We are going through a world crisis right now, the likes of which we have never seen before, and whether this will lead to a full-on financial crisis remains to be seen. What is sure, however, is that many investors are panicking and making quick decisions, which may not ultimately align with their long-term goals.
As I’ve written in a separate post about coronavirus and P2P lending, I believe that the industry will survive and come out stronger, but due to this purification process, we will see platforms that fail to survive, mostly because they were weak to begin with and could only be sustained while the times were good. We’ve already seen this with the Grupeer debacle and earlier this year with Envestio and Kuetzal. I’m keeping track of the full list of failed platforms and wonky ones here for your reference.
All three turned out to be scams or had unsustainable business models. I believe there are others that will fail soon, one of them being Fast Invest. Only time will tell. In the meantime, let’s see what EstateGuru can tell us about their approach, and I invite you to leave your questions and comments at the end of the post, as always.
Over to EstateGuru…
If you’re looking for security and sustainability in the Peer to Peer (P2P) investment sphere, property secured loans offer the perfect solution.
The current global health crisis’ financial effects have been most keenly felt on the stock markets, but parts of the P2P industry are also starting to suffer.
Apart from the understandable wariness of investors to commit new funds at a time of great uncertainty, many platforms have seen a run on withdrawals and buy-back guarantees, which has caused some of the more volatile and dubious ones to collapse completely.
At EstateGuru, following an initial week where we saw slightly increased withdrawals, both loan and investment levels have remained steady, and we expect both to start rising over the next few months.
Through in-depth customer research, we also determined that a large proportion of the withdrawals were made by investors looking to take advantage of the stock market decline and get in while prices were low. Whether this turns out to be a good decision remains to be seen.
We feel that this can be ascribed to a business model that places a high priority on security, a conservative approach to risk, liquidity, a focus on short-term loans, and the fact that the real estate market is most likely to suffer less than other industries in this crisis.
Over 90% of the loans offered on EstateGuru’s platform are secured with a first rank mortgage. This means that, in the rare cases where loans go into default, our investors are offered great protection against loss of capital.
As an additional layer of security, the average Loan to Value (LTV) level on our platform is below 60%. This buffer means that even a significant drop in real estate values will not impact investors’ capital or our ability to recover principal loan amounts in the case of defaults.
We have always been very conservative in terms of risk. In fact, we thoroughly analyze every project (borrower, collateral, business plan) no matter how small the loan amount.
Real estate, by its very nature, makes valuation easy and offers a level of predictability that other markets in the P2P industry cannot match. Sending an independent evaluator with local knowledge to a property to determine the viability of the application offers great transparency when we determine LTV rates. In addition, we always double-check using Automatic Valuation Models.
EstateGuru’s LTV rates are calculated on the current value of the property, never the projected future value.
As we are seeing, many of the P2P platforms who are struggling generally act as middlemen between investors and loan originators. This adds a murky third layer to the entire exercise and it can be very hard for investors to know exactly who they are funding.
At EstateGuru, every loan is backed by real estate, with most of them being residential real estate in particular. We expect governments in the seven countries where we have offered loans to support households intensively during the current crisis. As such we should see fewer problems in residential real estate than in other sectors.
However, the reality is that investors should expect more loan periods to be extended over the coming months as, in some countries, notaries have been closed during the quarantine. Also, banks and buyers have started delaying transactions due to the extended lockdown conditions. To react to these trends and adapt to the changing macroeconomic situation, we have increased interest rates for new projects to the level of 12%+.
As the P2P market has grown to become a widespread asset class with a proliferation of platforms vying for investments, the number of companies offering this service has grown exponentially.
For their own security, it is vital that investors have a thorough understanding of how the platform operator of their choice has set up its structure and product, with the focus on how the investors’ assets are actually represented. The key differentiators for us are:
- All EstateGuru’s investment opportunities are backed by real estate.
- EstateGuru keeps all investors’ assets fully segregated from the company’s own assets.
- EstateGuru has established all loan contracts directly between the borrower and the investor, ensuring that, should anything happen to EstateGuru, all contracts are valid and ongoing.
- EstateGuru has established a security agent structure, according to which the security agent will represent all investors in the transactions. The security agent is an independent SPV controlled by a law firm. If anything were to happen to EstateGuru, the security agent would find a new platform operator to manage the investments until their maturity.
- All investors’ cash assets on the platform are always available – meaning that this is your own virtual wallet, your funds have not been engaged elsewhere and you can freely access your available funds at all times.
- For the third year in a row, EstateGuru will be publishing an audited financial report to all of its investors. Our auditing partner is Ernst & Young. In addition to that, a monthly public overview of our loan portfolio is available. Moreover, investors can access our full loan book on the platform at any time.
In conclusion, we are confident that our structures, security measures and business model is robust enough to withstand the current economic situation and that investor loyalty and patience will be rewarded.
We have practiced transparency throughout our existence and have joined a variety of voluntary regulatory bodies while being strong proponents of the introduction of EU-wide policies. A healthy industry with responsibly run platforms is in all our best interests.