Interview with Mihkel Stamm-COO of EstateGuru
Heute haben wir den COO von der P2P Plattform EstateGuru Mihkel Stamm für ein spannendes Interview eingeladen. Wie die EstateGuru von der Konkurrenz unterscheidet und welche Sicherheiten Investoren haben, erfährst du in diesem Interview.
Mihkel, can you briefly explain our readers what EstateGuru actually does?
EstateGuru is the leading Marketplace for short-term, property-backed loans in Continental Europe. We connect developers and businesses with investors, enabling them to raise the necessary capital to finance their projects or to borrow against professionally valued property. At the same time, investors can earn remarkable returns by investing in property-backed loans. The particular expertise of our founders from real estate development, legal, financial and investment scene enables us to assess each project adequately and identify its potential.
What is the development of the P2P market you expect in the next few years?
Over the years there has been growth in alternative financing. For example in the UK Lendinvest (one of the biggest property lending platforms) recorded its record sales by giving out over 100 million in value in January 2019. Source
Similarly, here at EstateGuru we have also seen at least 2 times year-to-year growth during the time we have been operational. Source
At the same time, new market players pop up around the Europe. Therefore, the prediction is that by 2025 the market for alternative financing is more than 12% of the total volumes in Europe (Sources: Cushman & Wakefield 2016, IPF Changing Sources of RE Debt capital sources 2016).
However, there hasn’t been big crises in economy for a while. Therefore, it is hard to predict what will happen if there is a cooldown in the economy. Even today there has been some platforms who are struggling with increasing default rates. In our case we believe that having collaterized product will decrease the risks for investors and therefore making the product attractive in each economic cycle.
What is the difference between EstateGuru and other P2P platforms?
One of the main differences is that EstateGuru offers only business loans – we do not give out consumer loans and we originate all the loans ourselves. This enables us to do thorough due diligence on all projects. We have an internal credit committee who looks through each loan application and decides what can be approved for the marketplace. Also, all of the projects on the EstateGuru marketplace are backed by a collateral. Having a collateral adds an extra level of security. This also means that in the event of a loan default (when a borrower is not able to pay back the loan), we start a litigation process and eventually can cover the loan amount by selling the underlying asset through a public auction.
What is the return an investor can expect when investing via Estateguru?
As there is no costs for making the investments and at the moment we have managed to keep the loss of capital for investors at 0, then the return on investment can be seen as the average historic interest which is 12.25% from all repaid loans.
What will happen in case the borrower is not able to pay back?
EstateGuru only finances projects that are backed with a collateral and which have a maximum LTV of 75% (meaning if there is collateral, which is priced for 100 000 eur with current market value, then maximum loan we give out against this collateral is 75 000 euros). In the event of a borrowers inability to pay back the loan, we put the underlying asset up for a public auction and recover funds to investors by selling the collateral. EstateGuru nearly always (97%) provides collateral against a first rank mortgage, on certain cases 2nd rank. When EstateGuru has established a first rank mortgage then no-one can overcome this mortgage – not the bank nor other suppliers. When there is a second rank mortgage established, then the LTV still remains under 75% and in case of a bankruptcy no-one can overcome this claim. In that sense, the collateral remains to protect the investment at all cases. We follow each loan project closely and use soft methods to keep the borrower on track with his payments. When necessary, we start the sale of the collateral. For that we have professional partners in all countries where we operate.
All the loans are backed with a mortgage. What is the remaining risk investors still face?
EstateGuru has set criteria according to which the maximum LTV is 75%, but the average is 59%. The real estate collateral and strong risk mitigation enables us to build our business model upon the presumption that in case of a recession, EstateGuru will be able to recover our investors‘ funds. Should the firm itself become insolvent, then our legal processes (wind-down plan) are set up in a manner that all established contracts are solid and remain unchanged (because they are established directly between the borrower and the lenders). Our investment opportunities are short-term in nature and in this short period, big global macroeconomic changes are unlikely, which leaves us room to react to any smaller changes in the economy. In the long term, recovery is likely.
