What Is CrowdEstate
CrowdEstate is the Estonian startup founded in 2014. Current CEO is Loit Linnupõld, former Country Head of Nordea Bank in Talinn, Estonia. It was originally established to provide capital for financing of development of residential projects. In real estate, is one of the first crowdfunding platforms in Europe with historical 17.35% p.a. return (mainly due to initial high interest rates which are considerably lower now). It has more than 40,000 investors from all around the Europe.
Why Is CrowdEstate Relevant
CrowdEstate is one of the pioneers of crowdfunding in Europe. It managed to stay relevant even in today’s competition because of many years of know-how and a variety of projects available. Even though it started only with residential projects, in recent years, it has been expanding more and more into some other areas, such as working capital loans.
Same as other companies within the sector, CrowdEstate serves as a platform matching the investors/lenders and real businesses/developers. Usually borrowers approach the platform for additional financing on top of the loan provided by a bank or other institution or due to refinancing of current liabilities. Thus, the main competitors of CrowdEstate are similar platforms, offering the same services.
The main competitive advantage is detailed information about every investment opportunity. Compared to its competitors, the information provided is really robust and investor can see every aspect of the opportunity on one page. Each project contains an executive summary of capital structure, details about the project and collateral, location, market analysis, SWOT analysis, key personnel info and CrowdEstate rating (15 categories from A1 to C5). Due to a large number of investors, offers are usually filled in a few days (depends of the type of project, interest and collateral).
Website of CrowdEstate is really well designed. Directly in investor profile, you can see expected payments, news about your projects and projection of the value of your account after incorporating expected payments. It might be a little bit difficult to understand at first, but it is a great value added to see your portfolio development in time.
Strengths And Weaknesses
CrowdEstate serves as intermediary for loans provided to companies and developers in Baltic countries, Italy and Romania. Mainly projects in Italy and Romania are great diversification opportunity as very few such projects for investing in those countries exist in the crowdfunding industry.
The company offers its own services of screening process, being an agent between investor and borrower and usually is also involved in debt collection in case of default. This in both advantage and drawback because even though you are dealing directly with CrowdEstate without any third party, due to only several employees which work there the news provided to investors might be a little late. This is currently happening for some projects.
As the amount of investors is very high, you can communicate directly with other investors via group on Facebook HERE. Some employees of CrowdEstate are also present in the group so sometimes you are able to get information from there even before they are announced officially on the website.
CrowdEstate also offers secondary market with no fees for investors who wishes to exit the investment early by selling the remaining principal to a fellow investor either with discount or premium. The secondary market is pretty liquid here and I was personally able to sell all the opportunities so far even with a slight premium as well. Expected rate of return using XIRR formula is visible next to each opportunity. Investors are also able to sell only part of their principal (to partially decrease exposure towards one project).
Regarding additional assurance collateral is used. For residential projects the apartments which are being built usually serve as collateral. It depends on the project, whether 1st or 2nd rank mortgage is used, but collateral is always summarized within the project profile. There is no buyback guarantee from CrowdEstate or borrower. Even for generally safe collateral as real estate, investors have to understand that this is not 100% guaranteed in any time due to market price fluctuations.
The main weakness of CrowdEstate is currently communication with investors. As the company is growing and taking care of more and more projects, issues are arising as well. Since the platform is taking care for the whole administration most of the time, employees have to communicate with the borrowers directly and that might be time consuming considering the available workforce. Late communication brings uncertainty among investors who cannot make decisions based on the most updated information and cannot reasonably price the value of their remaining principal on the secondary market if they wish to exit the opportunity early.
As I already mentioned, the platform is more and more exposed to working capital loans compared to the past. I understand that this segment is offering higher interest rates than construction projects, but it also brings higher risk. Collateral is often not sufficient or even questionable and indeed such working capital loans are currently facing issues. According to fellow investors inexperience with working capital loans resulting in the wrong due diligence performed by CrowdEstate is currently a problem. However, it is also the personal decision of each investor in which loans he would like to participate.
In December, CrowdEstate announced that opportunities from Italy should’ve been taxed by withdrawal tax according to the multilateral treaties signed between Italy and country of origin of individual investors. After the announcement, investors got worried how is that possible that CrowdEstate wasn’t aware of the tax regime in countries where it operates and if the similar regime should work also in other countries where loans are granted. This issue is currently being resolved so no more details are available for now.
What Are The Risks
All loans are backed by collateral. Those are mainly 1st or 2nd ranked mortgage, commercial pledge to shares, commercial pledge to specific assets or personal guarantee. There is also a combination of these for some projects. Nothing is risk free and thus investors must remember that market value of collateral might be less than principal ale thus they might suffer losses in case the company will experience financial trouble. No buyback guarantee is provided by CrowdEstate.
CrowdEstate is not stating historical default rate. According to my information, there are some projects which are questionable at the moment and some part of the principal might be lost. There also were some defaults in the past, but CrowdEstate so far has a good track record in recovering investor’s claims. I believe that no residential project has defaulted yet altough few of them are currently having troubles (they are still backed by collateral though). Past historical rate is however no guarantee of future results.
