How to invest in redevelopment in Germany with a small budget?
In recent years, key rates in the EU have dropped to a record low. Bank financing fell in price to 1.5–3% per annum, and with it, the profitability of deposits, bonds and rental business decreased.
Investors began to look for new ways to make money. Many have turned to more profitable value-added strategies — building construction or redevelopment. As a rule, to independently engage in such a business requires an impressive budget and experience in the local market. However, now small investors can also participate in value-added projects through mezzanine credit and crowdfunding platforms.
Read more about Tranio value added projects.
As a rule, investors provide a mezzanine loan to a company specially created by the developer for the implementation of a specific project (Special Purpose Vehicle, SPV) in exchange for a fixed percentage for using the loan amount. The developer extinguishes the mezzanine loan second in turn after the senior debt – a bank loan. You can invest in a mezzanine loan with the help of crowdfunding platforms – platforms for collective investments. In Germany, they most often raise money for renovation projects or the construction of micro-apartments or commercial real estate.
Pros for investors
For investors, mezzanine financing is beneficial for several reasons:
Low entry threshold
While the minimum budget for buying a profitable residential property in Europe is 100 thousand euros, and a commercial budget is 1 million euros, many German crowdfunding platforms offer projects for small capital owners ranging from 500 euros.
Compared with a rental yield of 3-4%, mezzanine loans bring investors 7-10% per annum. Developers attract mezzanine financing despite high interest rates, since a bank loan is often not enough. Also, mezzanine loans allow them to reduce the size of their own investments in the project to 10–30% and thus receive a higher return on invested capital.
Opportunity to get additional profitability
In addition to interest on a mezzanine loan, an investor can count on additional profitability, the amount of which will depend on the project’s profit. This option is called the “additional kickback from the net profit of the project” (equity kicker) and is structured in the form of securities – options or warrants.
The investor, as well as the bank, is removed from the risk: in a negative scenario, the developer’s capital “burns out” first. To be safe, investors are encouraged to participate in projects where the developer provides equity, in which case he takes a part of the project risks on himself.
Simplicity and convenience
An investor can sign a loan agreement remotely and transfer money from his account – he will receive interest and a debt on him. Unlike real estate transactions, in such projects you do not need to wait several months, register ownership in the land registry and bear the costs of the transaction.
For example, consider a real micro-apartment construction project in North Rhine-Westphalia. The total cost of the project is 44.8 million euros. Of these, 83% (37.2 million) are provided by the bank, the remaining funds are the developer’s own capital (2.6 million) and a mezzanine loan (5 million). Project duration is 2 years.
To implement the project, the developer creates a special purpose company (SPV) for which it draws up a land plot and a bank loan. The developer attracts mezzanine investors through Tranio, the crowdfunding platform and its project company. It is assumed that 2.5 million euros will come from investors with a budget of 2 thousand euros and another 2.5 million – from investors with a budget of 500 thousand euros.
The yield of mezzanine investors with a budget of 2 thousand will be 6% per annum, with a budget of 500 thousand euro – 8%. The latter will also receive equity kicker in the form of the difference from the resale of the project shares to other investors.
An example of a project implemented using mezzanine loans
The total cost of the project
Bank financing (83%)
37 200 600 €
Project equity (17%)
– Equity developer
2 619 400 €
– Capital of investors (mezzanine loans)
5 000 000 €