Evo Investors update on COVID-19
Gustas Germanavičius March 20, 2020
Dear Evo Investors,
After the recent outbreak of COVID-19 Virus in Europe, most of the countries have quarantined themselves and just like us, I believe you have questions regarding your current investments and the status of projects. Therefore, during the last few days, I’ve been in contact with our partner originators and in this article you will find brief interviews on their views on the outcome of the projects and the real estate sector.
We understand that this situation can have both outcomes: positive and negative. For some, it’s an opportunity to earn even more using the Secondary Market. We have already noticed how investors trading and buying some of the investments with discounts, which will significantly increase their returns on the investments. Therefore our focus and efforts are currently on improving the Secondary Market which will be updated shortly. When they will be implemented, we will have another blog article where you’ll be able to learn some of the strategies for trading.
First, I would like to start with a short talk I’ve had with José María Pascual Muguerza CEO of Brickstarter- a partner who focuses on short-term rental property investments in Spain.
Short-term rentals are one of the types that are currently having the largest effect of the COVID-19 Virus. It's safe to assume, that these properties won't have many tenants if any in the closest future. What do you think about that?
Unfortunately, short-term rentals are suffering the quarantine and therefore many bookings have been canceled for the next 3, 4 weeks. We keep on receiving new reservations for the next months of May, June and July, but March and April have very little reservations. All the important local holidays like Fallas (Valencian festivity) or Semana Santa (Holy week before Easter)are being postponed, so we hope to recover part of the missing bookings later this year.
Have you decided to implement any changes in your business model and strategy for the next 6 months?
We really believe that our business model, based on mezzanine loans, is the safest for our investors. All our investments are backed up by the real estate properties, where our investors have invested in. The properties have zero debt, and therefore the investments are safe. We are the only platform doing that and that´s why Brickstarter is the safest P2P investment platform. We believe it´s the way to go as we will see defaults loans and delayed payments in other platforms in the following months due to the next financial crisis caused by the Coronavirus. Unfortunately, this is not just affecting short term rentals. Concerning our strategy, we´ve been studying in the last few months other areas besides short term rentals. We are working on launching coliving properties very soon, (which can be as profitable as short term rentals).
What do you think will happen with ongoing projects?
We hope that this Coronavirus crisis will be over in the following weeks so we can go back to normality as soon as possible. Fortunately, we have experience in running also medium-term rentals offering properties on websites like Spotahome or Homyspace (popular in Spain). All our properties are located in the city centers of important cities in Spain, so in case the tourism sector is not recovered we will deploy also this strategy in our Brickstarter properties.
Are there any costs that properties will incur? (electricity, internet, etc) Who is going to pay for it?
Very good question. There are a few things to consider here. First, to book any of our properties, you need to pay in advance, meaning that all of our apartments have positive cash flow. All the projects published on Brickstarter have also a 600 EUR security cash deposit included. Second, 80% of the costs of our apartments are variable. Therefore, an empty apartment means very low fixed costs. Taking everything into consideration we can conclude that right now there is no risk of supply cut-offs.
At what stage the properties are at a given moment?
EvoEstate is part of two funds in Brickbro. One of them is made by "loft" operations and the other is formed by "office" operations.
Regarding the "loft" fund, which was formed by the Gran Via 480 operation, as I mentioned the last time we have sent investors update to your clients, I would like to tell you that we have incorporated a new operation, Espinoi 1, and we have another pending property.
Regarding the fund formed by "office" operations, I would like to state that it is a fund in which we are progressing through the preparation of projects for the operations that make up the fund, which is: Josep Tarradellas, Viladomat and Republica Argentina. At the moment we have an offer for Josep Tarradellas in which we have a tenant who wants to rent the property and also we have a buyer, who is an investor who wants to have a tenant. We found out about this offer before the crisis. Therefore, regarding the stage of the properties, I would like to tell you that we are continuing to make progress on them, but it is normal that due to the situation on the market we are experiencing, the buying and selling market to slow down because visits cannot be made.
Are the construction works ongoing or have they been stopped?
Unfortunately, the construction works have been stopped. Our government declared a "state of alarm" a week ago and as a consequence indoor industrial works have been prohibited until the end of this period.
Are there any changes you are planning to make in your business for the foreseeable future?
