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Most investments, regardless of whether the preference shares are issued (“preference shares” or “shares” or syndicated direct loans (“loan”), have a property and a concrete project idea at their core, which is fundamental for the investment's framework. The investments that are introduced in this context are often different types of funding for private companies or housing association (“project owner” or “company”) with no to limited security.
The risk level can be considered high because there is not a financial advisor, nor any other operators, who directly or indirectly reviews or recommends the individual investments. Therefore, these types of investments are suitable for the following:
experienced real estate investors who understand the stated and unstated risks, or
investors who have consulted and received guidance from an expert with knowledge about the stated and unstated risks.
A loan can be combined with securities in the shape of pledge shares or real estate, guarantor, a company’s total assets or other securities. Please note that the securities of these types of investments are often subordinated and/or with a limited economic value. An investment in shares, on the other hand, cannot be combined with any security. As a shareholder, there is commonly no possibility of recovering invested capital because the investors are dependent on the fact that there is sufficient funds for the project owner to be able to fulfil all commitments to his creditors in the long and short-term, and that the project owners board and general meeting of shareholders decide on dividends.
Investments through Shares and Loans are typically dependent on the fact that the underlying property project is going as planned so that the investment can give the promised rate of return. For example, project owners may lack the financial prerequisites for dealing with major discrepancies, increased costs, delays etc, which consequently means there are no guarantees that the investors will return the initial invested capital or return. The investor should be well aware that the whole invested capital could be loss.
Investments presented through shares and loans, are not subject to the regulations of the law (1995:1571) about the guarantee of the deposition or the law (1999:158) about the investment protection (or any other unstated guarantees). In accordance to these rules, the investor cannot receive any reimbursement if the project owner or the company files for bankruptcy or has payment difficulties.
Investment protection is a commitment from the State to replace investors' loss of financial instruments and funds, for example, with banks or credit market companies, in the case that the institution is bankrupt or the Ministry of Finance decides that the deposit guarantee will enter in to force.
In addition to the risks associated with the investment instruments themselves as well as the security or safety of instruments linked to instruments, there are several risks associated with the project owner, its financial resources, project, suppliers and contractors, financing alternatives, external factors, and the state of the market and regulatory approvals, etc.
Below you will find the usual risk factors that could affect these types of investments.
These risks are not ranked in order and are not comprehensive. Additional risks and uncertainties may occur in each individual investment.
It is important to analyse potential risks in the current investment and weigh these against the offered return. An investment decision can be made after one has evaluated this, and taken its personal financial situation in consideration.
Please be aware that all investors have the possibility to ask any questions, via our digital query function, directly to a project owner before the investment is made. Do not hesitate to use this function if you have any questions or concerns!
When investing in shares, returns are usually paid through dividends. However, there are several risks that may affect the Project Owner's business negatively, and it cannot be guaranteed that the company can produce a result that allows a distribution. As a shareholder, there is typically no way to recover invested capital, therefor the investors are dependent on the fact that there are sufficient funds in the company to fulfil all commitments towards the company's creditors in the long and short term and partly that the company's Board of Directors and the general meeting of shareholders make the decisions on dividends. It should also be noted that private companies have less protection for minority shareholders than public companies have.
There is a risk that the majority owner will take, or fail to take, action for other shareholders' interests, such as if the majority owner chooses not to decide about the expected dividend to holders of preference shares or if the company simply has not carried out its business in a non-effective manner.
The general meeting of shareholders may, if capital is needed in the company, decide on an additional new issue of shares whereby the Company's existing shareholders' proportional ownership and voting rights may be reduced.
The company's shares are normally not available for trading on any marketplace. The shareholders who want to sell their shares (in a way that it is possible according to the Articles of Association) take a risk that the market value of the shares does not correspond to the acquisition value or anticipated valuation at any given time. There is also a risk that there will not be any buyers.
When investing through Loans, the return is paid through repayment of the loans as well as interest, possibly combined with a previously completed amortisation. However, there are several risks that may affect the project owner's business negatively, and it cannot be guaranteed that the project owner can produce a result that allows for the refund. The investors depend on the premise that there are sufficient funds available for the project owner to fulfil his commitments, and that the project owner's management or board actually implement the repayment.
