Guy Elias, Bricks Partner
Is the PropTech industry bringing real value to the value of assets or is this a passing trend?
Over the past few years, we have experienced significant advances in technological development in a wide range of fields and the increasing use of artificial intelligence, big data, and robotics.
In fact, some see that technological progress in recent years as the "Fourth Industrial Revolution", with a host of new technologies merging the physical, digital and biological worlds, affecting many fields, with an emphasis on economics and industry and recently also real estate.
The real estate industry is too broad to serve as a platform for unique and one-dimensional technological advances, so PropTech, which refers to a technology in the real estate field, is defined by constantly changing market conditions, along with changes in consumer behavior.
Thus, a variety of technological changes and enhancements will promote and enable changes in the industry, and the companies that will implement these changes will become the leading and influential companies in the field. And here, contrary to popular belief, the source of the change is not in the purchase and integration of dedicated hardware, but rather in the adoption of innovative and groundbreaking solutions that are mostly software solutions and advanced platforms.
Change is inevitable for any real estate company that wants to remain competitive and relevant. The transition to real estate that combines technology can no longer be ignored, so with the development of the industry and the penetration of technology, we anticipate that in this area as well as other areas, many companies will struggle to become the undisputed leaders in the field, with the stated goal of improving profitability and the best way is to strengthen the loyalty of customers ie tenants as we will explain below. This creates a situation whereas technology and innovation continue to shape the real estate industry, new technologies are evolving in the field that will continue to innovate and surprise soon.
Why is PropTech a hot topic in 2020?
Attention to PropTech is growing both due to the feeling that there is a certain slowdown in real estate and because it is no longer a niche phenomenon. Although investments in PropTech are still low compared to its older sister Fintech, the field is experiencing an impressive increase. From $ 186 million worldwide in 2011 to $ 2.67 billion in 2016. Data for 2018 show that venture capital investments in this area exceeded $ 12 billion last year.
Studies show that there is a keen interest in PropTech from property owners and investors. Therefore, and because this field is still in its infancy, it is an excellent and largely untapped market opportunity.
We believe that this is indeed the "next thing" since the use of the right and appropriate technology can and should extract an increase in profits from both the top and bottom line. In the living space, for example, the big gains include maximizing income by a higher level of tenant retention and generating additional income. The bottom line profits are all the savings in operating expenses (from better space utilization, through lower marketing costs, to lower energy bills and more) The PropTech industry provides quite a few solutions in these areas.
If we take the multifamily (rental housing) market in the United States as an example, it seems that this is a huge market of about 47 million households, where demand is increasing and as a result, the occupancy rate is at an all-time high. Seemingly an amazing figure. However, if you go into the depths of the beam, you find that 50% of it is rented to young people in their 30s (millennials) whose technology has become an integral part of their lives, but about 70% of the market is still held by private entities (Mom's & Pops) and not traditional real estate companies or REIT funds.
Also, the surprising statistic is that over 50% of tenants do not renew their tenancy agreement at the end of the year and are looking for a suitable alternative for their needs. Studies show that the small part is due to exogenous reasons and the rest mainly due to poor service. The loss of a tenant is equivalent to a loss of between 8 and 10 weeks of rent, which constitutes up to 8% of the income line and which translates into a 14% loss of NOI (assuming 60% after expenses). This state of complete infidelity of the tenants only increases the constant tension between the management company and the owners. We believe that the right use of technology can and should solve some of these problems.
We anticipate that this trend will only grow, PropTech companies are creating an opportunity for real estate companies and funds that will internalize the trend, to be a leader in the new digital real estate ecosystem and provide tools and solutions to some of the new and emerging problems and trends over the years. We have compiled several relevant examples to focus on in these areas:
Big Data: From making business decisions about which property to buy to creating better consumer experiences, many real estate businesses collect a lot of data that sits in databases without being used, not to mention in-depth analysis to select trends or behaviors in the industry of their consumers. Smart tools that analyze various sources of information aimed at predicting which property is most likely to increase in value due to various components. Also, real estate companies looking to target themselves and reach the right customers, need to know who they are, when they want to buy, where they are and how they are can reach them most efficiently. Harnessing big data is an invaluable tool in targeting the right buyers and an important factor in refining the process of buying real estate.
