April 10, 2019

A blog post by Surabhi Kejriwal, Real Estate research leader at the Deloitte Center for Financial Services, and Saurabh Mahajan, Deloitte Services India Pvt. Ltd., manager at the Deloitte Center for Financial Services

Proptechs are gaining investor faith

Commercial real estate (CRE) companies haven’t yet figured out how to deal with the relatively recent emergence of real estate technology startups, known as “proptechs.” While most of the broader financial services field have made the shift to a partnership mentality¹, CREs continue to view proptechs as a disruptor rather than as a potential source of collaboration².

In contrast, institutional investors clearly see the value in proptechs. In our survey of 500 global CRE institutional investors, nearly 90 percent of respondents believe proptechs will have a moderate to significant influence on the CRE industry³.
 

Investors plan to commit an average of 14 percent of CRE capital to proptechs globally, with unique new investments increasing from $3 billion in 2014 to $18 billion in 2018—even as new proptech launches declined sharply⁴.
 

This doesn’t mean investors are just blindly following the latest tech trend, however. Investors are channeling their resources toward more mature proptechs: Late-stage funding, essentially Series C and above, formed 71 percent of the total capital raised by proptechs in 2018. And nearly a third of those surveyed acknowledged that an incumbents’ collaboration with a proptech will influence their future investment decisions.⁵

What is driving the growing investor preference for proptechs?

Proptechs’ use of existing and evolving technologies to nurture new, innovative ideas are most likely a key factor in their attractiveness to investors. Proptechs are using technology to not only enhance transparency and operational efficiency but also to improve tenant experience and information flow. Ultimately, this improves both property profitability and investor return.

Take the case of Open Box, which promises automation services to real estate companies with a robots-as-a-service (RaaS) model⁶. The company’s real estate automation engine provides automated data transfer from budgeting function to valuation, saving hours of monotonous and manual work⁷. Another example is Leverton, a company that uses deep learning algorithms to provide real estate document abstraction services⁸. Leverton’s platform uses natural language processing and other machine learning capabilities to extract and structure relevant information from complicated documents related to purchase-sale, lease, title insurance, and mortgage transactions⁹.

Many proptechs are also redefining the business by positioning the CRE asset as not just a physical space but as a service hub. Acting as change agents, proptechs typically retain the core ethos of the real estate business—location, location, location—while changing perceptions about how the physical space is used. For instance, WeWork is clearly looking to achieve more than just a functional experience by providing a vibrant ambience, varied open-seating options, amenities, and networking opportunities for an on-the-go workforce¹⁰.

Proptechs also approach the business with a different view of talent. Unlike traditional CRE companies, they tend to have a larger proportion of employees with either a data science or technology background who can develop technology-based solutions at a more rapid pace than incumbents. And proptechs are leaner and faster decision-makers than their more traditional CRE counterparts.

Despite these advantages, many proptechs struggle to survive due to lack of industry knowledge, incumbents’ slow adoption of technology, and non-availability of timely financing.

How can CRE companies and proptechs work together to drive digital real estate?

CRE companies investing in proptechs need to get more comfortable with enhancing their risk appetite and adopting a fail-fast approach, as every proptech investment may not generate the desired returns¹¹.

Companies should also consider looking at a more mature partnership with proptechs that move beyond just a strategic investment.

It is also key that investors establish quantitative and qualitative metrics to measure return on investment from proptech investments. CRE companies may consider firm revenue and cost-saving targets along with market penetration¹². Alternately, qualitative measures may include incremental change in tenant experience, transparency and efficiency, or levels of innovation.

To learn more about investor preferences for proptechs and the global fintech ecosystem, read Deloitte’s reports, 2019 Commercial Real Estate Outlook: Agility is key to winning in the digital era and Fintech by the numbers.