PropTech: How technology is transforming the real estate industry
PropTech is part of a wider digital transformation in the real estate industry. In this Q&A, Troy Merkel and Scott Helberg share their views on how technology is being used to deliver value to the real estate market. They discuss the advantages of replacing inefficient systems and the sectors and geographies that are implementing and benefitting from PropTech across the industry.
Preqin: What is PropTech, and what does it mean for the real estate industry?
PropTech is the leveraging of artificial intelligence (AI), machine learning, robotics, robotic process automation, big data and blockchain. These emerging technologies are drastically impacting the way business is done today and are being applied to real estate across a variety of verticals. This can be on the brokerage and leasing side, property development, or investment and financing, and in the way that managers are interacting with their investors.
Preqin: What are the main benefits that PropTech can provide asset owners?
We are in a day and age where people want their information accurately, on demand and as quickly as possible. The implementation of PropTech is vital for investors: they can get the information they want immediately but also in their desired format. If you have two investors looking for potentially different formats or metrics of information, PropTech is vital for fund managers to be able to provide that at a reasonable cost and pass the information on without any obligation.
Preqin: Would that be implemented specifically for the investor? Would it take time to build out or is it a quick process?
While there may be customization requests from investors, the implementation of the platform and the benchmarking and analytics are quick and easy. However, the biggest issue we see is ensuring that the underlying structure of the data is accurate. If the infrastructure isn’t built correctly, you will begin to see cracks in the system, and it won’t work.
Preqin: How can PropTech deliver value in a market?
It can really help in two key ways. One is on a tenant-facing front, depending on your asset, i.e. whether it's residential, office or retail. There are various end consumers, and in the future, people will become even more interconnected with the implementation of 5G—you are going to need PropTech, which is tenant facing, to make the end customer happy. However, it’s also about the data you have access to—whether it’s on the investor side or the asset-owner side—getting access to that data, organizing it and optimizing it so that you can leverage it appropriately in order to maximize revenue or minimize cost.
Secondly, with cost reduction, sustainability is a big driver. When people think of sustainability, they think about saving consumed energy, leveraging smart devices, algorithms, machine learning and optimizing the electricals within a building. It’s important to be proactive and identify potential risk—5G, for example, will allow so many more devices to be connected. You begin to see buildings retrofitting some of this technology, and as a result, you see 25-40% reductions in utility costs. Companies, like OpenSpace, exist, which leverage AI systems to understand how people work and how workflow happens within a building in order to optimize. The buildings themselves may start to evolve, but a lot of it is about how we use those buildings and how we can best use them in a more sustainable way.
Preqin: Are certain sectors particularly invested in PropTech?
I think it's across the board, but where we're probably seeing the largest driver is on the residential side. Generally, more millennials sign apartment leases than office leases, and millennials have greater purchasing power. And since they are more adept at technology, and have a greater need for instant information and data, there’s going to be more of a push for PropTech. But, that doesn't mean it isn’t happening in other sectors.
Preqin: Which is the main market for PropTech?
It’s happening globally, but the U.S. is clearly the hub both from a fundraising perspective and in terms of where PropTech firms are located. We have seen huge cash flows both in Europe and in Asia—I recently saw that 60% of PropTech capital over the past five years was going towards Asia. From what we have seen, the implementation behind that was a little slower, but I don’t think you’re necessarily seeing that level in tech hubs like Silicon Valley. Generally, PropTech focuses where there is a large amount of real estate, as that’s where those ideas can be implemented effectively. The New York and London areas are, therefore, seeing the highest density of PropTech.
Preqin: What are the benefits of being an early PropTech adopter?
There is a benefit to being an early adopter, but many firms are looking to be fast followers. Smaller private equity funds are not going to have the capital dedicated to this in comparison to other larger PropTech and brokerage firms that are currently investing heavily into it.
Preqin: What advice would you give to fund managers looking to implement PropTech who might not be there yet?
If I had to give advice to those funds, the first is to build a strategy roadmap in order to work out a vision for the future. Make sure you structure your data appropriately and accurately. Moving forward, you can select the individual projects or process improvements required and then start to look for solutions for these. Lastly, you need to approach this almost as an opportunistic real estate investment fund—and that means accepting that not all new technologies will succeed or be the right solution.