No one who frequents real estate industry symposiums and conferences can fail to see the change: people wearing the customary business attire are increasingly rubbing elbows with market participants – usually younger – dressed in jeans and open-collared shirts. They represent property industry start-ups and confidently proclaim their aspiration of shaking up the conventional processes and procedures of the real estate industry. “Disruption”, the omnipresent battle cry in Silicon Valley, home to the digital revolution, is a word the start-up representatives love to use. Coined 20 years ago by Clayton Christensen, a professor at Harvard Business School, in his book The Innovator’s Dilemma, it means the displacement of existing business models by new market participants coming from the outside. This makes the question of how to deal with the wild youth that have come together under the name PropTech increasingly urgent for established industry representatives. The name is a combination of the words “property” and “technology” and refers to young companies that operate in the property industry using technology-based digital business models.
The PropTechs (and also the FinTechs working in the financial services business) certainly have the wind beneath their wings. According to CB Insights, an American information portal, $1.8 billion was invested in PropTechs worldwide during the first half of 2016, up 85 percent from the same period the year before. The lion’s share (60 percent) was in the United States, followed by the United Kingdom, India, and Germany. The blog www.gewerbe-quadrat.de counted at least 170 PropTechs in Germany in October 2016.
Not all traditional market participants have faced up to the new challenge. “Only a handful of major property firms have seriously come to grips with digitalisation,” is the criticism levelled by Alexander Ubach-Utermöhl, co-founder of the PropTech accelerator blackprintpartner and Chairman of the German PropTech Initiative (gpti), which represents some 20 start-ups. Expert Mario Facchinetti of SwissPropTech, a Swiss network platform by PropTechs for PropTechs, observes that many institutional investors “still feel very confident” about the challenge posed by PropTechs. He thinks that’s a mistake: “Institutional investors must also grapple with radical, disruptive methods.”
People are not yet taking sufficient advantage of the opportunities offered by cooperation between established property firms and young, innovative companies.
“Potential for more efficient business processes”
There will be some catching up to do, as shown by a survey conducted for Ernst & Young Real Estate and the German Property Federation ZIA, which represents the interests of the German property sector, in 2016. It found that 17 percent of the property firms surveyed still acknowledge that they do not use any innovative digital technologies. And a striking 85 percent do not believe that PropTechs threaten their business model. The PropTechs naturally see things completely differently, and almost two thirds of them are convinced that they have the potential to threaten established property firms.
Another conclusion of the survey is that only 39 percent of the “old” market participants state that they support PropTechs through cooperation on projects and inputs or through financial involvement. “People are not yet taking sufficient advantage of the opportunities offered by cooperation between established property firms and young, innovative companies,” says Christian Schulz-Wulkow, a partner at Ernst & Young Real Estate. There are now some incubators in which cooperative ventures of this kind can be developed – such as the German Tech Entrepreneurship Center (GTEC), which comes under the aegis of the business school ESMT Berlin and, along with Union Investment, is offering the international PropTech Innovation Award.
Partnerships and cooperation
There have been some examples of partnerships in various areas of the real estate sector. The international investment management firm Jones Lang LaSalle (JLL) is cooperating with Leverton, a PropTech based in Berlin that uses artificial intelligence to evaluate contracts. The international giant Google made headlines when it paid $3.2 billion for Nest, a start-up specialising in smart thermostats. In fact, the Anglo-Saxons are in the lead where PropTechs are concerned. Expert Mario Facchinetti reports that “the background conditions for PropTechs are better in the United States than in Europe at present.”
However, there has also been some close cooperation in German-speaking countries. JLL has acquired an interest in the Hamburg estate agent start-up Maklaro, and the smarthome provider innogy, a subsidiary of the energy giant RWE, is collaborating with the Berlin start-up Kiwi, which has developed a system for key-free door locks. And the traditional Swiss financial institution Postfinance has entered into a joint venture with the crowdlending platform Lendico.
Institutional investors are also looking at the opportunities offered by digital business. “The new technologies hold enormous potential for more efficient business processes and successful new business models,” says Reinhard Kutscher, Chairman of the Management Board at Union Investment Real Estate GmbH. “It’s worthwhile for both sides – the established industry and up-and-coming founders – to invest in the dialogue. After all, the most sustainable innovations result when courage on one side is combined with patience, experience, and solidity on the other side.”
Integration or distance?
But the question of the form cooperation of this kind should take is a thorny one. Start-up experts tend to advise against the acquisition of entire PropTechs, instead recommending cooperative ventures in which the independence of the young companies is mostly maintained. “Experience shows that the best approach is not simply to buy a start-up. That runs the risk of losing the entrepreneurial spirit,” explains PropTech expert Mario Facchinetti. In his view, this is because “two cultures clash: failure is considered unacceptable in the conservative property world, whereas tolerance of errors is a decisive factor in the success of PropTechs.”
