Real estate crowdlending allows several investors to collectively finance a loan granted to a company or developer. In return, they acquire the right to recover their capital and receive the interest established in the contract, provided that the borrower meets its obligations.
Knowing the interest rate and expected term in advance does not make the investment safe. The decisive question is whether the developer will be able to repay the loan, where the money will come from and what real protection exists if the project does not progress as planned.
What is real estate crowdlending?
Crowdlending is a form of crowdfunding based on loans. The platform connects companies seeking financing with investors willing to provide capital.
In a real estate transaction, the loan may be used to finance, among other needs:
- the purchase of an asset or land;
- costs prior to bank financing;
- construction or refurbishment;
- refinancing;
- or a temporary cash-flow need.
The contract establishes the interest, maturity and repayment conditions. Payments may be made periodically or concentrated at the end of the transaction, together with the principal.
Crowdlending and equity are not the same
Crowdlending and equity are two forms of crowdfunding, but they place the investor in different positions.
In debt projects, the investor acts as a creditor. The interest and repayment conditions are contractually defined, although payment depends on the borrower’s ability to pay.
In equity or capital gains projects, the investor participates in the capital of the company developing the transaction. There is no return fixed in advance: the result depends on income, costs and the actual duration of the project.
Debt usually offers greater visibility over the contractual return, but it is not necessarily less risky in every case. A subordinated loan without guarantees may offer limited protection, while the risk of an equity transaction will depend on its entry price, progress, pre-sales and structure.
What it means for a platform to be regulated
Business crowdfunding is subject to a common European framework that establishes authorisation, information, supervision and investor protection requirements.
Before investing, it is advisable to check that the provider appears in the official registers of the Spanish National Securities Market Commission — CNMV, either as an entity authorised in Spain or as a European provider enabled to provide services in the country.
Being regulated means that the platform is subject to certain obligations. However, it does not mean that the CNMV approves each project, guarantees its return or is liable for possible losses.
These investments are not bank deposits either, nor are they covered by the Deposit Guarantee Fund. Regulation improves information and establishes safeguards, but it does not eliminate the economic risk of each transaction.
The repayment source is the first criterion
Before focusing on the interest rate, it is worth answering one question: where will the money to repay the loan come from?
The usual repayment sources may include:
- the sale of homes;
- refinancing through a bank loan;
- the sale of the financed asset;
- income generated by its operation;
- the developer’s own resources;
- or a combination of several sources.
A mortgage guarantee may provide protection, but it does not replace a viable repayment source. If the plan depends on selling an asset at a price that is difficult to achieve or on obtaining financing that has not yet been approved, the loan may be delayed even if a guarantee exists.
It is also advisable to review the project’s progress, licences, pre-sales, the developer’s equity contribution and its experience in similar transactions.
Rank, guarantees and loan ratios
Not all debt is repaid in the same order. Senior debt has priority over subordinated positions. For this reason, a junior loan or a second-ranking mortgage presents a different risk from first-ranking secured debt.
Possible guarantees include:
- mortgage over an asset;
- pledge of shares or accounts;
- corporate guarantees;
- personal or third-party guarantees;
- and control over the cash flows generated by the project.
Their existence does not ensure recovery. Their rank, correct constitution, the real value of the asset and the time and costs required to enforce them also matter.
Two ratios help put the debt level into context:
- LTV, or loan-to-value, compares the financed amount with the value of the asset.
- LTC, or loan-to-cost, compares the loan with the total cost of the project.
A lower ratio may leave a greater margin of protection, but it should not be analysed in isolation. The valuation may change, the asset may be illiquid and project costs may deviate.
How to choose a platform
The advertised return should not be the only criterion. It is worth analysing:
- authorisation and supervision;
- clarity of documentation;
- the project selection and analysis process;
- the team’s experience;
- monitoring of transactions;
- management of delays and defaults;
- fees;
- and possible conflicts of interest.
Track record should also be interpreted carefully. It is not enough to know the average return of closed projects. It is more useful to review:
- how many transactions have matured;
- how many were paid on time;
- how many are delayed;
- how much capital has been recovered after a default;
- how long the process has taken;
- and what definitive losses have occurred.
A young platform or one with few closed projects may not yet have gone through a long enough cycle to assess its real performance.
How to diversify in crowdlending
Spreading capital across several loans can reduce the impact of an individual problem, but simply counting transactions is not enough.
A portfolio made up of ten projects from the same developer, in the same city and dependent on the sale of new-build housing remains concentrated in common factors.
Diversification should consider:
- developers;
- locations;
- loan purposes;
- ranks and guarantees;
- repayment sources;
- and maturities.
It may also be useful to invest through a consistent investment plan, rather than committing all the capital at once. This reduces dependence on a single entry point, although it does not eliminate risk if the new investments are very similar.
Staggering maturities helps prevent the entire repayment from depending on one date. However, timeframes are estimates: early repayments, extensions or delays may occur.
The main risks
Real estate crowdlending involves several risks:
- Default: the borrower does not repay the principal or interest.
- Delay: the maturity is extended or the project needs more time.
- Illiquidity: there is usually no simple exit before maturity.
- Guarantee: the asset does not cover the debt or enforcement is slow.
- Concentration: too much exposure depends on the same risk.
- Operational and planning risk: licences, works, costs or sales evolve worse than expected.
The advertised interest rate does not necessarily match the final return either. The net result may be affected by delays, fees, taxes, early repayments or periods during which the capital remains uninvested.
Basic taxation in Spain
For an individual resident in Spain, interest obtained through loans is usually taxed as income from movable capital and is generally included in the savings tax base.
Depending on the structure of the transaction, withholding tax may be applied before payment. The platform usually provides tax information, but it is up to the investor to check the data and include it correctly in their tax return.
Transactions with foreign borrowers or loans that become irrecoverable may require additional analysis. Taxation depends on personal circumstances and on the regulations applicable at any given time.
In debt, repayment capacity matters more than the interest rate
At Urbanitae, debt projects make it possible to collectively finance loans to real estate developers, usually from 500 euros. The interest, estimated term and structure are known before investing, but repayment depends on the development of the transaction and the borrower’s payment capacity.
That is why investing in crowdlending is not about choosing the project with the highest percentage. It is about understanding who has to repay the money, where it will come from, what position the loan occupies and what would happen if the initial plan is not fulfilled.
The platform, guarantees and diversification can help manage risk. None of them replaces analysis or ensures capital recovery.
