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Monday, January 30, 2023

Review: Why Risevest Real Estate Investment is a Risky Bet

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Risevest is a Nigerian Fintech start up that offers its users ability to purchase dollar-denominated investment products such as stocks, fixed income and Real Estate in developed markets like the USA.

Its Risevest Real Estate product claims to invest in its portfolio of rented buildings in the US and manage investors’ money for returns through rent and capital appreciation.

Historical Returns are put at 14% Per Annum.

Why we think it’s too risky for our readers

MoneyCentral believes Risevest Real Estate product is too risky for a number of reasons including liquidity, rising interest rates and lax regulation.

Liquidity

Risevest Real Estate product offering says it buys or rents high demand properties in the US below market value to ensure investments are profitable. It then rents out or sells those properties on the open US market and pays your returns.

It looks good on paper but in practice there is no guarantee that those properties can be sold or rented out on time to begin to earn returns, especially during a slowdown.

Blackstone one of the largest USA private equity firms announced this week that it has begun to limit withdrawals on its Blackstone Real Estate Income Trust fund, a sign of a slowdown for the real estate industry.

The fund was one of the private equity firm’s most ambitious efforts to reach individual investors.

According to Bloomberg, in the past year, rich individuals, family offices and financial advisers have become more cautious about tying up money in assets that are hard to trade and value (like Real Estate).

Lock up period

Risevest Real Estate product has a minimum lock up period of 3-months. This might not seem so long but Real Estate deals most times take much longer to actualize, leading to possible mismatch of investor funds.

What do we mean? Imagine a scenario where Risevest pools investor funds to purchase property to rent but cannot do so due to poor rental demand after 6-months.

This means no rental income has come in for 6-months, while investors are expected to be paid over that time period, leading to a mismatch.

No Financials

Because the Risevest Real Estate product is not a Real Estate Investment Trust (REIT), listed on an exchange, it is difficult to audit its claimed property holdings since it is not obligated to provide its financials.

This makes it a little too opaque for our risk appetite.

Returns

Risevest Real Estate puts its historical returns at 14% Per Annum.

The average annual gross rental yield (annualized gross rent income divided by median purchase price of single-family homes) among 389 counties in the USA is 8.4 percent for 2020, down slightly from an average of 8.6 percent in 2019, based on ATTOM Data Solutions‘ Q1 2020 Single-Family Rental Market report, which ranks the best U.S. markets for buying single-family rental properties in 2020.

A newer report released in May 2022 showed that profit margins on 3-bedroom single-family home rentals are declining annually in 2022 across most of the United States, with rental yields averaging 7%.

Thus Risevest Real Estate returns look elevated especially since the ATTOM Data does not factor net rental yield (also known as the capitalization rate or cap rate), which measures the return from a rental property after deducting operating expenses.

Higher Interest rates

Higher interest rates affect Real Estate negatively and was one of the major cause of the 2008/2009 global financial crises. Today, soaring borrowing costs and a cooling economy are rapidly changing the American Real Estate landscape.

Soaring borrowing costs have caused many US landlords to struggle with refinancing and even led banks to explore potential sales of US office loans. On the residential side, the housing market has slowed extensively.

Higher costs of debt have forced Blackstone to readjust valuations on some of its BREIT holdings and are thinning returns for the fund.

Insurance and other costs

Risevest Real Estate says the rental and maintenance of its properties are handled by carefully selected property managers so you never have to worry about the safety of your investment.

It adds that its US properties are insured against loss, damage and loss of rental income.

However, there is no mention of property taxes paid, maintenance costs and actual cost of insurance which will eat into returns.

Regulatory concerns

Risevest says it is registered in Delaware, USA and in Nigeria, and all its investments are held with regulated third parties, while they also work with SEC licensed trustees to provide oversight for their users.

In other words, there is no regulator that has direct oversight over Risevest’s operations either in the USA or Nigeria.

Risevest’s Delaware registration is similar to a CAC incorporation in Nigeria.

Conclusion

Risevest has tapped into trying to solve a familiar problem in Nigeria, the lack of inflation beating returns among the available domestic asset classes.

“We realized that due to currency shocks, high inflation rates and the impact of devaluation, most investment opportunities across emerging markets do not yield enough returns for investors to grow their wealth,” Risevest said on its website.

While this may be the case, it is also true that investing in non-liquid assets such as real estate half way across the world, with exposure to market and FX risk and a grey regulatory zone could easily lead to investors losing a huge chunk of their funds.

Until we have more clarity on Risevest Real Estate products financials and risk management tools, we would advise potential investors to avoid the product.

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2 COMMENTS

  1. Trash. Did you reach out to their team to answer questions you might have? They mentioned on Twitter that some of their properties are used for Airbnb. They also sometimes buy houses from auctions. You picked a product you have no in-depth knowledge of how they operate and started doing analysis by comparing to other products. This is shallow tbh. And btw, they recently announced that they got US SEC license, what about that? While some points raised are valid, the information about Risevest business is incorrect.

  2. Hi Aliu
    Thanks for your feedback.
    While we stand by our review, we must reiterate that Real Estate Investments are particularly risky at a time of rising interest rates and slowing economy like in the USA.
    They are even riskier when playing at the retail end and very illiquid if not packaged as REITs.
    MoneyCentral has no issues with Risevest business as a whole, just its Real Estate Product.
    We also welcome a Right of Reply from the firm for clarity on Risevest Real Estate products financials and risk management tools.

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