Welcome back to our series the various aspects of the FinTech revolution. If you’ve been with us from the start, you know that we already covered #WealthTech, #PayTech, #LendTech and #LegalTech. Now it’s time to look at PropTech (aka RealEstateTech), the wave of disruption that wants a piece of the market that is worth trillions of dollars.
PropTech or RealEstateTech does not need any lengthy explanations, the term itself is pretty self-explanatory: it simply covers all technologies that aim to make real estate transactions more efficient and focus on the different stages of the property and real estate value chain. Hence why it’s in most cases referred to as Property Technology (short for PropTech as you may have guessed) but don’t let yourself get confused by the different acronyms as they focus on the same or part of the same real estate chain, which we are going to look into in more detail today.
The Real Estate Chain
And that’s where it gets interesting, because while most of us may not be aware of it, the property chain is a pretty long sequence of segments and different parties. We’ll try to give a (simplified) picture in order to make it easer to get to grips with the sector and to better defined what we’re actually talking about:
The logical first step is the property development and building or, an existing property is about to be bought, the acquisition by the future owner. This is generally is summarised under ownership. Other than the group of builders, developers and owners, we can also add investors to the pool of interested parties.
Then there is finance, because building a property is an expensive business. That money can come from the owner’s own funds, from banks in the form of an investment or through mortgages, and of course all sorts of property investors.
The construction stage is dominated by the contractual element that needs to be addressed before the work can start or the ownership of a property be transferred. It also consists of procurement and supply chain management as well as all aspects related to construction firms.
The transaction itself sees brokers of various kinds getting involved, together with different sort of service providers for home appraisal, documentation, notaries, lawyers and so on.
The last stage concerns the actual use of the property, which again can get different kinds of brokers interested in the process – think for example real estate agents for commercial properties, private home owners, rentals etc. – depending on the kind of property in question.
PropTech = FinTech?
Now, this clarification was important, because not only do we see now that there are a lot of people involved in the different stages of the Real Estate Chain. You may have also guessed that since this part of a series that looks into the different FinTech trends, not all of it may be relevant for us. Smart Building tech, for example, could be considered part of PropTech, but it does not automatically have any angle that is FinTech relevant (it may so, but we get to that), so it’s important to draw a line somewhere. That is easier said than done though as the case of AirBnB shows: a prominent example of the sharing economy, it is as such not necessarily a FinTech case (unless there would be a connection to financial services like the model of WeWork shows), but there might be an overlap, especially when it concerns the ownerships stage. So, technically we ought to limit our analysis to those aspects that are strictly Real Estate FinTech, but forgive us if we sometimes cross this line, because it is simply too interesting to be leave some of this stuff out.
PropTech Disruption in practice
Now that we know what we’re talking about, let’s looking at some of the areas of disruption.
Sales and Lettings marketplaces
The obvious choice of a segment to digitally disrupt were the brokers for property sales and lettings. Traditionally, you would walk into a brick-and-mortar real estate agency and wherever you go you can still find plenty of bright shop windows that are usually lined with the ads for sales or lettings in the respective city. The difference though is that at first these announcement that were originally only available in store or local newspapers moved into the online world. So far, so good. The next steps though were to make these ads more relevant both in terms of budget and timing, to streamline the admin process or to help find landlords and sellers the right kind of counterpart. Easyproperty, part of the brand of families that also brought us the Easyjet airline, or Zoopla are two examples of the many platforms that operate in this space. Unlike these companies, others like Purple Brickstry to disrupt this space by offering a fixed-fee model instead of the usual commission-based system.
Real Estate Information and Analytics
Similar to other areas of FinTech disruption, the value of data in light of large amounts of available information has a central place in PropTech. Big Data Analytics are at the core of research and information solutions to improve property efficiency and better manage available space. One of the leaders in the field, CoStar, claims to have invested more than $1bn in research operations to build the industry’s most comprehensive database of commercial real estate information. Surely, there most be some value in this data. It is the second generation of startups challenging the incumbents by using cheaper and more advanced technology in combination with a greater availability of public data to produce what appear to be product-driven businesses, according to a research report by the University of Oxford. Companies like Datscha, Geophy, Kensee and Mashvisor all offer combinations of various data sources and hoping to persuade property investors to make sense of the combined result.
Financing
One of the key areas of innovation in the Real Estate sector has been financing addressing two different aspects: first, the raising of funds for the development and building stage; second, the financing of ownership in the form of debt and mortgages.