We are currently being very cautious. We are going to slow down the growth rate that we had planned for the next 3 months. Market prices are going to drop and the term of the operations can be extended. We are also raising a lot of capital in funds and structure to have liquidity and return with a strong product capture strategy when the situation gets back to normality. We are guiding the Brickbro operations team towards sales to be able to remove the stock that we have as soon as possible
Next up is Diego Bestard CEO of Urbanitae an originator that focuses on higher risk- higher return equity projects also in Spain. Different from Brickstarter, their business model focuses solely on the developments and during my brief conversation with him I was keen to understand if the development periods will not be extended.
2 months ago we were in the normal state and were conducting businesses as usual, but current changes with the spread of the virus and downturn of the markets you will be modifying your strategy. Have you decided to implement any changes in your business model and strategy for the next 6 months?
The market conditions that we are seeing have impacted every single financial market in the globe, but we are lucky enough to be in the position of being an alternative investment that is not directly correlated to these fluctuations. While most investors in the world have seen losses of up to 40% of their wealth in the last weeks, the investment in Urbanitae and the projects we have done in the past have not been effected for now, and all projects are continuing their progress as expected. To add to this, most of our projects are midterm, with investment windows between 20 and 30 months, so they are somewhat protected from these massive short-term fluctuations. Regarding strategy change, it is too early to tell how things will go in the upcoming months, but we will certainly adjust our target projects according to what the market demands. The great thing about real estate is that it is very broad, with many different types of assets and different ways of monetizing. We will certainly keep our eyes on the market and focus on finding the best opportunities out there.
What do you think will happen with ongoing projects that our investors have co-financed?
As mentioned before, we have been in touch these days with every single developer regarding the projects that we have ongoing, and everything, for now, is “business as usual”. The developments are not stopping and in fact, last week we had several developments that sold some units, so sales haven’t stopped either. It is to be expected however that we will probably see the estimated terms increase in some of our developments, mainly due to slowdowns in acquiring building licenses or slowdowns in sales.
Have the constructions been stopped or are they still taking place?
It was announced today by the main associations of property developers in Spain that construction is not halting and will continue as usual, with the adoption of some safety measures to make sure workers are not infected. In general, we think real estate is a good refuge to be invested in right now, considering how the markets are behaving. If we add to this that credit availability is expected to be the greatest ever, we think real estate has the potential to be the best asset class in the markets. On top of this, and thanks to platforms such as Urbanitae, people are able to diversify more than ever. We will continue to look at the market closely and keep investors informed.
The final correspondent from Spain is our partner Inveslar and its CEO, Raul Zarco. During the last couple of quarters, they have introduced equity projects that involve buying properties from Auctions and Co-Living properties.
I know that Inveslar has relatively small operational expenses and therefore monthly burn is low compared to other platforms. Have you decided to make any changes in the way you will run your business in the upcoming months?
We are preparing our platform to grow faster than the last few years. We have learned a lot in the last 4 years, and we are convinced that we are in the right moment to scale it, with all the operational expenses controlled, with a small monthly burn, a great pipeline of operations and upcoming European regulation, we are preparing new financing round with an ambitious business plan.
Can you tell us more about the business plan you are planning to implement?
We are planning to raise investments for further developments. So far we have had 0 defaults and have returned investors over a 3% higher yield than expected. Last year we closed about 800K worth of property investments on our platform. Our target is to reach 2,3M in 2020 (so far we are on a good track), 5,1M in 2021 and 11,8M in 2022. On our platform, we will be investing in customer acquisition and platform developments.
What are your thoughts on the active Auction Products and Co-Living Loans?
Currently, we have 4 Auction projects (Equity) active at this time. One of them (Menorca) already has a purchase agreement with the tenant to buy. With Cambrils (29 IN) we just got the keys last week, and we had planned some visits these days and there is an interest from potential, but with COVID-19 some of these visits had been canceled. Badia Valles and Salt IN we expect to sell quickly because the price of the sale is really attractive. Loans projects that are Co-Living projects, Despite COVID-19, the rents have not slowed down much. If the occupancy of our agency is usually 95%, now for the properties is 90%, so it doesn't affect a lot the profitability, therefore we believe it's a stable market.
