discussions about its usefulness in the media recently and well, the government needs money! I’m not really going to miss this cut when it disappears since it’s been reduced once already to limit its usefulness. Numbers wise, taking into account the tax return the effective interest rate of my mortgage is <2%, which is nice, but it being over 2% wouldn’t hurt much either.

Currently the cap of interest that’s tax free is 1920€. For my mortgage the interest payments for the year 2014 were 1200€, so we’re not even taking advantage of the full scale of the cut. Overall it comes to about 240€ in returned money, and that essentially covers the income tax I’d have to pay for my investments with a bit left over that’s going straight back into investments.