I know what you are thinking – we need more tech buzzwords. We finally have our heads around IoT, Blockchain, AI, AR/VR, FinTech and Digital Transformation (also known as using technology to improve a business process – like we’ve never done that before), so we urgently need to find the next big buzzword. Hence, I bring you PropTech.
While PropTech may become the industry’s new favourite buzzword, don’t underestimate its potential, particularly in sectors like real estate and construction that have been laggards in leveraging technology to improve business processes. According to a recent McKinsey report, construction labour productivity growth has averaged 1% per year for the past two decades, well below the total world economy annual productivity growth rate of 2.8%. This creates opportunities for traditional and non-traditional property industry players to either disrupt or be disrupted.
The venture capital (VC) firms have caught onto this opportunity as well. According to CB Insights, over USD 6 billion of VC funding has gone into PropTech since 2011, with nearly USD 4.6 billion, or 70%, of that funding coming in the past two years alone. And the trend is expected to continue with 2017 funding expected to exceed USD 3 billion.
In this instalment of the IoT Watch List, I will discuss why I believe the combination of market demand/need and an increase in VC funding will drive a surge in the region’s PropTech start-ups.
So what is PropTech? Like most buzzwords, PropTech means different things to different people. The best (simplest) definition I found comes from LendInvest, who define PropTech as “the wave of companies using technology to refine, improve or reinvent the services we rely on in the property industry to buy, rent, sell, build, heat or manage properties.”
PropTech encompasses all the phases of the residential and commercial real estate lifecycle, including property acquisition (e.g. funding, marketplaces), development (e.g. construction, supply chain management), and management (e.g. facilities management, security).
The size of the real estate industry – valued at USD 217 trillion globally in 2015 by Fortune – is what makes PropTech so attractive. Every residential and commercial building creates an opportunity to leverage PropTech solutions and services.
1. IoT will drive the PropTech industry
The digital world has already transformed aspects of the property industry. We leverage online marketplaces to identify properties to buy or rent and aggregation sites to secure financing. Building management systems (e.g. HVAC, lighting, electricity) use sensors to capture performance and environmental data. Companies, governments and consumers then leverage that data to reduce costs and improve the quality of their working and living environments. And this is just the beginning.
Many of the future advancements in PropTech will leverage IoT-related technologies to enhance the customer experience and drive operational efficiencies. Some examples including:
- Augmented and Virtual Reality (AR/VR) to provide virtual viewings, view “below the surface” infrastructure, and assist facilities managers in equipment servicing
- Artificial Intelligence (AI) to improve asset life and uptime through predictive analytics and increase site security
- Blockchain to streamline government land registry services, develop smart contracts to increase ownership transparency, and create fractional property ownership through “tokenisation”
- Drones to monitor site security, improve employee safety, and conduct site surveys at remote or difficult to reach locations
And that is just A through D of the tech buzzword alphabet.
2. The industry leaders are getting active
The leading commercial real estate firms have become increasingly active in the PropTech space as a matter of necessity. They realise technology can be leveraged to help them enhance the customer experience, reduce overhead costs and streamline their operations. They have chosen to disrupt themselves rather than become a target for disruption.
The world’s two leading real estate firms, CBRE and JLL, have been particularly active, with each developing PropTech solutions in-house, investing and/or acquiring PropTech companies, and creating new business units to support their digital transformation.
Because the industry leaders have taken such an aggressive approach, their competitors will have to follow suit, which will lead to increased demand for PropTech solutions across the board.
3. The calm before the Asian PropTech storm
PropTech has a strong foothold in Asia, but there is room for growth. Take Singapore, for instance. Today there are between 279 (according to Singapore’s FinTech Association) and 450 (a VC’s perspective) FinTech start-ups in Singapore, but only 33 PropTech start-ups. However, I expect that number to grow fast as people realise the market opportunity and more companies start to support PropTech initiatives.
Just last month Singapore hosted Hood Disrupt, the region’s first PropTech hackathon. 17 teams competed over 3 days to create PropTech solutions that were judged by the leading names in Asia’s property market, including JLL, City Developments Limited, and C31 Ventures (more on them later). The winning solutions covered the wide spectrum of PropTech opportunities, including:
- Vektor – an autonomous spatial mapping robot
- Airsquire – sensor drones to detect fires on rural properties
- Surreal – an app plug-in that allows homeowners to visualise floor plans in 3D
- Trabble – a chatbot with machine learning for the hospitality industry
An innovative and unique set of solutions to say the least.
I expect to see many more similar events over the next year backed by both real estate industry and VC firms which will, in turn, help kick-start the PropTech market in the region.
Market demand + $$$ = start-up opportunities
1. Problem Solving versus Revenue Generating
I have looked at hundreds of technology start-ups over the past 15 years and one thing I learned is solutions that solve problems have a better success rate than solutions that may drive future revenues.
This is why I believe PropTech has a great future. Most PropTech solutions I mentioned solve business problems that will reduce costs, streamline business processes and improve the customer experience. These tangible business benefits are easier to measure and apply against the solution costs to create a business case that will deliver a positive ROI. And, as you know, initiatives backed by a solid business case are the types that get funded.
2. VCs will look for FinTech alternatives
Singapore is saturated with FinTech start-ups that received VC funding. The initial buzz created around the Singapore FinTech scene made it easy to bring these two parties together. But recently, the VCs are having a harder time finding FinTech start-ups to invest in with Singapore’s overall FinTech investment down 65% in 2016 (source: KPMG).
This does not mean that the VCs don’t want to invest in Singapore, rather, it just means they will look for new sectors to invest in, with PropTech looking an increasingly attractive alternative.
3. Industry-backed PropTech funds
The number of PropTech funds is on the rise, but what is more interesting is seeing how many are backed by leading players in the real estate industry.
CBRE, the world’s largest commercial real estate firm, recently created a strategic partnership with Pi Labs, Europe’s first PropTech-focused VC firm.
JLL, the industry’s second largest firm, launched JLL Spark, a global business to identify and deliver new technology-driven real estate service offerings. JLL also partnered with start-up investor Seedcamp and private equity firm Starwood Capital to launch Concrete, an investment vehicle for PropTech start-ups.
But it is not just the global players getting into the space.
Singapore-based CapitaLand, one of Asia’s leading real estate companies, created a corporate VC fund – C31 Ventures – with an initial investment of SGD 100 million. Their investment targets cover the whole PropTech value chain, including energy, operations and maintenance, construction, design and building materials, real estate funding and customer engagement.
Finally, Thai developer Sansiri has partnered with Siam Commercial Bank to invest in up to 40 property-related start-ups by 2020.
These partnerships are important not only because the real estate firms are supporting the investment funds monetarily and through sharing their industry expertise, but also because they can leverage the solutions across their business operations. And let’s face it, few things can help a start-up grow faster than having a leading brand as an early reference customer.
The next 12 months should be interesting for PropTech. The market opportunity and demand exist. The funding sources are growing. Now, we just need the start-ups to take advantage of it.