Can real estate tech return more than just investment?

By

Mark Grinis

EY Global Real Estate, Hospitality & Construction Leader

Real estate leader drawing from three decades of experience. Author. Speaker.

8 minute read 16 Oct 2019

Venture capital activity in real estate is accelerating the development of the built-world tech marketplace.

Commercial real estate has had a long-standing reputation for being desperately behind today’s technology-driven world, with its functions lagging behind other sectors’ technological development and progress.

However, over the past 10 years, the rise of the entrepreneurial class within real estate, fuelled by venture capital investment, has generated a new global real estate tech movement, that is not only changing the perception of the real estate industry but has the potential to transform it.

The real estate tech industry is so new that one established market definition is yet to be determined. Here, we have chosen to report on the ‘built-world tech’ market. Others refer to it as ‘PropTech’ (property technology).

The explosion of real estate technology in the market has left many in the industry overwhelmed with choices and with no clear understanding of the benefits of embedding the technology that is available.

In Venture capital funding points to hottest concepts in built-world tech, EY, together with CRETech, a leading thinker on built-world tech, aims to demystify this emerging market. We provide insights on where investment is flowing; on current trends; on front-running start-ups by capital investment; and we outline some of the challenges to real estate adoption.

Below is a summary of our report, which can also be found in full in the resources section on this page.

The evolution of ‘built-world tech’

Since 2015, US$75.2b has been invested in built-world tech by a venture capital (VC) community that has identified real estate as a lucrative opportunity for technology. In the first three quarters of 2019 alone, US$24.6b has been invested by VCs, making 2019 a record year for VC investment. 

This highlights the fast-growing interest in the emerging built-world tech sector and the need for real estate owners to understand how the market is developing and providing opportunities to transform the sector.

Capital investment

US$72.5b

Amount invested in built-world tech since 2015.

As the built-world tech market gained the attention of the VC community, there was initial concern that start-ups would redefine the core of real estate operations (much like new business models reinvented the hotel and taxi sectors). Instead, built-world tech has evolved as start-ups have focused on finding solutions to some of the greatest challenges facing traditional operators, thereby complementing rather than redefining their businesses.

Moreover, these start-ups are increasingly focused on cost-saving and profitability, which will enhance the return on investment (ROI) for real estate owners. This presents a significant opportunity for real estate owners who take the leap.

We expect a number of break-out companies to emerge in 2020, including venture capitalists interested in seizing new opportunities. As a result, we can expect funding rounds to increase along with deal sizes.

Drilling down on VC activity

To provide some clarity on the built-world tech market, we have classified the market in eight major disciplines, or verticals, and researched the VC flows in each one to determine where money is being invested. The availability of capital and interest in this sector would suggest that those willing to invest in a technology provide a reasonable proxy of the most commercially viable technologies.

The rankings by capital flow provide an interesting view of the market and reveal where money is flowing.

  1. Real estate and finance
  2. Flexible space
  3. Management
  4. Internet of Things (IoT) and smart buildings
  5. Construction
  6. Data analytics
  7. Visualization
  8. Tenant experience

Find specific details on each discipline in the Verticals by Funding section of the full report.

The leaders

Of the eight categories, “real estate and finance” and “flexible space” lead the way in funding with more than US$20b invested in each area.

However, we see the two verticals maturing in different ways. While overall investment volumes are similar, real estate and finance has seen this capital committed across more than seven times as many transactions; whereas, median company valuations are notably lower.

At first glance, real estate and finance appears unconsolidated, with a long trail of relatively small transactions funding a wide variety of solutions. However, that doesn’t imply that leaders and mature solutions do not also exist. Mature solutions certainly exist in the real estate and finance segment, but it’s still a diverse area with an exceptionally wide range of potential challenges that VCs can invest in across the brokerage, marketplace, investment solutions and blockchain areas.

One to watch

Visualization start-ups have received relatively little capital to date—only US$0.7b across 222 transactions—but the median valuation in this space is very high. Investors may be starting to back opportunities only now, but they are already marking out leaders with 43% of the US$700m invested going to just five firms.

Business enhancement opportunities for owners and operators reside in each of the verticals. These opportunities range from improved data accuracy, tenant engagement and retention to decreased expenses, improved operations and the ongoing benefits of tech-company investment. The ability of an owner or operator to aggregate those benefits is a positive signal for adoption going forward.

Business enhancement opportunities for owners and operators reside in each of the verticals – from improved data accuracy to tenant engagement and improved operations.

The shape of things to come

Although the market is still relatively nascent, we expect a number of distinct trends driving VC activity in the built-world tech industry to develop as the market matures:

  1. Data and information are king. AI and automation will gradually influence owners/operators over time.
  2. The future lies in ROI. There is a huge opportunity for startups to build platforms to deliver better ROI for owners and operators. 
  3. Watch for emerging leaders. Many startups have reached their tipping point, and the race to get acquired is on.
  4. Owner/operators become direct acquirers. Many are assessing current processes and pain points with an eye on the tools that can aid their operations, cut costs and increase profitability.

Although a lot of existing technology may have enhanced efficiency or added new insights, it has yet to make a significant impact on ROI. This is a particular issue facing start-ups and their offerings, but we expect the next wave of solutions to offer precise ROI suggestions.

Similarly, we expect there to be a number of tech and real estate convergence opportunities. Should some of the best real estate landlords of the future start out as built-world tech companies, they could have an opportunity to deploy their tech into their own portfolios. If it makes a significant difference to ROI, it could point to more efficient ownership and management.

A number of other trends such as new business models, crowdfunding for syndicated investment opportunities and the growing popularity of co-living will also greatly influence how capital is invested across the sector.

Building a lasting model

By and large, VC activity in the built-world tech market can be defined by two dynamics. On the one hand, it’s a marketplace driven by huge inflows of capital. On the other, adoption (although evident) lags behind this flow of investment.

There are three major hurdles standing between greater VC investment and adoption which if remedied could transform the real estate industry:

  1. Infrastructure: Owners and operators that wish to solve their operational and value challenges through technology must hire the right talent, analyze the processes and functions that would benefit the most by replacement technologies and develop strategies that will deliver these needs. Organizations can do this by taking a closer look at existing solutions and bringing in the right talent to implement adoption.
  2. Absence of single-source solutions: On the provider side, greater adoption may occur if start-ups consider creating connected umbrella solutions to solve a range of challenges and needs. The buyer profile in our industry does not always respond when a value proposition is not clear, yet innovation is incremental, and firms need to demonstrate that their solutions are adaptable and have an acceptable shelf life.
  3. ROI: Ultimately, this is where all commercial real estate firms, no matter the size, reside. In current product offerings, there are few quantifiable returns on investment, i.e., an anticipated reduction in costs or increase in revenues. However, over time, as more technology is adopted and outcomes are measured - and the needs of the market are more clearly identified - a more definitive link between product and ROI will be established.

Although clearly there are issues that remain unresolved, current momentum and progress suggests that the built-world tech market is creating a new and exciting era in real estate—one that we are watching with anticipation.

Summary

Commercial real estate has a long-standing reputation as a technology laggard; slow to respond to the disruption that has swept across other industries. But with venture capital investment in ”built-world tech” at an all-time high, how can the real estate industry make sense of the emerging technologies and opportunities that could transform their businesses? Download the PDF.

About this article

By

Mark Grinis

EY Global Real Estate, Hospitality & Construction Leader

Real estate leader drawing from three decades of experience. Author. Speaker.