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Proptech

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What is Proptech?

It's a portmanteau. Quite simply property and tech. Basically anything that is to do with buying, renting, monitoring, tracking, finding, renovating, measuring, moving or any other things ending in -ing to do with property. Literally anything, if you can do it to a building and you can do it with a computer or your phone — its proptech.

And what’s going on?

Here we have taken Savills org chart and deconstructed the different business lines and stuck in some UK start ups that are having a crack at eating away its various revenue streams.

CP Savills break down

There’s a lot of money being piled in to the sector, and for some good analysis check out CB Insights, but in summary this is where the big money is going:

  • Listing & search services
  • Investment platforms (crowdfunding, P2P, etc)
  • Online estate agents
  • 3D virtual-viewing technology
  • Leasing management software

Between 2010 and 2013, the United States captured the majority of investment going to proptech startups. However, in the past two years, the majority of dollars invested have shifted to other markets, and India, China and the UK have all seen significant growth in investment. Currently 6 out of the top 10 startups by valuation are outside of the US. Fangdd, a Chinese version of Zoopla is the most well funded globally. The seed/angel stage dominated deal activity, accounting for almost half of all deals completed globally since 2010.

In the UK

The UK has seen steady growth since 2010, with deal count spiking to 13 in 2014, a 6-year high. The UK accounts for 5% of global deal share in the sector.

We Brits fookin love property. Oh my god do we love it. We can not get enough of it. If you live in London try going a week without hearing someone banging on about house prices. Not gonna happen.

It has a huge amount of history, loads of people working in it, limited stock, foreigners piling in to get in on the action, a bull market for as long as most people can remember, and basically everyone thinks you can’t lose money in it… and to be honest, it is hard to (but the have’s don’t like to publicise that too much at risk of upsetting the have not’s).

As a result, it’s massive:

CP Property stats

And big markets mean big opportunities, so lets have a look at some of the characteristics of this stuff…

Drivers

Supply side: new development, refurbishment, planning restrictions.

Demand side: location, economic growth & employment, population trends, infrastructure & accessibility, building aesthetics & design, obsolescence.

The Pro’s are: - Physical asset - Relatively stable income return, normally fixed - Capital growth potential - Diversification - Risk/return profile - Inflation protection - Direct and indirect

The Con’s are: - Valuations, not market prices - Illiquid - No central trading exchange (for direct property) - Large lot size of direct property/portfolio purchases - Transaction and management costs

Let’s break that down…

Pricing

The heterogeneous nature of property means pricing is difficult, which in turn reduces liquidity. Property performance data is based on valuations, rather than transactional data. An opportunity exists for improved gathering and displaying data.

Trading

There is no central trading exchange. Most transactions are via agents or directly between investors. Secondary trading platforms are now available (e.g. PropertyPartner).

Ticket Compared to other forms of investment there is a high minimum ticket size. Some startups are reducing that minimum entry point via crowdfunding.

Transaction Costs

DD fees and stamp duty means property is geared towards long-term investing. There is the possibility to reduce dd (surveying, legal) through automation.

Land always has value, buildings do not

While buildings can become obsolete or destroyed, land remains an asset that generally retains value because it is in limited supply. Furthermore, the amount of development is usually limited by the land-use planning system. Companies that could help investors identify sites where the existing building/site/development dynamics are inconsistent could be very valuable.

Value Add

Adding value through ‘active’ management. This can entail such actions as refurbishment or redevelopment, the renegotiation of leases or new lettings etc. Difficult to digitise.

Management

Effective management is essential to maintain income flow and to ensure that a building remains attractive to occupiers, but has time and financial costs. Systems for streamlining owner/landlord duties are attractive.

Understanding these characteristics may reveal real opportunities for technology providers.

Now the interesting bit - commercial property.

Why’s it interesting? Well consider this:

  1. Higher transaction values mean there’s more at stake for the players involved.
  2. Given higher transaction values, the competition is stronger and so the players are willing to pay up for competitive advantage.
  3. Single transactions often involve multiple constituents — property brokers, mortgage brokers, lenders, developers, appraisers, builders — each of whom want an edge.
  4. There’s lots of relevant commercial data available to parse, which naturally plays into the wheelhouse of skilled data scientists and tech entrepreneurs.
  5. Broader diversity of funding sources creates newfound opportunity for pricing and product optimization.
  6. The market is antiquated and grossly underdeveloped.

Sounds like if you’re going to so a startup in proptech - and you want to go big - go for the commercial sector…

…The only question is which sub-sector? Office, Retail or Industrial?

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