Taronga Ventures Interview: Launching a Real Estate Tech Fund in the Asia-Pacific
In January this year, VC heavyweight Norwest Investment Partners identified real estate technology as one of its top predictions for 2017. Despite attracting growing interest, the real estate tech investment scene is still limited to a handful of specialist accelerators (MetaProp, Pi Labs etc), industry investors (Capitaland, CBRE, Savills etc) and more general VCs that include some real estate investments as part of a broader portfolio (the most notable exception being Camber Creek in the US which specialises in real estate).In Australia, Taronga Ventures is closing a AUD$50m fund and will become the first independent, specialist ReTech fund to launch in the Asia-Pacific region. The process of raising capital and selling the concept of real estate tech is a story that reflects the industry as a whole – early pioneers who clearly see the imminent impact and opportunity of technology, corporates hungry for innovation and real estate leaders eager to ride the disruption wave but uncertain how to go about it.
Jonathan Hannam, Taronga’s Managing Director, speaks to Jack FitzGerald, Founder of real estate tech blog Disrupt Property, about the journey and the opportunity:
Describe the opportunity – why real estate tech and why now?
We all know that globally the real estate market is the world’s biggest sector. Savills puts the combined value of all parts of the real estate sector at a staggering US$217 Trillion (January 2016) almost 2.7 times the value of the world’s GDP.
During the past two years we have seen a dramatic increase in the amount of venture capital activity with investment into real estate technology hitting new record levels in 2015 (US$1.7 billion raised across 191 deals according to CB Insights). This represents a 50% year-on-year increase and a massive 821% increase in funding compared to 2011 levels.
Despite this, ReTech figures pale in comparison to those in FinTech (total investment in 2015 exceeding US$19 billion) and HealthTech (US$5.8 billion in 2015). Thus, it is clear that the real estate sector, as the world’s largest, has been slow to attract venture capital.
We are involved in an industry that develops large and expensive developments that take many years to complete and due to the ‘bricks and mortar’ nature of the industry it has been slow to innovate. However, that is now starting to change and many existing players are starting to discuss and consider the impact of innovation on their portfolios.
In my most recent role at Mirvac, I witnessed the struggle that a traditional developer faces when trying to innovate. At a board and corporate level everyone wants innovation but in order to drive innovation through an organisation you need to have a culture that can accept failure, a management team that is driven by the long term returns of an asset rather than the development profit and a willingness to try new things. And this is not easy.
To some extent the partners behind Real Tech Ventures saw the broader opportunity of creating a new market niche that provides corporate and institutional owners of real estate with a low risk way to drive innovation through their organisations – by investing into a fund that is purely focused on Real Estate innovation and disruption.
As Asia and Australia’s first real estate tech focused fund, how have you found the investor reaction?
This has been a fascinating journey. In most cases we have tried to present directly to the CEO or President and then have the CEO invite the relevant people to the meeting. Innovation sometimes sits with Finance, or directly under the CEO or CIO and also we have seen Innovation as a part of HR – meaning that the organization is looking to use innovation to change the culture. When we present the fund and its ecosystem we clearly stimulate new thinking and often as we are presenting additional people will be asked to join the meeting. The investor reaction to the theory of Real Tech Ventures has been extremely positive.
What has been challenging is that many corporates are currently designing their innovation strategy and thus it takes time to consider the best way to actively participate in this space. In many cases we have been asked to come back and present to different parts of the corporate even up to and including board members in order to raise awareness of the product.
For many of the large sovereign wealth funds they have established VC or Private Equity teams and thus we often begin by presenting to the real estate teams and then meet the VC group.
The corporate groups generally do not have the experience of investing into venture capital and look at this as more of a balance sheet defensive play – allowing participation and exposure without the downside of having to manage numerous VC entities. So there is a different approach.
How aware are Australian real estate companies of real estate tech?
At the recent Australian Institute of Company Directors update in October 2016, the former Chairman of Stockland presented his expectations for 2016-17 and the focus was on digitalization. His recommendation was that all boards need to set aside funds and invest into disruption in their sector – we couldn’t agree more. This was a presentation covering all sectors rather than just real estate.
For real estate in particular, the knowledge of the disruption that technology can bring to the sector is well known – especially if we look at the impact of Airbnb to the hotel sector and the rise of groups like WeWork. We are aware of one of the major property consultancies taking a position to say that within five years they will be a Tech company.