Nonetheless, the acquisition of a complete start-up can make sense, says Tobias Just, Academic Director of IREBS International Real Estate Business School, particularly in the case of a complex business model that is hard to copy. “However,” emphasises Just, “it is important to keep these teams at arm’s length, to give them a lot of freedom, and not to shoehorn them into established structures.”
In spite of all that, Tobias Just points out that the success of PropTechs is in no way a given: “A whole series of them won’t survive,” he says – particularly those whose business model is easy to copy. Günter Vornholz, professor of real estate economics at EBZ Business School in Bochum, Germany, also cautions against irrational exuberance: “Certainly, property firms must be careful not to miss the boat. But not everything that is technically feasible is also economically advisable.” So the question is, in what parts of the real estate industry will business models that are both innovative and economically advisable prosper? Experts agree: almost every part. Just, for example, can imagine that “in the future there will be large auction platforms for office buildings, retail properties, and other commercial properties.” Therefore it’s no wonder that many large transaction advisors would prefer to occupy this business segment themselves – which is why JLL created its own online transaction platform for commercial properties in 2016.
From the viewpoint of institutional investors, Tobias Just considers asset, property, and facility management to offer particular potential for value creation based on digitalisation. “Processes can be made considerably more efficient if there is automatic recording, for example, of which office users are working at which workstation and during what times they are working,” Just explains. “In portfolio management, data can help improve the structure of the portfolio. Due diligence will also get faster when data is automatically collected and analysed.”
PropTech Innovation Award
The deadline for submissions to the first international PropTech competition was 15 March. Union Investment and the German Tech Entrepreneurship Center (GTEC) hope that the PropTech Innovation Award will attract visionary ideas for the real estate world of tomorrow. The prize money will total €35,000. Winners will also have the opportunity to further refine their concepts during a 12-month support programme at the GTEC Lab in Berlin. The prizes will be awarded on 17 May in Berlin. For more information: www.gtec.berlin/proptech2017
Big data and Blockchain
Property professor Günter Vornholz sees another exciting field: “The subject of big data is of particularly interest to institutional investors” because analysing large quantities of data makes it possible to predict market trends and orient investment strategies to them. In contrast, Vornholz advises taking a calmer stance with regard to crowdinvesting, which means the financing of property projects by numerous private funders: “Commercial property financers won’t feel any threat to their jobs from crowdinvesting.”
Blockchain technology, however, will have far-reaching consequences, according to experts. “It could fundamentally change property transactions and letting processes,” says Marion Peyinghaus, digitalisation expert and Managing Director of Competence Center Process Management Real Estate GmbH. Blockchain is a database technology that has become familiar from the digital currency Bitcoin and links participants in financing or merchandise transactions directly, without a central authority. According to proponents of the technology, Blockchain could make both banks and notaries redundant. However, Peyinghaus points out that the technology and the legal background conditions are not yet sufficiently advanced to allow Blockchain to be used in a big way.
Peyinghaus appeals to the industry not to view PropTechs as a threat, but rather to see them as bringing new opportunities: “These young companies may offer a chance to make one’s own business processes more efficient.”
“We want to build bridges”
Jens Wilhelm, Member of the Management Board at Union Asset Management Holding AG, believes cooperation between digital innovators and the established real estate industry offers many opportunities
Mr. Wilhelm, Union Investment and the German Tech Entrepreneurship Center (GTEC) will be conferring the first PropTech Innovation Award in May. What is the motivation for this initiative?
With this award, we have jointly created an incentive for young companies to present their ideas for driving forward digitalisation in the real estate industry so they can be evaluated by a jury of neutral experts. We came up with the idea because most PropTech companies in Europe are from Berlin and GTEC has an excellent network there. At the same time, the PropTech Innovation Award is an international competition. That dimension is very important to us, because the property sector thinks globally.
What benefits do you expect for Union Investment from the competition?
The future development of the real estate industry is the subject of a wide-ranging public debate. Our aim is to work with various partners to stimulate that debate and, if possible, to establish new standards for the industry which will then benefit everyone. Essentially, we hope to build bridges between the digital innovators and the established, influential real estate economy.
What is Union Investment’s digitalisation strategy?
We initiated automation of the core processes of our business model long ago. We will continue to pursue this so we can further improve the efficiency and quality of those processes. We also believe that the entire property industry still offers a great deal of potential for the collection and evaluation of data as part of big data analyses. Fund management could greatly benefit from this, for example. We are also involved in implementing BIM (Building Information Modelling) in our projects. It is strategically important to understand digitalisation as an integrated task along the value chain of the entire real estate economy.
The interview was conducted by Fabian Hellbusch.