The remaining risk is that when recession hits, it is possible that the value of the collateral decreases and in this case we are forced to sell the collateral at a lower value than expected, meaning that we are able to return less than required to our investors. To minimise these risks we always suggest to diversify portfolio as much as possible. To get better understanding associating risks read our risk statement (https://estateguru.co/
Not particularly a risk, however the investors need to consider potential timely delay in receiving the funds once a borrower becomes insolvent. The auction process is difficult and acquires time, which is why we will consider other alternatives before an auction is announced. EstateGuru specialists try to reason with the borrower to find alternative solutions, as this would at the end of the day be the fastest means for the investors to regain their funds. Our business model and processes are strong, however legal procedures always acquire a certain amount of time.
Why are borrowers ready to pay more than 10% for a year? Isn’t it cheaper for them to borrow from the bank instead from the crowd?
After the credit crunch and recession, many banks have tightened their lending criteria, which means that it is much harder for borrowers to get funds from the bank. Many loan applications with a strong business plan and a solid collateral get rejected because they are not in suitable stage or loans sums are too small. In this cases we are the bridge for medium and large size developers before they get their projects to the stage where banks step in. At the same time, when you are small or medium size developer then speed and flexibility is the key. EstateGuru offers fast and flexible property financing for these kind of borrowers. If it’s a one year project, then it doesn’t matter that much if the percent is 8% or 10% (when you calculate interest sum what you need to pay). Financing through EstateGuru is quicker than banks and cheaper than hard money lenders (when all the hidden additional costs included). Also, EstateGuru is not simply a funding partner but also a marketing partner for the borrowers’ end product – that is often the reason why our borrowers return to EstateGuru. EstateGuru increases the level of professionalism and quality in real estate development through access to financing and development know-how.
In the unlikely event, if EstateGuru goes bankrupt, what will happen to the money of the investors?
EstateGuru is a facilitator of real investments, we do not offer the management of assets. All investment contracts are signed between the borrower and the investor, leaving EstateGuru out. All client funds are separated from EstateGuru’s operational funds. In case of EstateGuru´s financial difficulties or bankruptcy, client funds are safe and can still be accessed. In such an unlikely event we will act upon our wind-down policy, a contractual entity will be appointed to take over the role of EstateGuru to serve all the investments.
Many readers are criticizing that in order to use the full scope of your Autoinvest the minimum investment of each project is at least €500. Now you have adopted the autoinvest by lowering the limit to €250 for each investment. Is there a chance to lower the Auto Invest criteria to €100 or even lower?
Currently there are no plans to lower the criteria for the same reason mentioned above. We really want that investors make calculated decisions. If a person continues investing, builds a bigger portfolio and builds experience, then step-by-step the investment into one loan would also probably increase and at one point this person could also unlock choosing the criteria’s.
What are the next big changes we can expect from EstateGuru in the forthcoming future?
We are building global tech driven short-term property-backed lending brand. To achieve this then in 2019 we stay focused on growth and expansion in Europe. This also includes growing our loan offering and investor base, but also we are looking to build new partnerships with other Fintechs, Proptechs and innovation oriented traditional financial institutions. We also keep our eyes open at exciting investment and consolidation opportunities that would help to bring EstateGuru forward in a more effective way.
We closely monitor the economic and property market situation at both the micro and macro level and are confident that EstateGuru’s funding solutions are needed in every market environment. We have strengthened our risk and loan servicing teams who are ready to cope with any challenges that changes in the economic environment could bring. As strongly as we believe in flexibility and diversification, we also believe in being prepared for every situation.
Which strategy would you recommend new investors who are interested in financing p2p loans?
We always propagate diversifying portfolio. Instead of investing all your money into one loan, you should divide it into multiple loans (and it would be even better if you also diversify between loan types and have geographical diversification) and build portfolio over time. This way if something happens with one loan (and recovery process starts) your overall portfolio stays in good shape. Our stress-tests shows that if you have diversified your portfolio enough then it can also handle better more stressful economic situations.
Mihkel, thank you very much for your time and this interesting interview. I wish you and EstateGuru all the best for the future.
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