Machine Learning and Artificial Intelligence: Artificial intelligence (AI) and machine learning is the art of computers teaching themselves how to improve the way they perform their tasks based on previous experience or through pattern recognition. Such systems are used by real estate investors to effectively control expenses, manage risks, and achieve higher returns through algorithms.
Some of the AI tools in use include chatbots to automate answering frequently asked questions and answering glitches and questions of tenants in the complex. On the asset purchase side, these tools enable investment analysis while setting income and growth targets monitored using an intelligent robot as well as default forecasting for risk analysis loans while focusing on profitable investments only.
Internet of Things (IoT) is a key component in home automation and smart homes. It involves the automation of the ability to control items throughout the home from electric curtains using a handheld device or voice command and ending with sensors that monitor the activity of gas electricity and water. Smart home technology has begun to change the way homeowners view properties, instead of giving a suite of basic services, enticing real estate developers rent with ready-made homes for the internet for all that that entails.
This is a basic device in this age. This is what tenants demand - especially those of Generation Z, who are in their 20s and are expected to double the number of millennials by later this year, making them a growing force not only in real estate but in the economy as a whole. Generation Z is the first generation born after the penetration of the Internet, which means they are more experienced in technology than their predecessors and put a premium on connectivity.
Simply put, a smart property owner would be wise to adopt smart devices, as the presence of such technology - whether it controls security, lighting, TVs, or thermostats - appeals very much to younger tenants they grew up around such a gadget, and want to continue living in places that display it.
In a competitive landscape where the target audience is young, we believe that property owners who embrace technology innovations and put their properties at the forefront of technology, will be more attractive and win the competition for tenants. And if previous experience with other services is any indication, then the availability of technology-equipped apartments should be translated into a rent premium for the property owner as well.
Package Delivery Another area in which technology has made an impact in the field of package delivery. 41% of Americans receive between two to five packages a month, a typical multifamily building receives 100 packages a week. These data grow significantly in large and central cities where the numbers not only double themselves but sometimes triple and even quadruple themselves.
Thus, a new situation is created wherein many buildings dozens of packages are piled up every day in the foyer which harms the appearance of the property not to mention the thousands of packages that are stolen and cause millions of dollars in damage every day. This new situation requires change. Therefore, to ensure safe delivery, new technology-based solutions are born that change the situation from end to end. These solutions, which require a change of mindset among property owners, have also created a situation where the use of smart locks and more correct space planning has led to an increase in rents along with an increase in tenant satisfaction, even though this is ostensibly the opposite equation. The wonders of technology.
Communicating with tenants- Sending emails or using apps such as WhatsApp is no longer an advanced technology, but it is still the most common means of communication among tenants and residents. As well as dedicated apps for keeping in touch with the tenant that can also be used to make rental payments as well as report faults. Smart property owners are still able to sign contracts online today, courtesy of smart contracts and electronic signatures. It's not disputed today that tenants prefer to receive such messages on purpose - and this is especially true of younger tenants like the millennial generation, who tend to be environmentally conscious.
Augmented and Virtual Reality (VR) now allows customers to tour the apartment as if they were actually there from anywhere in the world. Real estate developers, hoteliers, and other businesses use technology to give prospects a sense of the product itself. Using real-time technologies and devices, real estate developers can give their investors a realistic report on the progress of homes as well as completed units. Using the power of virtual reality, it is also possible to allow potential buyers to move through and experience the space even before construction begins.
Automation of Real Estate Operations: To stay competitive, real estate companies need to look for better ways to increase efficiency, differentiate and position their products and services while building customer loyalty. With strong back-office activity, the company can have visibility of the customer life cycle from the moment they were potential customers until they become homeowners or tenants. Companies can automatically deal with customer relationship management, portfolio management, and facility management, and challenges such as cost efficiency and communication between different stakeholders can be addressed.
In conclusion, it is said that we are in the midst of a revolution.
We anticipate that the current trend of real estate-oriented technology development will only increase especially because the share of real estate in the investment sector share is growing along with the fact that traditionally this sector is where the impact of technology is still limited. We believe that the increase in the use of real estate technology together with the increase in investments in companies developing real estate technology will not only not hurt the real estate industry but will strengthen its position along with a steady decline in market share and relevance of companies refusing to embrace change.
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