After the Spanish originators, I wanted to talk with Reinvest24 which business model also includes buy to let deals and also might have exposure during the quarantine. Interview with Tanel Orro, CEO of Reinvest24.
One of the projects is the Restaurant and wine boutique commercial space in Kadriorg. Currently, Europe is quarantined and will probably take some time to open up again. Do you think the tenant- the restaurant has strong enough financial standing to survive quarantine?
One of the reasons why we choose to take this property was that the tenant (the restaurant owners) had experience with crises. They were in the restaurant business in 2008 and successfully managed their businesses through the crises. Currently, restaurants in Tallinn are not under quarantine, but obviously, they are pretty empty. If this lockdown situation is going to last for months, then it will be difficult for them, but 1-2 months should not be a problem.
Duplex apartment development in Tallinn’s tech hub has been late now for a couple of months. You have recently informed that the property has been getting demand from the buyers, could you elaborate on the situation?
Lowering the selling prices has attracted some bigger investors, we have agreed on the terms and its just matter of signing the agreement in the notary. Notaries are working in Tallinn and we are trying to schedule a time before the end of this month. New updates will follow soon.
What do you think will be the general effect of the virus on your business? Do you plan to implement any changes in the foreseeable future?
This situation gives us the opportunity to find better deals, that were not on the market during the high growth times. These days we see, that mentality of businesses starts to change and now instead of investing into real estate for their offices or business, they prefer to rent and invest money into their business, either buying better equipment or investing into new technologies.
The last person I’ve decided to talk with is Tadas Budrikis, CEO of Nordstreet. An originator for property-backed loans for real estate developments and renovation. Most of their projects are in Vilnius, but there was one which was in Poland.
Most of your loans portfolio are developments and renovations. What do you think the recent effects will have on both types?
It depends on many macroeconomic factors and the duration of the quarantine. If the economy is going to restart soon we don't think we would feel a significant impact because most of our borrowers have some savings, therefore the probability of late interest payments is low. If everything continues for a longer period for sure some of the projects, especially those where the borrower was developing to sell could be problematic because of the lack of liquidity. Those who developed/renovated projects for a short period with the idea to refinance our loans cheaper in the future, would not have a significant effect. To sum up, we are not expecting project defaults mostly because of the low average LTV ~50%, which means that our clients still have some space to refinance our loans somewhere else.
Usually, during these market situations, commercial banks in Lithuania closeout for property financing. This should open interesting financing opportunities for you. Could you share some of your thoughts about the upcoming lending strategy during the upcoming months?
Yes, we are already receiving many more requests from the borrowers. This is a good time for crowdfunding because the quality of the borrowers should increase, due to the reason that high-quality bank clients would search for other opportunities to finance their projects and it could be us. Of course, we understand that to invest under these marked conditions the risk is also much higher. Therefore we understand that we should propose higher interest rates to get investors in. As I said now will be a good time to invest through crowdfunding platforms because the quality of the deals should increase as well as the interest rates.
Nordstreet is one of our originators that consistently return higher returns than expected. Kudos for that. Do you think you’ll be able to achieve the same with projects that have a maturity date in the upcoming 3 months?
Indeed, we had a very successful 2019 and even until today we have 0 defaulted projects. We believe it won't change in the next 3 to 12 months. The borrowers have many options to return the loans because behind every loan there is some kind of guarantee (real estate collateral), so they can choose to either sell or refinance it. We don't think that we have projects where we are in danger regarding the collateral we have. We would consider refinancing some of the projects ourselves if we would see that it is just a matter of time when the borrower will return the loan.
Statement from Audrius Visniauskas- EvoEstate CIO & Co-Founder
“In the upcoming weeks, there will not be any new skin in the game projects as we currently see much better offers on the Secondary Market. Some of the strategies our investors’ have implemented are to buy discounted offers for existing investments, which in case of low yield or worst case scenario negative yield, would give a higher return. During the more active trading period, we understood how much we have to improve the Secondary Market and currently our tech team is working on it. One of the really attractive opportunities are the investments that pay interest at the end of a project because the interest has already accrued.”
I hope these series of interviews have answered some of your concerns and of course, we are at your disposal even more than ever. If you need to arrange a call or send us an email, our team is here for you.