Liven’s CFO: The Rise in Interest Rates Poses a Challenge for Both Developers and Homebuyers
According to Liven’s new CFO Joonas Joost, one of the most crucial challenges in real estate development is currently associated with the increase in interest rates, which in turn has caused a decrease in homebuyers’ purchasing power and the overall availability of properties.
“Not only the high interest rates, but also uncertainty and fears of possible further increases have reduced the overall confidence in the market. The pool of potential homebuyers has thus decreased, and the main challenge is to find those who have the need and means to exchange homes or acquire a new one, and for whom locations, layouts, and solutions offered by Liven are suitable,” said Joost.
According to Joost, the increased interest rates have understandably had a negative impact on the developers’ financing costs, but the impact on the business model is significantly lower compared to the impact on real estate investors’ business models.
The second issue is related to processing the plans and permits in Tallinn, and as a third challenge, Joost highlights the difficulties associated with communicating the value of the real estate developer’s business model. “Due to the project-based business model, the long lifespan of the projects, and the concentration of sales revenues and cash flows within a short period of time, one of the main challenges is to explain the value of our portfolio and business itself to the investors,” he admitted.
Fluctuating economic results
Joost said that economic results can vary greatly depending on the period, and using common valuation metrics such as P/E and EV/EBITDA can easily result in both overestimating and underestimating the value. “We have summarised that by the end of the first quarter, our development portfolio consisted of over 125,000 m2 of sellable area in very different stages of development, with an estimated net turnover and potential of around 400 million euros, with an estimated profitability at 14%,” he said.
Joost added that this does not include the new potential properties and the sales and profit of the future projects, but it does provide a good understanding of the approximate perceived value of the company.
In the last 12 months, Liven handed over more than 135 homes to new homeowners, resulting in a turnover of 25.8 million euros for the period, with a net profit of 0.5 million euros.
According to Joost, the process of ensuring profitability begins with a thorough analysis of the acquired property and creating a business plan and a risk assessment for each potential project. “Our goal is to achieve at least a 20% return on equity, which means that if the analysis reveals that the desired return cannot be achieved, we are not interested in purchasing that property,” he explained.
Construction constitutes the largest financial cost of development. According to Joost, they select the main contractor through a tender process, which helps to manage costs as efficiently as possible and stay within the budget. “At the beginning of this year, we also reduced personnel, which consequently reduced our need for an office space. The latter will have a short-term impact though, as we will be moving to a new showroom-office in Telliskivi by the end of this year,” he said.
Return on equity is important
Return on equity is important for Liven, which is why they utilize both equity and external financing in all their development projects. “During the acquisition and development phase of our properties, we typically use mezzanine-type financing, where interest payments usually occur at the end of the loan period,” explained Joost.
Once the development has reached a later stage and pre-sales have reached 50%, they commence construction, with the majority of construction invoices being financed through bank loans. The use of external capital occurs on an ongoing and continuous basis, depending mainly on the amount of development projects and market developments.
Liven has conducted three rounds of equity fundraising so far – in 2019, 2021, and 2023. “We still have plans for public equity fundraising and listing on the stock exchange. We aim to organize the issuance as soon as possible, when there are signs of increased confidence from both homebuyers and investors towards real estate sector companies,” said Joost.
According to him, customer satisfaction and feedback are extremely important for Liven, as they focus on homebuyers as their main target group.
He admitted that in the past six months, there have been more than three acute topics on the table. These topics include revenue, cost, and cash flow forecasts, regular reporting, capital raising, loan acquisitions and refinancing, preparation for an initial public offering of shares, internal workflow issues, and more.
From one complex sector to another
Joost has been working as the CFO at Liven for six months, prior to that, he worked at Tallink. He said that as the COVID-19 crisis was coming to an end, his time at Tallink had run its course, and it was a suitable moment for him to move forward. He was attracted by Liven’s management team and the company’s ambitions, both in terms of geographical expansion and from the perspective of going public. Currently, his focus at Liven is to get things up and running as quickly as possible and successfully complete the initial public offering as the environment improves. “I want to ensure that three years from now, financial matters at Liven run smoothly and swiftly, including fulfilling the obligations arising from stock market regulations,” he said.
According to Joost, the world of economics, finance, and management have always fascinated him. He attended an economics class in secondary school, obtained a bachelor’s degree in business management, and a master’s degree in finance. “I definitely enjoy topics such as analysis and financial modelling, as well as discussing different ideas. I like to understand and make sense of the surrounding environment,” he said.
One of the biggest challenges in working in a small team lies in finding a balance between thinking on a larger scale and dealing with details. Both aspects are necessary, but there is a risk that focusing too much on details can narrow the overall thought process.
Joost believes that the secret to successful teamwork lies in having a shared vision and shared goals. This also includes open communication and overall willingness to collaborate, ensuring that everyone stays aligned and moving in the same direction. “It is also important to understand that people think and act differently. In terms of teamwork, it is important that team members bring different skills and personal qualities to the table, so that everyone wouldn’t have the same strengths and weaknesses,” he said.
Active lifestyle helps to relax
The new CFO considers physical activity, especially playing basketball and interacting with people outside the work environment, as the best way to recover from a stressful workday. Joost also enjoys board games, table tennis, and playing the piano.
However, the majority of his leisure time is spent at home with his family, which includes a teenage daughter and a happy little baby who joined the family at the end of last year. “The older child already has her own activities and interests, but the little bundle of joy is a great stress reliever at home,” he expressed his joy.
Published on: www.finantsuudised.ee