The securities issued together with the loan may in practice have an extremely limited financial value and is absolutely no guarantee of the investor's capital. The value on the share pledge and company subscriptions are, for example, dependent on the companies having underlying realisable assets while a subordinated property mortgage is dependent on the property being sold at a price that partially covers the senior lenders' total receivables and expenses, and that they still have capital left. As an investor, you can evaluate the risk, but regardless of the security one will have to count on waiting to receive its capital at a mortgage settlement. There is at risk that the collateral will show a no to a limited value.
It is common for a parent company to be the security for a Loan as collateral for lenders (investors). However, the guarantor's financial position does not have to be strong and/or may deteriorate after the commitment was entered, which may impair investors' ability to get paid from the guarantor.
If additional capital requirements should arise, it may be more difficult to finance the project owner when several pledges exist. Potential creditors may be discouraged from lending money if there is a large number of collateral issued to different lenders. Furthermore, smaller project owners often find it difficult to find additional funding at all if a project does turn out as planned. This may lead to a result in the project not being finalised and/or in a worst case the project owner becoming insolvent. Some investments depend on the Project Owner being able to raise additional funding or refinance existing loans. If this occurs, reimbursement may not be possible and/or the project owner may become insolvent
There may be an opportunity for the project owner to repay the loan in advance, which may mean a lower total return for the investor compared to if the loan and the interest rate had been paid on the due date.
The loans consist of simple promissory notes that cannot be transferred nor pledged to someone else. This means that there is no ability for the investor to sell the loan. With that said, the investors capital is locked during the term of the loan.
If the market interest rates change, the fixed-rate investment could become a less attractive investment option if alternative investments would have a higher return. It is very difficult to predict an interest rate in the long term.
The credit risk is more difficult to overlook for long-term loans compared to a short-term. Most risk factors can be strengthened for loans with long remaining maturity compared to loans with short remaining maturity.
Revenue from a real estate project is primarily generated by a positive operating net, value increase or by selling the item on the market. However, there is a risk that the project owner acquires or invests in a less attractive project that results in a high vacancy rate, and even a low or very limited increase in value or lack of buyers. Factors that may affect commercial success are location, standard, financing, market, interest rates, season, supply, development, competence and experience, collaborations, subcontractors, permits (such as the urban development plan, construction permits), etc.
Many Project Owners have no or a limited history, which makes the risk assessment difficult in light of the fact that it is harder to draw conclusions regarding the financial statements, financial strength, ability to pay, willingness to pay, tax payments, general care, etc.
Since Project Owners operate in a very competitive market with a great number of strong players, there is a risk that individual Project Owners lack sufficient resources and skills to gain access to attractive property acquisitions and projects with good returns. Insufficient skills and limited resources can affect the commercial opportunities of the project to work and survive on the market.
The project owner is often dependent on external parties for possible final financing and refinancing, and also that the Project Owner or its controlled housing association can get access to building credit. The Project Owner is dependent on banks and/or credit institutions assessment to achieve commercial success in the market as well as to be able to complete their projects.
Since some investments involve owning the real estate in the long term to generate revenue, there is a risk that the operating profit may be affected by changes in operating costs associated with the properties, such as heating, property management, water, electricity, cleaning, property taxes, insurance, administration and other maintenance. In addition to increased costs, operating income may be adversely affected by reduced income, for example, due to increased vacancy rates in the property, or because revenue does not increase at the same rate as costs. A deteriorated operating net can affect the return on a project.
The project owner and its contractors may be faced with problems when building the projects, which may lead to increased costs for the Project Owner. The building risk can occur, for example, in relation to orders, contract documents, construction technology, cost estimates, weather conditions, geographical position, planning, and logistics.
There is also a risk that the Project Owner doesn’t have the required permits required by the county and authorities for the construction of the property (building permits, changes in the detailed plan, etc.) or that these are appealed.
Fluctuations in the market can lead to increased costs for a construction project, including materials, staff, and contractors. This can affect the prospect of a construction project being completed according to the schedule and budget.
The project owners can acquire real estate in different geographic markets or target specific geographic markets. However, there is no guarantee how the development will continue based on the past, which means that supply and demand can develop differently between different markets that are still in the same geographic market. A market's negative development, or a less progressive development compared to comparable markets, may adversely affect the project owner's profitability and financial position.
Many times, Project Owners are dependent on third parties for the actual production and construction. Therefore, the project owner is at risk that the counterparties fail to fulfil their commitments, which can adversely affect the project's conditions. Possible risks include errors in the production, delays, and insolvency. The project owner can be in default if any advance payments is made to an entrepreneur who is subsequently bankrupt.
