Million projects for funding - mission possible
"25 percent of medium-sized and 22 percent of large companies in Lithuania feel the need for alternative financing, " was the verdict announced by the Bank of Lithuania at the beginning of 2019. With the emergence of such needs of larger companies, crowdfunding platforms that emphasize the financing, speed, and flexibility of real estate projects compete more and more successfully with banks and unions. Their newly proposed phased financing model provides an opportunity to finance projects exceeding one million euros and innovatively aligns the fees of real estate developers and investors.
The needs analysis revealed a clear trend In 2019, a company survey conducted by the Bank of Lithuania (LB), assessing the demand for financial resources and borrowing habits of Lithuanian companies of various sizes, revealed three fundamental trends.
First, it has been proven that the popularity of external financing sources such as bank loans or crowdfunding is growing. For example, in 2014, approximately 19 percent of surveyed companies actively used such external sources of financing, and in 2019, as many as 35 percent of companies choose such financing. This means that more and more companies are financing their business with borrowed money instead of their own money.
Secondly, almost a quarter of the surveyed companies confirmed the need for such alternative means of financing as crowdfunding. Among them, construction sector companies stand out - as much as 34 percent. they are interested in alternative financing tools.
The survey data also confirmed that the financing conditions of traditional credit institutions for companies have become noticeably stricter in recent years. Almost 50 percent of managers or financiers of the interviewed companies said that currently the lending conditions for businesses are at least partially restricted. According to the Bank of Lithuania, this is evidenced by the rapid increase in the number of rejected new credit applications.
Ability to develop larger projects
Observing the above-mentioned trends, crowdfunding platforms with real estate pledges present phased financing to real estate developers. According to this funding pooling model, the amount required for the project, reaching a million or several million euros, is collected in several stages.
"With the help of phased financing, we divide the available projects worth several million into phases. In the first stage of development, the value of the real estate pledged and developed with each stage of financing is continuously increased, and an additional loan amount is paid from the increased value. This ensures the two most important aspects for developers - the amount required for a specific stage of development is collected quickly and there is no need to pay interest on money that has not yet been used," explains Viktorija Vanagė, the founder and manager of the crowdfunding platform "Profitus".
Representatives of alternative financing emphasize that the operating rules of crowdfunding platforms with real estate pledges 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 is building a solid reputation for alternative funding, encouraging more and more larger companies to use crowdfunding platforms.
According to the director of the Lithuanian Real Estate Development Association (LNTPA), Mindaugas Statulevičius, at this stage of the platforms' activity, funding pooling models are used to significantly contribute to building their reputation.
"The need for alternative financing will remain high as traditional financial instruments become limited due to lack of competition and concentration." Platforms are growing in popularity and choice, but they need both time and services to earn trust. Here, phased financing appears not only as an opportunity for platforms to grow but also as a means to build trust among investors, to stably create a good story", comments M. Statulevičius.
Vidmantas Maslauskas, the developer of the "Birutė Park Villas" project in Palanga, agrees with the head of LNTPA - the proposed phased financing solves the most pressing issues for all real estate developers.
"Although we are using phased financing through the crowdfunding platform for the first time, we can already identify its clear benefits. This model makes it possible to speed up the construction process and increase the scope of construction - for example, to develop several projects at the same time," the developer points out.
An investor's perspective
Staged financing is favorable to the real estate developer and provides additional benefits to the investor who appreciates investment simplicity and high returns.
"Financing a million-dollar project in stages, as in the case of any other project, the investor receives all the information about the project and chooses the most attractive return. In this case, the investment is reliably protected by the primary real estate pledge (mortgage). The decision to finance only 60% of the increased real estate value and the consistently growing value of the mortgaged property become additional safeguards in the case of phased financing," V. Vanagė points out.
According to preliminary data, the strategy of improving the investor's position is paying off - "Profitus" records a stable growth of the average invested amount. Although at least the investment is currently 100 euros, the average investment on the platform already exceeds 9450 euros this month.
Taking into account the current analysis of the needs of real estate developers and the growing interest in crowdfunding platforms, phased financing becomes not only an innovative but also a practical choice for companies planning million-euro and larger real estate development projects. Existing examples already prove the effectiveness of the model, and the interest of investors and the resulting additional benefits allow us to predict its further popularity.