Investing in real estate used to be either expensive to an extent that it was reserved to wealthy real estate developers or buying shares or units in a real estate fund or REIT. The FinTech alternative is Equity Crowdfunding or to be more precise Real Estate Crowdfunding. Like all forms of crowdfunding the pooling of capital from various backers, often far below the limits for minimum investments of traditional investment vehicles, gives investors access to an area that previously was less accessible. Regulation is a hot topic and rules differ significantly from jurisdiction to jurisdiction. A report by the Cambridge Centre of Alternative Finance that looked into the UK market found that “the average deal size was circa£3.25 million, which is the largest average transaction size across the models. The weighted average platform onboarding/qualification rate was relatively low, with less than 2% of potential deals making it onto the platform”. Fundrise and RealtyMogul are two of the platforms with portfolios worth more than $1bn each, but given the segregation across jurisdictions there are plenty of country specific alternatives.
The second aspect focuses on the debt and mortgage element of the property chain. The firms operating in this market aim to cover all stages from getting a mortgage to the processing up to the transfer of a mortgage or property related debt. UK-based LendInvest and BetterMortgage (or simply Better) from New York are two direct online lenders that aim to digitalise the whole mortgage experience while firms like Landbay or LendingHome are lending marketplace platforms though the borders between the two areas seem to blur a bit and the respective offerings are not limited to the core services. IN the end both kinds try to give their customers access –either directly or indirectly- to financing for property or access to invest in property loans.
A bit of an overlap between this category and what could potentially become its own if this areas continues to see strong growth as it has recently are secondary market exchanges that help property owners sell their homes faster as the property market has seen record levels for illiquidity. Platforms like the Silicon Valley start-up Opendoor, which is valued at more than $1bn, promise to dramatically simplify the process to help you move in to your next home.
Digital mortgage broker like the Goldman Sachs backed Trussle or Habito have not only move the traditional mortgage broking function online. They also claim that they can help you getting a mortgage faster and cheaper, just in many other areas where the online world connects providers and customers, thanks to the use of innovative technologies like artificial intelligence paired with human expertise, often comparing dozens of lenders.
And then there are the firms that want to make the whole process of mortgages and property loans easier. If you think about it (and if you ever applied for one you might still be traumatised by the experience) the procedure to produce numerous documents and information or the checking and verification of these all within often tight deadlines can be very painful. Exactly at this pain point firms like Blend pick up the baton and promise us simplicity and transparency to the whole conundrum.
Property Management
Especially if you’re one of the lucky few to own more than just one property, the aspect of property leasing and management is of relevance to you. Either you struggle with controlling of your portfolio of properties and leases, so software providers like REoptimizer help you to balance your portfolio, save time and money, streamline communication, and manage projects across your entire organization with ease. Or it is the process of the portfolio management itself that troubles you, in which case companies like Leverton help you with their AI-based software to manage large amounts of complex real estate documentation.
Innovative Technologies
Now that we’ve covered the different categories of PropTech, let’s conclude with a view at the innovative technologies that are at work. While the first wave of PropTech was mostly a digital transition and bringing the real estate to the internet and vica versa, things have moved on since the beginnings. The use of cloud services, the analysis of big data, and the application of artificial intelligence as seen above are at the centre of the second stage of the PropTech revolution. Naturally, real estate holds large potential for the use of virtual reality application as nothing would be more obvious to show prospective buyers in an immersive experience their potential new home and give them a better understanding of what they put their savings in.
The real revolution could be based on Blockchain technology though: the technology at the heart of Bitcoin and other cryptocurrencies has the potentialto be a real game changer in real estate. Real Estate is very dependent on intermediaries and here blockchain could dramatically reduce the number of people and institutions involved in the process of real estate changing hands. Since the records on a blockchain are transparent and cannot be altered, they provide for more visibility and efficiency. This could help with the search for properties, the questions surrounding ownership and related debt or mortgages or the automated execution of title transfers based on smart contracts.
As in all other sectors where blockchain has been promised to be the silver bullet, the initial euphoria seems to have made way to a more realistic view of the technology and a consideration of the many obstacles that need to be overcome and the same is true for the deployment of blockchain in real estate. However, exciting projects like the Future House Purchases project of the Swedish government agency Lantmäteriet, which is the national mapping, cadastral and land registration authority let us believe that it is not a question of if but when.
The Swedes have teamed up with a number of stakeholders like blockchain tech company Chromaway to model a property purchase using blockchain and smart contract technology with the goal to evaluate the technology from a legal, business and IT perspective. Despite still in testing, the results so far show that a process that currently takes between three to six months from the signing of a purchase contract to the registration of the sale could be reduced to mere hours to completion.