5 minutes
Editorial Invest in Slovakia
We received an inspiring question from one of our visitors. "How are we different than that failing company in China?" We offer the following article as an answer in an effort not to shame, but to learn and do things better.
The world of real estate investing was rocked by the following news last month: The Chinese property development giant is on the verge of bankruptcy. The name Evergrande has no doubt come to you even if you are in another investment sphere. What has caused the current state of affairs and why hasn't it happened to us yet?
Nothing just happens overnight. This company has also gone through various stages of development and slowly but surely built up a decent momentum over time. These are a few of the issues that have driven the Chinese developer to the state it is in now.
"First it was apartment buildings, then a soccer team [Guangzhou F.C.], a mineral water company [Evergrande Spring], a music brand [HengTen Networks], amusement parks [Evergrande Fairyland], and finally electric cars [Evergrande New Energy Auto]." - Eryk Bagshaw, Sydney Morning Herald. In the words of Mattie Bekink, director of the China Economist Intelligence Unit, the firm has "strayed far from its core business, which is part of how it got into this mess". These statements announce one of the causes of the current problem - "the complexity of the Evergrande Group and the lack of information about the company's assets and liabilities." Therefore, "it is difficult to ascertain a more accurate picture of [its] recovery." (words of Goldman Sachs analysts).
How does Invest in Slovakia work? Focus on one thing - that, in what we are the best at. Real estate has proven its value over its long history and has earned its rightful place among investment assets. We also believe that crowdfunding is the future of investing.
The Chinese Communist Party allows few investment options - 70% of Chinese household wealth is invested in real estate. The market is therefore not sufficiently diversified, and in connection with this Evergrande Group, but also other developers (China Properties Group, Fantasia Holdings, ...) have been wrongly economically motivated and have created supply even when demand has not kept up - resulting in the growth of "ghost towns" in China (picture of an unfinished apartment building). It is quite common practice that debt is part of the "life" and functioning of a company. However, a company's level of debt must be guarded and must not exceed a certain level. Its regulation is the responsibility not only of the relevant supervisory and regulatory authorities (which have been dealing with this issue more or less successfully in China for a long time), but also of the management of the company itself. The latter decided to take a risky step last year when regulators and banks decided not to continue with its endless indebtedness.
Evergrande approached some of its 200,000 employees with an offer of extremely expensive short-term debt. It promised them a return of up to 25 percent annual interest on a two-year loan if they reinvested in the company. Which is a risky model, sustainable only if the company can grow and sell relentlessly without delays. When the Chinese government introduced the "three red lines" policy last year, the property development giant crossed all three - it had a liabilities-to-assets ratio of more than 70 per cent; a net debt-to-equity ratio of more than 100 per cent; and a ratio of cash (and cash equivalents) held to short-term debt of less than 100 per cent.
What Invest in Slovakia has at its disposal? Accountability, transparency, check - Operating in an environment with healthy competition, we are not only motivated but compelled to offer our investors only the best investment opportunities that will pass in-depth analysis and careful selection.
The notion of a self-fulfilling prophecy captures the point of another reason that has taken another pinch of stability out of an already tilted pyramid. The market rewards winners and punishes losers. When the problems start to mount, fear, uncertainty and doubt ("FUD") lead investors to "cash out" their deposits. This leads to a fall in the value of the firm's shares and so earnings, together with the economic indicators mentioned in point 2, fall and the 'cost of debt' of the indebted firm rises.
What do you buy through Invest in Slovakia? With us, you do not buy general bonds or shares with no real voting option, but you can directly choose the project you will support as an investor. The decision remains in your hands. (Don't like the current opportunity? Choose another one from our regular offer.)
It has slowed down many industries and developers, as one of those affected, have had to suspend work, increase budgets and delay closures. They were paying off loans on projects they had not profited from. Anyone, not just construction companies, has to reckon with various complications and delays, but such long 'dead periods' are certainly not predictable.
How did Invest in Slovakia handle critical situations? The unfavourable conditions of the pandemic also affected us - our timetables were delayed due to the processing of building permits and zoning decisions, as the authorities were not in a hurry and worked in a limited mode. However, even in this situation, we were able to regularly offer new, interesting investment opportunities to our investors.
While not all, most problems can be addressed or their impact mitigated if they are started early. In the words of David Bahnsen, Bahnsen Group's chief investment officer, to The Post, "Evergrande's collapsing bond prices have been predicting complications for some time." The solution the group has opted for was mentioned in item 2. Costly short-term debt. They paid so dearly for getting more time. The near future will tell if the time gained will be sufficient. "In recent years, the company has been mismanaged and has not been able to operate prudently according to changing market conditions," said Fu Linghui, a spokesman for the National Bureau of Statistics. "This caused a serious deterioration in its operational and financial metrics and ultimately demonstrated the risks."
What makes Invest in Slovakia different? We monitor the market and the company's development indicators. Another supervisory body may be the NBS, which has not yet set its policy towards crowdfunding, but from next year we will be fully subject to their supervision. The security of the projects is set to cover everything that can happen. Although we are not yet regulated by the NBS, we are setting up sanctioning and security mechanisms so that investors' claims are always covered. There is no 100% guarantee for any form of investment, be it cryptocurrencies, equities or government bonds. Real estate, however, is liquid and although cyclical, holds its value.
For us, prudence means that in the event of any problems, the property can be sold either at a profit or, in the worst case scenario, at market price and the investors can be paid out gradually.
The government's drive to increase domestic consumption (in order to reduce the country's economic dependence on foreign trade) has led to massive urban development in the world's most populous country. Urbanisation was intended to help increase the numbers of people with higher incomes, able to spend more money. The problem comes when new cities fail to fill up with taxpaying residents and businesses. The return on the costly investment thus comes later, if at all. Why is it costly? Because it involves buying land, building infrastructure and other expenses. As a matter of interest, indigenous peoples, for example, find it more profitable to sell land to the government than to use it for cultivation or to build their own homes. "China has been trying to eliminate its bad corporate debts for years. And while it made some progress before the pandemic, the task often seems endless, and that's what you certainly see here," He told Mattie Bekink. "[The current situation] was precipitated by the Chinese government's decision to reduce the amount of debt that companies could take on. This has created a capital crunch for Evergrande, forcing it to suspend construction of new apartment buildings and delay payments to suppliers.".
Which way is Invest in Slovakia going? My we connect by heart. We have chosen a proactive approach to regulation. If the NBS prepares a regulation for crowdfunding activities, we will actively pursue efforts to regulate real estate crowdfunding. We have information that there should be a Europe-wide regulation of crowdfunding next October. This means that we will be subject to the supervision of the NBS once all conditions have been met. Which will again be a better starting position for us and will also increase confidence in the eyes of investors.
