The importance of Loan-to-Value (LTV) in investment assets

What if we told you that a single financial number could unlock peace of mind as an investor? It’s called Loan-to-Value (LTV), one of the most powerful indicators of financial health and stability. LTV helps assess risk by comparing the total value of loans to the value of underlying assets. In this article, we will delve into this concept with a practical approach and its implications for different investments.

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What is Loan-to-Value (LTV)?

Picture this: you own a property worth €300,000, and your mortgage is €200,000. That means 66.7% of your property’s value is financed through debt. This ratio—your Loan-to-Value—reveals how much leverage is tied to your asset. The lower the percentage, the less debt you carry relative to your asset’s value, resulting in greater financial security.

In the world of investment and real estate, LTV is a crucial measure of risk. A low LTV means reduced debt exposure, increased stability, and a solid foundation to weather market fluctuations. It’s the difference between a well-anchored home and one built on shaky ground.

In commercial real estate, average LTV ratios typically range from 65% to 80%—and that’s considered normal. Even in conservative sectors, ratios rarely fall below 60%. While these levels of debt may be manageable in stable markets, they pose significant risks in times of volatility. When too much of a property’s value is tied to loans, even a small dip in asset value can trigger instability.

Why LTV matters in investment assets

LTV is a cornerstone metric for evaluating financial risk and stability in investments. Here’s why:

• Risk assessment: A high LTV indicates heavy reliance on debt, increasing vulnerability during economic downturns or fluctuations in asset value.

• Investor confidence: Lower LTV ratios reassure investors that an organisation’s assets can comfortably cover its liabilities.

• Operational resilience: Companies with lower LTVs are better positioned to weather financial shocks and sustain growth.

The significance of a low LTV

A lower LTV ratio reflects robust financial management and reduced financial risk. Here’s why it matters:

• Improved security: Investors are less exposed to risks like asset devaluation or market instability.

• Financial flexibility: Companies with low LTVs have greater freedom to pursue growth opportunities without over-leveraging.

• Long-term stability: Sustainable financial practices lead to lasting investor trust and operational success.

Real-world context: Comparing LTV in different sectors

The LTV ratio serves as a vital metric for understanding financial stability and risk across various sectors. Each industry approaches LTV differently based on its unique requirements, risk profiles, and the dynamics of the underlying assets. Here, we compare LTV standards in commercial real estate, international markets, and sustainable investments.

LTV in commercial real estate

Commercial real estate often demonstrates a higher tolerance for LTV ratios due to the value and predictability of income-generating properties. Typical LTV ratios for this sector range between 65% and 80%, with variations depending on property types and loan structures:

• Multifamily housing: These properties average 73% LTV, with lenders often capping loans at 80%. The high predictability of rental income drives lenders’ willingness to approach the upper end of the LTV spectrum.

• Commercial investment properties: For office spaces, retail centres, and industrial properties, the average LTV hovers around 68%. Many conventional lenders limit these to a maximum of 70%, recognising the moderate management needs and income risks.

• Business properties: Hotels, restaurants, and gas stations typically max out at 70% LTV, with lenders often favouring a more conservative 65% threshold due to higher management intensity and revenue variability.

• Construction and bridge loans: These financing options reach LTV ratios as high as 75% to 80%, reflecting the higher risk associated with projects still in development or transitional phases.

The higher LTV ratios common in real estate underline the significant risk exposure for investors and lenders when compared to sectors with lower LTV norms.

Read more: The carbon-neutral future of commercial real estate

International variations in LTV

Globally, the LTV landscape adapts to regulatory environments, financial markets, and cultural factors, reflecting unique levels of risk tolerance and accessibility:

• United States: LTVs for conforming loans usually top out at 80%, but government-backed programmes allow for higher ratios, such as Federal Housing Administration loans at 96.5% or Department of Veterans Affairs loans at 100%. These options cater to a broader range of borrowers but increase systemic risk.

• Australia: The flexibility of Australian loans permits LVRs (Loan-to-Value Ratios) of up to 95% with mortgage insurance and even 100% under specific conditions. These higher thresholds open opportunities for buyers without significant savings but present increased risks for lenders and borrowers alike.

• New Zealand: Regulatory restrictions have capped high-LVR lending to maintain financial stability. Owner-occupiers are generally limited to LVRs below 80%, with stricter caps of 60% for investors.

• United Kingdom: Standard LTV ratios range from 60% to 95%, but the 2008 financial crisis led to the disappearance of previously common 125% LTV loans. These constraints promote sustainable borrowing while limiting exposure to economic volatility.

Read more: Investors: build a carbon-efficient portfolio

LTV in sustainable investments

Unlike real estate, where asset values can fluctuate with market conditions, sustainable investments offer tangible benefits that extend beyond financial returns. These include biodiversity restoration, ecosystem recovery, and the creation of sustainable livelihoods. Such projects not only generate carbon units (also called carbon credits) but also deliver measurable environmental and social impacts, enhancing their overall investment value.

That's where DGB Group stands out

Sustainable investments are often grounded in robust business and financial models. A prime example is DGB Group. We are a global company listed on the Amsterdam Euronext stock exchange under ticker code AEX:DGB. In our latest Semi-Annual Financial Report 2024, DGB announced an impressive Loan-to-Value (LTV) ratio of just 23.65% ,far below industry averages. This reflects our disciplined debt management and commitment to financial security.

What does this mean in practical terms? For every €100 of assets we hold, only €23.65 is financed through debt. This ultra-low ratio demonstrates our prudent financial management and ensures a stable foundation for long-term growth.

Our robust portfolio of projects is carefully curated to align with our mission and financial goals. This strategy ensures that every opportunity is backed by tangible, measurable value. The result? A sustainable and secure foundation that bolsters investor confidence and long-term growth.