Some Project Owners own a property or project together with one or more investors. There is therefore a risk of disagreements or conflicts between the parties and that the parties do not fulfil their commitments to each other or to the project, which depends on either party's financial position. Disagreements and the non-fulfilment of commitments can have a negative impact on the Project Owner's ability to complete a construction project, sell the property, or operate the business in an effective manner.
A limited Project Owner is often dependent on one or a few key players, whose skills and knowledge about the organisation are essential to the Project Owners continued development and management. These people can be key employees and owners with significant influence, whose interests do not necessarily need to be in line with investors' interests. Furthermore, the operation of the Project Owner or their subsidiaries may be adversely affected if, for any reason, such key players may or may not wish to continue working with the Project Owner.
The project owner is always an environmental risk when acquiring real estate. There could be additional costs if there are any toxic substances that are found, which have to be fixed or analysed. Project owners can also be strictly responsible for environmental damage that occurs on the property.
Legal proceedings and disputes may occur with any project a project owner is a party to. There is a risk that such disputes will have significant costs for the project owner.
If for some reason the project owner should receive negative publicity, it could have a negative impact on a business opportunity. The result can lead to difficulties in implementing construction projects or to filling vacancies in listed properties and adversely affect an ability to pay the investor.
If the project owner's clients suffer from sudden economic problems, or for other reasons do not pay on time, this can affect the project owners’ ability to fulfil his obligations to the investors.
For limited Project Owners, a business is usually linked to one or a few projects, which leads to an increased risk often associated with poorly diversified portfolios. If any negative event or relationship should occur in any of the projects in the portfolio, it could affect the Project Owner and / or the Group's earnings to a greater extent than if it would occur in a larger company.
The value of one or more properties or projects in the Project Owner's portfolio may decrease in value because of, for example, market variations or impairments associated with the property's condition. If the value is lower, it may be difficult for the Project Owner to sell the property with profit, or to receive new funding if the property cannot be used as collateral, which may lead to a worse financial position for the project owner and the investors' certainty.
All ownership leads to responsibility. For a Project Owner, the properties may be destroyed by fire, water damage or other sorts of damage. The project owner can, through negligence, cause personal injury on their own property or someone else's property, or even cause environmental damage for which Project Owners are responsible. Insufficient insurance coverage can lead to unforeseen costs as well. Compensation may also occur for personal injury and damage to another's property in additional to the remediation of environmental damage. Each of these risks could have a significantly negative impact on the project owner’s operations, earnings, and financial position.
In the financial market, the development can affect the interest rates which means that interest expenses can affect the Project Owner's rate of return and financial situation.
A Project Owner may be exposed to fluctuations in exchange rates, for example, if one has operations in other countries or if any of the counterparties that the Project Owners work with have operations in other countries (for example, home manufacturers). Variations in currency exchange rates can, therefore, affect a Project Owner's earnings and financial position.
Since some projects are dependent on capital gains in order to achieve the expected return, there is a risk that fluctuations in the economy will reduce overall demand in the market which means that the price level of properties and condominiums may decline, or the number of potential buyers may be limited. In addition, regardless of the economy, there is a risk that a Project Owner will not find buyers due to misjudgement, changes in infrastructure, political decisions, etc.
Project Owners' payment obligations linked to investments, as well as amortization and interest expenses, require good liquidity. If a Project Owner does not have sufficient liquidity to meet his payment obligations, it may adversely affect the operation, financial position, and results. Regardless of the property and the project's quality and status, a liquidity shortage can lead to insolvency and bankruptcy.
A project owner may, upon acquisition of land or projects, take over a company or property that may lead to obligations that contain assets with a negative impact on the Project Owner's financial position.
The changes of laws and regulations (tax law, property law, or other related laws) may affect the project owner's ability to continue his or her business under the same conditions as before, and could significantly affect the project owner's financial position and ability to complete the projects and any refunds.
When many projects are in the early stages, uncertainties are greater and therefore the risk level is higher. Examples of such uncertainties are the absence of (a) credit decisions from a bank or other financiers, (b) short-, medium- and long-term funding, (c) final construction permit, (d) contracted contractors, (e) certified economic plan for the housing association, (f) agreement, (acquisition agreement, assignment, booking agreement etc.) which is legally binding and/or has a practical economic value, (g) access to real estate or condominiums, and (h) an overview about how the market will be or develop when the project is to be sold, , completed, refinanced, etc.