How to invest in German redevelopment projects on a modest budget
European Union (EU) key interest rates recently hit
Because of this, investors are now looking for other ways to grow their savings. Many have turned to more profitable strategies known as Value Added projects, which include property construction or redevelopment. Independent participation in such projects typically requires a large budget and experience in the local market. Today, however, investors with smaller budgets can also participate in Value Added projects via mezzanine loans and crowdfunding platforms.
Investors typically provide mezzanine loans to a Special Purpose Vehicle (SPV) a developer creates for a particular project in exchange for a fixed interest for a loan. The developer redeems the mezzanine loan after the senior debt, which is a bank loan. It is possible to invest in a mezzanine loan via crowdfunding platforms, which are collective investment platforms. In Germany, they mostly raise money
Advantages of mezzanine financing
Mezzanine financing is beneficial to investors due to a number of reasons:
• Low entry threshold
While the minimum budget for commercial and residential property purchases in Europe is €100,000 and €1 million respectively, many German crowdfunding platforms offer projects to investors with budgets as small as €500.
• High yields
Unlike rental properties, which yield
• An opportunity for additional yields
In addition to the mezzanine loan interest, investors can count on an additional yield, which depends on profitability of the project. This option is known as an "equity kicker" and is typically structured in the form of one of two types of securities: options or warrants.
• Moderate risk
Just like a bank, the mezzanine investor typically maintains a safe distance from the risk. The developer is the first to lose capital under a negative scenario. To be on the safe side, it is recommended that investors participate in the projects in which developers put down their own funds. In doing so, they partly assume the risks associated with the project.
• Simplicity and convenience
Investors can sign a loan agreement remotely and transfer money from their accounts. They will receive the interest and the body of debt onto them. Unlike property transactions, these projects do not require waiting for several months, registering title to a property in the Land Register or paying for the transaction.
Let us consider an example of a real micro-apartment construction project in the federal state of North Rhine-Westphalia. The total cost of the project is €44.8 million. A bank provides 83% (€37.2 million) of this sum, while the developer (€2.6 million) and mezzanine loans (€5 million) make up the balance. The project delivery time is 2 years.
To carry out the project, the developer creates a Special Purpose Vehicle (SPV) to which the land plot is registered and a bank loan is issued. The developer attracts mezzanine investors via Tranio, a crowdfunding platform and its project company. of the sum to be raised from investors, €2.5 million is expected to be provided by investors who contribute at least €2,000, and the other €2.5 million by those who contribute at least €500,000.
The yield rate for mezzanine investors who contribute €2,000 to €500,000 is 6% per annum and 8% for those who contribute more than €500,000. The latter also get an equity kicker in the form of the margin on the resale
|Total project cost||€44,820,000|
|Bank financing (83%)||€37,200,600|
|Funds to be raised (17%)||€7,619,400|
|Investor funds |
Yulia Kozhevnikova, Tranio