Why money is pouring into proptech

But the big picture is clear. The sector I call proptech is growing fast. Like all tech sectors it has its challenges. But it will have an increasing impact on traditional real estate.

EY’s Global Real Estate, Hospitality & Construction Leader, Mark Grinis, released a report, Venture Capital Funding Points to the Hottest Concepts in Built-World Tech, to the 2000 attendees at the CREtech New York conference last week.

“For real estate companies to compete in a new era where power has shifted to tenants and residents, embracing technology must be the cornerstone of their business strategy,” he said.

Luckily not all proptech is disruptive.

“Built-world tech has evolved with start-ups focused on solutions that can solve real estate owners' and operators' challenges, complementing rather than redefining their businesses,” said Grinis.

“These start-ups are increasingly focused on cost saving and profitability, which will enhance the return on investment for real estate owners.”

Australia's place

Australia has 265 companies playing in the proptech space – a 428 per cent increase since 2013, according to the global proptech tracker Unissu.

“These companies are seeing value in the industry and needs that are not being met,” says EY’s managing partner for Oceania real estate, Selina Short.

“Some of Australia’s largest developers have launched proptech accelerators, incubators or innovation labs, and it’s no surprise that proptech investment in Australia is predicted to reach $20 billion in 2020.”

In 2018, SmartCompany nominated seven Australian proptech start-ups which had “raised millions,” including Soho, which offers a new way of linking real estate agents, owners, buyers and renters; ActivePipe, which helps identify real estate clients, LocalAgentFinder which empowers homeowners in the search for an agent; BrickX for property investment, HappyCo for management software; Athena for home loans; and MadeComfy for the management of short-term stays.

Charter Hall, which last year ran a proptech accelerator program, divides the new technologies into three categories: one that creates smarter buildings; a second that uses space more efficiently; and a third that smooths the interaction between finance and real estate.

Taronga Group, founded to invest in real estate innovation and technology, has a RealTechx Growth Program, that's focused on start-ups in energy, sustainability, safety and wellness.

EY’s Short acknowledges the huge expectations for proptech as a “panacea” for all problems.

Biggest hurdle

“The biggest hurdle ahead is scalability,” she says. “It’s one thing to introduce a smart system into a shiny new building – quite another to roll it out across an entire portfolio of existing stock.”

Many other solutions, she notes, only address “a small slice of the pie”.

The key challenge, she says, is “whether we are investing in the cultural change and new skill sets required to ensure this clever tech actually creates better outcomes for people and, ultimately, stickier tenants. That’s the big question.”

Grinis also notes three challenges. One is the level of infrastructure and talent; the second is the absence of single-source solutions; the third is the inability to deliver owners a solid return on investment.

Of course, not all of proptech start-ups will work. Some will fall foul of the backlash against big data. Many will fall short of their proponents' ambition.

WeWork woes

The latest SoftBank rescue package for WeWork values the group at around $US8 billion, not the $40 billion discussed just months ago, and the rescue will be painful to building owners and developers, including those in Australia.

One Seattle developer, who pre-committed his entire 36-storey project to WeWork in 2017, has, just months before completion, announced that WeWork will no longer be moving in.

Beyond its too-fast growth, WeWork is exposed to a reversal in office market demand because, as many realised in the lead-up to the float, the model is essentially an arbitrage. WeWork takes bulk space on long-term leases, cuts the space up, and offers it to customers on higher-priced short-term agreements.

If demand drops for its suites and desks, WeWork could be squeezed between falling revenue from short-term occupants and fixed long-term lease costs, some $US47 billion of them. The group would not be the first in real estate to be trapped by a mismatch in timing between assets and liabilities.

Here to stay

But as I wrote last month, even if WeWork does not survive, the flexible-space model that WeWork promotes is here to stay.

Global commercial real estate group CBRE has a similar view in a just-published report from its head of occupier research in the Americas, Julie Whelan.

“This segment of space would not have skyrocketed to where it is today if occupier demand were not fuelling it,” she writes.

“The flexible-space model may shift from where we are today, but the fundamentals of speed, flexibility and low capital outlay will remain staples of occupancy decisions.”

Significantly, one of the most canny real estate investors in the US, Barry Sternlicht’s Starwood Capital, is reported to have provided part of the rescue funding for WeWork.

The report makes sense. Like many, Sternlicht would have seen the value in flexible office space and now has a seat at the table in the sector’s biggest play.

Of course in true tech culture, the failures only encourage the rest.

“We expect a number of break-out companies to emerge in 2020, including venture capitalists interested in seizing new opportunities,” Grinis said.

“As a result, we can expect funding rounds to increase along with deal sizes.”