When investing in government bonds, through peer-to-peer lending platforms or by financing real estate projects, the principle is essentially the same: the investor lends their money and receives interest in return. However, the potential return and risk can differ significantly depending on who the money is lent to, what secures the loan and what would happen if the borrower failed to repay it.
According to Bernardas Preikšaitis, COO of the real estate investment platform InRento, before investing it is important to assess not only the offered return and potential risk, but also the period over which the invested amount is expected to be returned to the investor.
Who Is the Money Really Lent To?
In the case of government bonds, the investor lends to the state, while by purchasing corporate bonds, they lend to a business. The annual interest rate on currently issued government savings notes, also known as defence bonds, is around 2.4–2.8%. Corporate bonds usually offer higher interest rates, but it is also important to assess what secures them and what would happen if the company failed to meet its obligations.
“Some corporate bonds issued in the market are not secured by any assets, or are secured only by a second-rank pledge. The investor sees an attractive interest rate, but does not always ask what happens if the issuer fails to pay. The answer is often simple: the holder of an unsecured bond joins the general queue of creditors,” says B. Preikšaitis, one of InRento’s executives.
When it comes to corporate bonds, secured bonds are backed by specific company assets, while unsecured bonds rely on the company’s overall solvency. Subordinated bonds carry even higher risk: if the company becomes insolvent, the claims of their holders are satisfied only after those of other creditors.
Bond redemption is also important. Since the principal amount is usually repaid only at maturity, it is worth assessing what funds the company plans to use to settle with investors.
“Before purchasing corporate bonds, it is worth answering several questions: whether the issue is secured by assets and in what order of priority, what financial covenants are set out in the issue terms, and what funds the issuer plans to use to redeem the bonds. If the answer to the last question is a future new issue, the investor is taking on not only the issuer’s business risk, but also refinancing risk,” notes B. Preikšaitis.
The Biggest Difference Is Not the Interest Rate, but the Collateral
According to the European Securities and Markets Authority (ESMA), more than half, 58%, of all capital raised through European Union crowdfunding platforms is allocated to investments in loans for businesses and real estate projects.
On peer-to-peer lending platforms, investors’ funds are usually lent to individuals or small businesses. Such loans are often not secured by pledged assets, while in the case of real estate crowdfunding, loans can be secured by pledging the financed real estate.
“The key difference is not the size of the interest rate, but the collateral. When a loan is secured by a first-rank mortgage on real estate, in the event of borrower insolvency, investors’ claims are satisfied as a priority from the value of the pledged asset. When lending without collateral, investors are left relying on the borrower’s honesty and solvency,” explains B. Preikšaitis.
However, collateral itself does not eliminate risk. If the borrower fails to meet their obligations, it matters at what price and within what timeframe the pledged asset could be realised.
“It is important to be transparent here: a forced sale of pledged real estate can take from several months to a couple of years, while the realisation price depends on the market situation at that time. This is precisely why a conservative loan-to-value ratio is important – it creates a buffer in case the asset has to be sold under less favourable conditions,” he adds.
Returns and Liquidity
The risk of different investment instruments is also reflected in the expected returns. Currently, the annual interest rate on government savings notes reaches up to 2.8%, while the historical average return of real estate projects financed on the InRento platform stands at 11.68%. Interest is paid to investors monthly, although historical results do not guarantee the same returns in the future.
Investment liquidity also differs. Savings notes can be submitted for redemption before maturity, while bonds or crowdfunding investments can be sold on the secondary market. However, the Baltic bond market is not particularly liquid, and most crowdfunding investments are usually held until the end of the project. Some platforms, including InRento, provide the option to sell investments earlier. In InRento’s case, the number of secondary market transactions is not high, but this is driven not by a lack of buyers, but by limited supply – there are more often too few investors willing to sell attractive investments than too few buyers willing to purchase them.
“None of these instruments is universally the best. Government bonds are suitable for a financial reserve, while asset-backed lending is an instrument for those seeking a higher return without giving up the protection of collateral. The most important thing is to understand what you are buying and not to lend all your funds to a single borrower, no matter how reliable they may appear,” summarises B. Preikšaitis.
What Else Is Worth Checking Before Investing?
According to ESMA, retail investors account for 88% of those investing through crowdfunding platforms. In the EU, these platforms operate under the unified ECSP (European Crowdfunding Service Providers Regulation), while in Lithuania they are licensed and supervised by the Bank of Lithuania.
“For the investor, this means a simple rule: before investing, it is worth checking whether the platform holds an ECSP licence, meaning authorisation as an EU crowdfunding service provider, and finding its publicly disclosed default rates. A licence does not guarantee a return, but it ensures that the platform is subject to uniform information disclosure requirements and independent supervision,” says B. Preikšaitis.
Nevertheless, regulation does not eliminate risk, so it remains important to assess the investment itself and diversify the funds invested.
