Visit to Crowdestate

I visited Crowdestate this fall, in the Estonian capital Tallinn. I intended to publish this report earlier, but I was still awaiting more detailed answers to some questions I asked during my visit. And of course I wasn’t too busy to forget it (ahum..).

My guess is that Crowdestor has the prettiest office location of all platforms: right in the medieval Old Town. The old city center of Tallinn is one of the best preserved medieval cities in Europe and is listed as a UNESCO World Heritage Site. Lot’s of small cobblestone streets and alleys, city walls, good restaurants and terraces. “Unfortunately” my hotel was only a 5 minute walk away, but I was able to discover it all the next day.

At Crowdestate I talked for quite a while with founder, CEO, and owner Loit Linnupõld.

How did Crowdestate start?
In 2013 I was working in the banking industry, investment management. Clients wanted to invest in real estate, but there weren’t a lot of options. I decided to quit my job at the end of 2013, and started Crowdestate on January 9th 2014. I started alone, and used my savings to fund the company.

The first version of the platform was built by a student in WordPress, and it had a fully manual backend. This was very time consuming! But it was a good test to see if it could work. This was only a small investment. We are now at version 3 of the platform, which is a very different platform from the first two.

The first project was a good learning experience as well. It was a very large investment and there weren’t enough investors yet to fully fund the project, eventually the funds were returned in May. But we were able to fund the next project with 400+ investors.

How big is Crowdestate now?
We have more than 40,000 investors now, and we have funded 193 loans with a total value of 80 million euro since the platform started. We currently have 24 outstanding loans and around 5-10 projects are added each month.

Our main office is in Estonia, with smaller offices in Latvia, Italy, Romania and Georgia. We offer projects in Estonia, Latvia, Italy, Romania and Georgia. The average loan term is 12 months, with a maximum of 36 months. We do not offer buyback guarantee, our investment opportunities are secured by a 1st, 2nd or a joint mortgage, personal guarantee etc. Really depends on the project’s structure.

We focus on our key activities with our 10+ employees: providing our investors with vetted investment opportunities and providing them with support. All other activities such as legal support and IT development are outsourced. We have 5 people working on platform development, and we have invested over 800,000 euro in it. The backend is now almost 100% automated.

Last year we found out a ‘copycat’ was using our name in The Netherlands, but we took them to court and won. The same thing happened in Russia and Spain.

What makes the platform unique compared to other platforms?
We are one of the largest and oldest real estate crowdfunding platforms in Europe. We provide our investors with wide range of real estate investment opportunities with different risk/reward profiles. We source and analyse our projects ourselves.

We have been profitable as a platform for all years since establishment, and we have enough funds to keep the platform running for 12 months without income.

How is the platform regulated?
We are self regulated based on UK rules, for instance we regularly publish financial statements.

We initiated a certification program in 2016, together with the Ministry of Finance and the local regulator. We are the only platform that has been certified each of those 4 years. Other platforms that have been certified earlier are Bondora, EstateGuru en Fundwise. Certification details are open and can be found on financeestonia.eu.

We do expect that from next year European regulations will be introduced.

The minimum investment of 100 euros makes it difficult for smaller investors to reinvest received interest. Are you willing to lower this minimum?
No, the minimum investment has been set to 100 EUR for several reasons. 100 EUR is affordable, and receiving interest on less than 100 EUR does not really make sense: it would be less than 1 EUR per month. Also, distributing very small interest payments could result in rounding loss.

Investing in 100 EUR incremental increase is based on the same reasons. Additionally, if we would allow reinvesting smaller amounts, that could result in the last available investment being a small and odd, for instance 7 EUR. As the minimum ticket is 100 EUR, that would mean that nobody can invest into that 7 EUR contract. So keeping a 100 EUR step is very logical, but still affordable to everyone.

What is the expected impact of another (financial) crisis, and how is the platform prepared for this?
Crowdestate as a platform is well capitalized, with more that 1,5 million EUR in equity. This would allow us to be operational for 2-3 years even if we do not publish a single investment opportunity during that time. The effect of the crisis is unpredictable, it might result in both good investment opportunities as well as project defaults. We do our adjustments in both processes as well as organisationally as needed.

In what scenarios can investors lose money?
Investors can lose their investment partially or in full when the project fails and we are not able to collect our receivables via legal processes. The key reasons for project failure might be various, but based on our experience, they are mostly either external (changes on the market, force-majeure etc) or arising from the human risk.

Are these applicable to the platform, and what is done to minimize this?
Yes, we are currently having several projects not performing according their contractual obligations.

In few cases (Baltic Forest, Viru Halud), the reasons are external and are related to the unfavourable developements on local, European and global timber markets. Nevertheless, the owners are actively taking steps to restructing their business so they can start loan repayments soon.

Few investments (eg Metsa tee 31/33/35, Q-Haus Baltic) have defaulted due to realisation of human risks – specifically, the owners/managers of those Sponsors have committed investment fraud in their own benefit and on the expense of their investors/creditors. We have initiated court processes and presented initial charges there. We have also started selling the collateral, the factory.

It is impossible to manage/ control market risks and we do not really take too many steps there. At the same time, we will pay more attention to the higher risk sectors/industries and we might decide to excude some of them being published on the platform.

The realisation of the human risks has brought up a need to review and update our due diligence activites focused on analysing the team and its track record. At the same time, this will not eliminate all potential risks – for example, Q-Haus Baltic would still be passing our updated team due diligence as both the company and its owner/manager had spotless background (no legal violations, no tax debts, no payment defaults, well-appreciated in their industry etc).

How are the investors’ funds protected?
The client’s funds are kept on a seggregated account and are not allowed to be used for anything else than for executing clients’ orders (investments, payouts). The cash balance on seggregated client account is always equal to cash within Crowdestate’s IT system, we keep online track of the balances. This means that if all investors would like to withdraw their cash balances at the same time, there would’t be any problems with doing that.

All investors’ have direct claims against the investment projects, without intermediaries. This means, that even in the case when Crowdestate as a platform should cease its operations, investors’ claims are not affected.

What are your plans for the future?
Besides the changes in the due diligence processes we are focussing on adding new countries and new investors. We are translating our website into Spanish and Romanian.

We are adding more statistics to our website, you can find these on our statistics page.

My impressions after this visit

Loit is very passionate about the company he founded, and takes the time to talk about it and answering questions. So much that we forgot about the tour around the office. The Crowdestate platform itself is also very open, and it publishes a lot of statistics. If those aren’t enough, you can download the entire loan book and do your own analysis. You can also download the list of overdue projects.

It is comforting to know the platform has enough equity to survive rough times. The overdue projects require attention though, as the platform does not offer a buyback guarantee. Several projects defaulted in the past, but Crowdestate was able to recover all investor funds (myself included). So far no investor funds have been lost. This of course is no guarantee for the future, but Crowdestate puts a lot of effort in keeping it like this.

This makes the Crowdestate team very busy, which is also quite small (10+). This is noticable in the communications, it can take some time before emails are answered. I had to send several reminders to get the anwers I needed. This is something that needs to improve.

Sometimes there are signs that a project is in trouble, before this is communicated via the platform. This is why you should be careful when investing via the secondary market as some investors will try to sell these investments in a hurry. When Crowdestate notices a project in trouble it will freeze all investments and you cannot sell it on the secondary market anymore.

All of this is not a reason for me to leave the Crowdestate platform. I will mostly avoid the secondary market, and try to spread my investments over different companies. Sometimes multiple projects are published for the same company, which you can see as different stages in the same project. And if one project is in trouble then they all are.