How this benefits you as an investor

Our 23.65% LTV shows that we’re not just building impactful projects—we’re doing it responsibly. By minimizing debt, we safeguard the operational health of our portfolio.

With such a low LTV, your capital is invested in a company that has the flexibility to weather challenges, sustain growth, and prioritize stakeholder security.

In a market where LTVs of 65% to 80% are the norm, our 23.65% is a standout figure. It’s like owning a mortgage-free home in a neighborhood where everyone else carries heavy mortgages—it gives us a competitive advantage in both stability and flexibility, particularly significant given DGB’s dual focus:

• For bondholders: A low LTV ensures financial stability, reassuring investors of DGB’s capacity to meet bond obligations.

• For assets: DGB’s extensive project portfolio and carbon credit pipeline are well-supported by this conservative ratio, bolstering confidence in our operational sustainability and future growth.

DGB’s LTV ratio stands as an exemplar of financial prudence and stability, dramatically undercutting the norms in commercial real estate and other global sectors. This distinction offers investors unparalleled confidence in DGB’s economic resilience.

DGB’s approach is particularly compelling when contrasted with industries characterised by higher LTV ratios:

1. Low-risk financial strategy: While real estate often operates with LTVs exceeding 65%, DGB’s sub-25% LTV demonstrates a cautious approach to debt. This ensures that loans are well-covered by assets, minimising financial risk.

2. Asset-backed growth: Unlike speculative industries, DGB’s LTV reflects a portfolio of high-value, nature-based projects with measurable returns for both investors and the planet.

3. Investor security: DGB’s disciplined financial practices translate to reduced risk for bondholders and shareholders, ensuring their capital is underpinned by tangible, secure assets.

By maintaining a low LTV, DGB sets a benchmark for sustainable investments, showcasing how environmental and financial goals can align to deliver both stability and impact.

Read more: Investing for the good: How socially responsible investing is driving economic sustainability

DGB Group’s low LTV: a testament to financial stability and purpose-driven impact

DGB’s impressive LTV ratio isn’t just a reflection of prudent financial management—it’s a cornerstone of our unique approach to driving impactful, scalable solutions. Here’s how this low LTV aligns with DGB’s core strengths and positions us as a leader in sustainable investment:

A robust business model that mobilises capital

DGB’s strong business model underpins our ability to attract capital effectively. Unlike traditional ventures, we focus solely on projects with solid economic foundations, ensuring financial security and scalability. As a publicly traded purpose company, DGB invites like-minded investors to join our cause, leveraging the power of public participation to amplify our environmental and social impact.

Top view of tree seedlings in a nursery. Hongera Reforestation Project, DGB.

Combining profitability with purpose

DGB’s approach seamlessly integrates scientific rigour and strategic foresight, ensuring that every project is not only environmentally sustainable but also economically viable. This profitability model attracts investors seeking scalable solutions that address market needs, reinforcing DGB’s reputation as a forward-thinking, purpose-driven organisation.

Explore the benefits of green investing

Leveraging public company advantages

Operating as a listed company brings several benefits that align with DGB’s low LTV and financial strength:

• High valuation: Public assets often command higher valuations due to their liquidity and transparency, offering reassurance to investors.

• Global visibility: Our public listing enables us to reach a worldwide audience, engaging individual shareholders in our mission.

• Access to capital markets: The ability to raise funds by issuing stock allows DGB to finance new projects and expand operations without increasing debt burdens.

• Regulatory discipline: Public scrutiny and stringent regulations ensure operational efficiency and accountability.

• Transparency and trust: Enhanced reporting requirements foster trust among investors, partners, and the public.

• Liquidity for investors: Shareholders can buy and sell shares with ease, making participation in DGB’s mission accessible and attractive.

Financing transformative on-the-ground projects

We deliver impact through direct, on-the-ground involvement and expertise. Our approach combines scientific precision with strategic vision, ensuring that every project is not only environmentally sustainable but also economically viable, allowing us to deliver innovative, effective solutions that reinvigorate nature and benefit all stakeholders.

DGB team member planting tree in a tree nursery. Hongera Reforestation Project, DGB.

Our projects mitigate millions of tonnes of CO₂ while reforesting and restoring forests, enhancing biodiversity, and uplifting communities. Our transparency as a public company ensures clarity in stakeholder communications and scales our efforts to meet global environmental goals efficiently.

A €1 billion vision

With a goal to mobilise €1 billion in investor capital, DGB is committed to revitalising nature and supporting local communities. This ambition is powered by our public company status and our purpose-driven mission, enabling us to scale faster and achieve meaningful progress while maintaining a low-risk financial profile reflected in our 23.65% LTV. 

DGB finances, develops, and manages on-the-ground projects to restore nature and make a tangible environmental impact. Our projects are independently verified by leading international standards, ensuring each project’s quality and impact. Invest with DGB—cut out the intermediaries—and benefit from financing nature restoration.

Become part of a sustainable investment future

DGB’s impressive LTV ratio is more than a number—it’s a testament to our commitment to ethical and sustainable investments. With a portfolio spanning reforestation in countries like Kenya, Uganda, and Kazakhstan, and impactful initiatives like providing energy-efficient cookstoves or restoring chimpanzee habitats, DGB’s projects go beyond carbon mitigation. They represent a unique opportunity to invest in meaningful, verified, and high-impact solutions.

DGB’s outstanding LTV of 23.65% demonstrates our financial strength and commitment to sustainable growth, providing unmatched security for our investors across all its offerings, including our Green Bonds.

Enjoy an exceptional 8% annual return on investment, providing sustainable financial gains while supporting projects that restore ecosystems, reduce carbon emissions, and protect biodiversity.

By choosing DGB, you’re not just investing in a company—you’re contributing to a greener, more sustainable future.