Remember that with crowdfunding, your capital is at risk. CrowdEstate is not covered by the Deposit Guarantee Scheme or the Investor Compensation Scheme. This is a standard practice in the industry as currently crowdfunding in general does not require any license from the regulator.
What Are The Possible Returns
CrowdEstate promotes historical return slightly above 17% p.a. As the competition is growing, it has to be pointed out that current returns are generally lower. CrowdEstate is using its own grading system and more risky projects are paying higher returns. Currently, for residential projects the interest is between 11-15% and for working capital loans the interest is between 13-17%. For residential projects the interest is paid approximately quarterly and principal might be repaid slowly over time or only at the end of the project. That is reasonable considering the timeline of construction projects. Working capital loans are generally paid on monthly or quarterly frequency. This information can always be found under project’s prospect.
From my own personal experience, I have a long term XIRR of around 12% before taxes, which is a reasonable amount considering the fact that I only invest in lower risk residential projects backed by 1st rank mortgage collateral.
Currently, CrowdEstate doesn’t offer any sign-up or cashback bonus. That might be due to the fact that the platform has a significant number of investors already and is able to finance as many projects as needed. For the year 2018 only 1 project was cancelled due to lack of funding, according to the annual report.
At CrowdEstate it is possible to set up an auto investment strategy. This can be used to automatically invest in projects by selecting the desired opportunity type, expected return, length of the investment and CrowdEstate own grade. This is a standard feature for passive investors who don’t want to access each project individually or want to make sure that the project will not be fully funded already before they can login.
CrowdEstate is operated by Crowdestate OÜ, registered in Estonia. Balance sheet as at 31.12.2018 shows that assets consists mainly of intangible assets (I assume website) and cash. There is a relatively small loan of EUR 35 thousand and some payables but equity is the most dominant component on liability and shareholder’s equity side.
Healthy balance sheet is supported by growth on income statements as well. In general, the platform doesn’t charge any fees to investors but it is getting a commission from borrowers after the project is funded and cash is distributed which is the industry standard. CrowdEstate was able to more than double the revenue and profit before taxes. Growth was supported by an increase in employees when the company had 5 employees compared to 2 employees in previous period.
The CrowdEstate’s business model seems to be sustainable and achieving significant growth already as a result of the increased number of projects and investors. I don’t see any information about the auditor in the annual report so I have to assume that those figures are not audited. If you want to read it by yourself, click HERE.
There were 2 projects pointed out in the notes to financial statements as projects with overdue repayments. Currently, the first project (Kevade 9, Talinn) is officially bankrupt since November 2019 which clears the path to selling the company’s assets, including the apartment mortgaged as collateral to investors so it seems that the investors will be able to get at least the principal back. For the second opportunity (Cellin Technologies (II)) it seems that refinancing offer proposed by the company has been accepted by investors which postponed the repayment. It still looks like there are issues, but there is also definitely hope for the investors. This means that CrowdEstate managed those 2 issues quite well. We will see how new annual report will look like as there are quite few working capital loans projects with ongoing issues.
Summary And Recommendation
|Market Position||Market leader in real estate development project financing|
|Risk||– Default risk of borrower|
– Insufficient value of collateral
– Default risk of CrowdEstate
|Loan Performance||No statistics publicly available. In general relatively solid payment discipline with several problematic projects where delays currently exist|
|Loan Details||Complex assessment of each opportunity with financial statements and forecasts|
|Auto-Invest||Yes, managed by investor|
|Financial Performance||– Profitable for last 2 consecutive financial years|
– Not audited by external auditor
CrowdEstate offers commission free investing in working capital loans and residential or commercial construction loans provided to business or developers based in the Baltics, Italy and Romania from EUR 100 per one loan. Historically, investors were able to receive around 17% p.a. interest. Expected interest to current investors is generally lower at around 11-14%. The platform is user friendly and information about the project is one of the best in the industry. For passive investors auto-invest feature is available.
For me personally CrowdEstate is the first crowdfunding platform I invested in back in 2018. As I mentioned, I invest only in construction loans with 1st ranked mortgage as I find working capital loans to be out of my risk appetite. But this is up to each investor and his goals. In recent months, few issues arose and fellow investors are complaining about the communication from CrowdEstate support and due diligence process which might not be as thorough as proclaimed. There is also a doubt about the ability of the platform to deal with working capital loans and recognizing any potential issues early.
I personally recommend not to use auto-invest and assess each loan individually. The platform provides lots of useful information about the project and it might not be the best idea to let the auto-invest decide for you. And most importantly, always be aware of the risks.
To recap, if you would like to participate in crowdfunding through one of the oldest platform in Europe with a solid record in returns and managing defaults, you understand the risks and uncertainties involved, you can join me and thousands of others and SIGN-UP HERE.