So for many Australian groups they are aware of the problem but are still trying to work out the solution. To some extent there has been a greater level of innovation in Asia, where we have seen a number of major developers and owners of real estate take market leadership positions in the space.
In Hong Kong we have groups like Swire creating blueprint – a hub and accelerator space. Others, like Mitsui Fudosan in Japan and CapitaLand in Singapore, have created their own dedicated venture teams with balance sheet capital allocated to invest into companies that will potentially enhance or disrupt their portfolios.
What do you think are the current platforms capable of changing the industry?
As far as broad themes go, any area where there is a middleman, or a reliance on information asymmetry, is ripe for disruption. From a real estate perspective this would see the agency business most exposed as technology will allow a much greater level of interaction between developers and tenants. We are now seeing the arrival of Purplebricks into Australia offering fixed fee sales for residential and there are many groups looking at disrupting the commercial leasing space in much the same way.
Real estate tech is a massive vertical with everything from sales and marketing through to building automation and VR – what areas is the Taronga team most excited about?
Different team members have different focuses. I personally think that VR will lead to the end of expensive residential sales suite and as the technology evolves actual purchase decisions made, such as selection of kitchen tiles, carpets, colors etc., will be directly sent to procurement. I also see the logistics space, especially storage, will be completely revolutionized by autonomous transport while with driverless cars we are already seeing examples of a reduction in car-parking requirements for developments where there are commitments made to supplying shared vehicles.
My Co-Founder, Avi, has been actively exploring the major model shifts that have been occurring in the real estate sector. Technology enablement has changed the way we use the built-environment. For example, the nature and use of CBDs is evolving, from traditional centres of commerce and trade to centres of community and tourism as remote working and communal office models become the norm. What does this mean for investors investing in the next major commercial tower in a CBD? What will the tenants of tomorrow require?
Our Investment Director, Pathum, who recently relocated from San Francisco, has been exploring the interaction between physical spaces and how they directly interact with groups and individuals. From connectivity technologies to the provision of detailed information which is relevant on an individual basis, the expectations placed upon a building are much greater, and a higher order of interaction is required.
China is a bit of a black box when it comes to real estate tech and the rest of the world – it has produced some of the biggest capital raises but few people know what’s going on there. Given your background working in China, how do you see this market and are you planning to invest there?
China continues to be a great opportunity. We have spent time at Vanke’s impressive R&D facility in Shenzhen and have a number of potential partners and opportunities in China both from Insurance backed groups and investors. A key part of our ecosystem is to have a launching pad for north Asia either in Hong Kong or Shanghai and we are working towards this with one of Asia’s leading conglomerates.
Many Chinese developers are willing to use technology to try to differentiate their products in a highly competitive market. Groups like Fosun have produced some of the most advanced show suite technology in Shanghai making full use of VR and 3D animation. Advances in construction material and sustainability also provide many opportunities for either investment or partnership.
Also as you have referenced, China has seen some of the largest real estate technology capital raising deals last year globally, in terms of funding size, with the success of Fangdd and Aiwujiwu. Thus we see China as a market that can be both a perfect growth market for companies in which we invest and also as a potential exit market.
Rather than being a pure VC, you also plan to work with corporate innovation teams? Why is that?
The Taronga ecosystem is about creating a virtuous circle between investors, the fund manager and the underlying investments.
We will know if we are successful when our investors can propose a problem to the ecosystem and have that problem solved by one of our investee companies. Having active and committed Innovation Advisory Council members is a critical component to this ecosystem. Taronga will work closely with corporate innovation teams to ensure that there is an ongoing exchange of information. As a part of this we envisage that there will be opportunities for staff exchanges and mentoring.
You are targeting AUD$50m – how deep is your deal pipeline? Are there enough quality deals and how quickly can you spend it?
We have been pleasantly surprised by the level of deal flow and have received opportunities from markets as diverse as Stockholm, Sweden, Jerusalem and Tel Aviv in Israel, Toronto, Canada as well as Silicon Valley and all across Asia.
So far we have taken around 65 companies to a second round of due diligence and they all meet the requirement of having an impact on the built environment and being of benefit to our investor base.We expect to invest over the next three to four years with around 5% of the capital going to early stage investments and around 95% of the capital going to Series A and beyond investments.