Although the financial assets of the majority of Lithuanians consist of deposits held in banks, there is increasing interest in higher-return and riskier investment instruments. According to investment experts, Lithuanians with savings, in addition to deposits, most often choose bonds, stocks or investments in real estate (RE).
A person who has accumulated several thousand euros in savings can already start “employing” their funds so that they are not eroded by inflation. Experts advise novice investors to develop the habit of investing periodically and to choose the amount of the investment depending on their financial capabilities.
“The amount invested should not be very significant for the investor, because without experience, fluctuations in the value of investments can cause unnecessary stress,” says Domas Klimavičius, Head of the Investment Services Group of the Markets and Treasury Department of Šiaulių bankas.
According to him, it is rational to start investing with clearly understandable instruments, such as bonds. “They carry a fixed return, have an investment term. The value of bonds fluctuates little, so the investor is not forced to worry about large fluctuations in the value of his investment,” notes D. Klimavičius.
“Bonds, as an investment product, are usually classified as the least risky products on the investment scale in terms of risk-return ratio. The issuance and public distribution of bonds is regulated by law. This is a matter of trust in the issuer (bond issuer), when investors, when lending money, expect that this money will be returned with interest. For this reason, only companies with a reliable reputation in the business community can successfully issue bonds,” says Indrė Dargytė, member of the board of Eika Asset Management.
On October 26, real estate development company UAB Eika, which also owns a commercial real estate portfolio that generates a stable income stream, will issue bonds worth 5 million euros. They will be distributed by Šiaulių bankas. Eika plans to borrow for 2 years with an interest rate of 4.5–5 percent, which will be determined by auction. The nominal value of one bond is 1,000 euros.
Bonds, deposits, shares, investments in real estate sector instruments – experts introduce popular investment instruments and advise on what to consider for a novice investor.
Deposits will not bring tangible returns
According to data from the Bank of Lithuania, at the end of 2017, the largest share of Lithuanian financial assets (56.8 percent of total financial assets) consisted of deposits held in banks.
According to the investment expert of Šiaulių bankas, deposits are a fixed-return instrument offered by banks, which is insured by Deposit and Investment Insurance. “A depositor can expect to reduce the impact of inflation on his savings, but this instrument will not bring tangible investment returns,” says D. Klimavičius.
Bond stability is suitable for beginners
Bonds are fixed-return debt securities issued by a company or government that provide the investor with a stable cash flow (interest) during the life of the bond and return the invested amount at the end of the bond’s term.
“The return on corporate bonds in our region ranges from 3 to 14 percent and more, depending on the specifics of the business. The interest rate essentially indicates the riskiness of the bond – the higher the interest rate, the riskier the business. A company with a strong balance sheet, stable cash flow and a good reputation can borrow much cheaper than a newly established business operating in a risky business sector,” says an investment expert from Šiaulių bankas.
According to I. Dargytė, investments in bonds allow you to receive periodic interest payments, from which the investor can increase their savings and continue to invest them. In addition, some bonds are short-term, for example, 2-3 years, so the invested funds return quickly – it is a short-term investment with fixed interest.
“Before investing in bonds related to the real estate sector, one should assess various risks. For example, which developer or project the money is being lent to, as well as whether there is a mortgage on the plot or project. In the case of the distribution of Eika bonds, the repayment of funds will not depend on the success of one project and will be carried out from the proceeds from the sale of apartments in all projects,” says a member of the board of Eika Asset Management.
Stocks offer higher returns and more risk
Shares are an equity security. By purchasing shares, investors become shareholders in the business and can expect to earn income from the distribution of business profits to shareholders (dividends) and/or growth in the value of the business.
“Stocks are higher-risk investments that historically generate higher returns than bonds. The value of stocks fluctuates more significantly and often confuses an inexperienced investor and forces them to make decisions based on emotions,” notes D. Klimavičius.
It is difficult for a novice investor to choose individual stocks, so if you want higher risk, it is advisable to start with a basket of stocks offered by investment funds.
On average, they invest 81,000 euros in rental housing.
Currently, the most popular way to invest in the real estate sector is to purchase rental housing, but this requires saving several tens of thousands of euros.
“After conducting a customer analysis, we see that a typical Eika home buyer is an investor who buys a middle-class home for EUR 81,000, without a mortgage. After analyzing 1,400 apartments sold over the past four years, this type of customer made up about a third (30 percent) of home buyers,” notes I. Dargytė.
Long-term rental housing in Vilnius has historically generated relatively high yields (. rental yield), but currently, due to higher housing prices, the average is about 5 percent per year. In addition, it must be estimated that funds and time will need to be allocated for housing maintenance and administration.
Real estate lending platforms: investment from 100 EUR, but there are risks
Investing in real estate lending platforms is possible from very small amounts, for example, from 100 EUR, making it an attractive product for retail investors. In addition, as in the case of bonds, periodic interest is paid.
“Investments through real estate lending platforms can be classified as higher-risk investments. Loan platforms act as intermediaries between lenders (investors) and the borrowing real estate developer, so they do not risk their own capital. They make efforts to analyze real estate projects and assess their risks, but in the event of the developer’s insolvency, they do not have and do not contribute their own capital to save that project,” notes I. Dargytė.
Real estate funds: investments worth thousands, high earnings
In the Baltic market, it has been possible to invest in real estate funds operating in this region for the past 10 years, but in most of them the investment amount starts at EUR 125,000.
Investments in real estate funds provide an opportunity to earn long-term returns from real estate projects. Here, money is usually “locked” for at least 6 years. This is a sufficient period of time to “employ” the amounts committed by investors and create or develop real estate projects, as well as increase the value of already developed objects.
“The annual return from the development of residential projects can reach 13-15 percent. This type of investment provides the highest earning potential, but is classified as the highest risk in the spectrum of real estate investments,” says I. Dargytė.