"25% of medium-sized and 22% of large enterprises in Lithuania feel the need for alternative financing" the Bank of Lithuania announced such a verdict at the beginning of 2019. As the needs of larger companies emerge, crowdfunding platforms are increasingly competing with banks and unions, emphasizing the speed, flexibility and flexibility of real estate projects. Their newly proposed staged financing model provides the opportunity to finance projects exceeding one million euros and innovatively combines the benefits of real estate developers and investors.
The needs analysis revealed a clear trend
A survey of companies conducted by the Bank of Lithuania (LB) in 2019, assessing the demand for financial resources and borrowing habits of Lithuanian companies of various sizes, revealed three key trends.
First of all, the popularity of external sources of financing such as bank loans or crowdfunding has been shown to be growing. For example, in 2014, about 19 percent of the surveyed companies actively used such external sources of financing, and in 2019, as many as 35 percent of companies are choosing such financing. This means that more and more companies are financing their business with borrowed rather than their own money.
Second, the need for alternative financing instruments such as crowdfunding was confirmed by almost a quarter of the companies surveyed. Among them, companies in the construction sector stand out - as much as 34 percent. they are interested in alternative financing instruments.
The survey data also confirmed that the financing conditions of traditional credit institutions for companies have been significantly tightened in recent years. Almost 50 percent. the managers or financiers of the companies surveyed said that lending conditions for business are currently at least partially restricted. According to the Bank of Lithuania, this is reflected in the rapid increase in the number of rejected new credit applications.
Opportunity to develop larger projects
Following the above-mentioned tendencies, the platforms of crowdfunding with real estate collateral present real estate financing to real estate developers. Under this funding mobilization model, the amount needed for a project, amounting to one million or several million euros, is raised in several stages.
"Using phased funding, we divide our multi-million dollar projects into phases. The value of the real estate pledged in the first stage of development and developed with each stage of financing is constantly increased, and an additional loan amount is paid out of the increased value. This ensures two most important aspects for developers - the amount needed for a specific stage of development is collected quickly and there is no need to pay interest on the money not yet employed” explains Viktorija Cijunskyte, the founder and CEO of the profit-sharing platform PROFITUS.
Representatives of alternative financing emphasize that the rules of operation of crowdfunding platforms with real estate collateral and the supervision of the Bank of Lithuania ensure that companies with poor financial conditions and risky general economic situations are not selected for financing. This builds a strong reputation for alternative financing, encouraging more and more larger companies to use crowdfunding platforms.
According to Mindaugas Statulevicius, the director of the Lithuanian Real Estate Development Association (LNTPA), at this stage of the platforms operation, funding mobilization models are making an important contribution to building their reputation.
"The need for alternative financing will remain high as traditional financial instruments become limited due to a lack of competition and concentration. The awareness and choice of platforms are growing, but they need both time and services to help build trust. Here, staged financing appears not only as an opportunity for platforms to grow but also as a means to build trust among investors, to create a good history in a stable way” comments M. Statulevicius.
Vidmantas Maslauskas, the developer of the "Birutes Parko Vilos" project in Palanga, also agrees with the head of LNTPA - the proposed staged financing solves issues that are extremely important for all real estate developers.
"Although we are using phased financing through the crowdfunding platform for the first time, we can already name its clear benefits. This model allows to speed up the construction process and increase the volume of construction - for example, to develop several projects at the same time” says the developer.
Phased financing is not only a financing model favourable to the real estate developer - it provides additional benefits and investment simplicity and a high return to the investor.
“By financing a million-dollar project in stages, as with any other project, the investor gets all the information about the project and chooses the most attractive return. In this case, the investment is reliably protected by an initial real estate pledge (mortgage). In the case of staged financing, the decision to finance only 60% of the increased value of the real estate and the consistently growing value of the pledged property becomes additional safeguards, ”V.Vanagė points out.
According to the initial data, the strategy of improving the investor's position pays off - PROFITUS records a stable growth of the average amount invested. Although minimal.
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