With technology flipping industries on their heads, it should be unsurprising the latest disruption to the commercial real estate market is PropTech.
You might not think the digital age would transform how we buy and sell real estate.
After all, property is a tangible asset requiring multiple parties to complete the investment. It could be argued the fundamental process has barely changed in decades.
But think again.
Commercial property is becoming an overwhelmingly large segment throughout the globe, with the total value of investable global commercial real estate set to reach US$65 trillion by 2020 (Asia Pacific accounting for over 30% of it). Tools will be in high demand to make life easier for owners, tenants and property professionals to:
- Quicken the transaction process
- Lower property investment costs
- Improve trust and transparency
- Match tenants and landlords with their ideal property
- Provide cheaper construction and materials
- Optimise the use of property managers
It’s still in its infancy but expect the ‘Amazon experience’ to hit the real estate market soon.
This article will show you how technological solutions will be used to solve challenges in commercial real estate, thanks to an emerging market called ‘PropTech’.
What is PropTech?
You could broadly define PropTech as any disruption of real estate through technology. A disruption could be a major change to particular processes or norms to benefit the parties involved (perhaps through time, cost, accuracy of information, convenience or transparency).
An existing PropTech influence can be seen hiding in plain sight. Domain.com and Realestate.com.au have completely transformed how homes are bought and sold in Australia. The online channel is the number one most important method to sell these days, and more techniques are yet to come in other areas of the property market.
Using on-site inspections as an example, a property manager or interested investor can now inspect the building and roof quality of an asset using drone technology. The drone can zoom in on defects in the building and classify the problem, and thermal imaging on the drone’s camera can even identify moisture ingress and any sources of heat and cooling loss.
Having this sort of technology at your disposal will be more than just ‘keeping up with the Jones’s’. It may be a luxury today but in several years’ time when your competitors have weaponry like this, you’re going to want to arm yourself too.
“Since the mid-2000s, more and more PropTech startups have been bringing new technologies to market that address a wide variety of inefficiencies, scoring more attention and capital from technology VCs and growth funds”, says Nathan Dever from Ten-X, an online real estate sales platform.
Also known as REtech or CRE Tech, it is already a US$54 million industry in Australia (and a US$1 billion industry in India). The PropTech market in Asia Pacific is expected to hit US$4.5 billion per year by 2020.
Technology in property will be more than just a ‘nice to have’ and its tipped to impact nearly every role in the institutional real estate chain.
What you can expect to see from PropTech
Like any investment class, if you put a microscope over real estate you’ll see some flaws.
Australia has been voted one of the most transparent real estate markets in the world, yet some might be concerned about players who are discreet about aspects of their operations – such as lease rental rates, property prices and valuations – to claim a competitive advantage. Setting time aside for inspections and meetings is another issue for some investors, just as property managers will inevitably miss out on blemishes when inspecting a building.
The digital age is all about doing traditional things better. Here are some factors PropTech will improve:
Trust and Transparency
You’re dealing with lots of money when investing in real estate. And this understandably makes sticklers out of investors during the buying process. Investors do not like mistakes, uncertainties and grey areas.
Peace of mind might be given via ‘blockchain’.
If you haven’t heard of it, blockchain is known as a decentralised ledger and ‘single source of truth’ of transactions or data. Also known as a ‘smart contract’, it creates a single place for several parties to share private data about a single item (such as a property acquisition) establishing an agreement about the validity of the data. The blockchain is secured under mathematical algorithms, ensuring only the correct parties have access to the information.
When purchasing commercial property there are several parties involved. The buyer will talk to the real estate agent, the bank, their solicitor and the vendor. The bank will look to the vendor, the purchaser, the Titles office and even credit check companies. These parties need to trust and be trusted. As important, there needs to be trust in the information being correct and error-free.
In comes the smart contract, a single set of connected files where all parties record their data. Every participant will consent to the information and agrees it is true and correct.
I can hear investors and property professionals sighing with relief already.
Nanotechnology is technology which manipulates individual atoms and molecules. Specifically, it deals with dimensions of less than 100 nanometres (that’s the equivalent of 0.0000001 metres).
Why is this important? Well, nanotechnology is being used more and more in building materials and could transform the construction industry.
It is improving building quality by creating high strength concrete and thin, lightweight, super-efficient insulation. Manipulating the makeup of tiny molecules has even created self-cleaning glass and windows, reducing the need for cleaners and retaining window surface quality for offices and retail premises.
It is estimated that by 2025, up to half of new building materials will contain nanomaterials.
We’re used to the idea of being ‘connected’ in this digital age. Our phones might speak to our laptop, downloading photos we take or messages we receive. And our laptop might speak to our wireless speakers, playing music for us without the need for getting out of a chair.
This not-so-new phenomenon of connectivity is called the Internet of Things (IoT) and it’s finding its way into many industries.
Having access to IoT in real estate will be valuable for property managers. Wireless sensors allow landlords to offer tenants virtual guard services, which monitor the equipment that monitors your property. Advanced surveillance, special recognition software and onsite deterrents means virtual guards can address specific security breaches on your property and determine the best course of action.
IoT can also identify performance trends and help property managers understand and achieve their tenant’s goals. Sensors can control office lights, air conditioning, elevator use, parking spaces and electrical systems.
The role of the property manager will be optimised during the uptake of IoT so they can focus on their number one objective – maximising the return of the landlord.
Reducing design mistakes
Virtual Reality is a hot topic in technology circles. For real estate, VR will help reduce design mistakes when property owners don’t need to force an image in their mind from building plans. They can simply put on a helmet and open their eyes. What a dream for developers, real estate agents and marketers.
Not only that, but 3D printing is expected to play a huge part in reducing building design errors. An adaptable model size of the planned property will allow better visualisation of the completed building.
Challenges facing PropTech
Remedies like blockchain still have a way to go before becoming commonly accepted.
Governments remain wary of the system, with China even banning its use in cryptocurrency investment. PropTech startups will need to address what sort of governance will be in place when they begin to provide decentralised ledgers.
With baby boomers still making up the largest portion of commercial real estate investors, technological change to the industry is not necessarily a pressing issue. They are likely to favour human interaction during the purchase of high value assets like property and many will no doubt be sceptical of changes to property purchasing fundamentals.
However, millennials and young buyers are reaching their prime buying years and are next in line to fill the market, using mobile and internet to help form opinions about opportunities. This means PropTech startups will soon have excellent opportunities to aim their services at this customer segment.
How should landlords react to technology changes?
There are many inefficiencies in a growing commercial real estate industry which need improving. True.
Digital ‘coups’ are sprouting to more segments than many could ever have expected. True.
Real estate is too rigid to be remoulded by the hands of technology. False.
Landlords should be aware and keep an ear to the ground for upcoming technology rollouts and looming changes to the way real estate is transacted. Most importantly, landlords should adopt a flexible mindset for the ongoing revolution: it’ll go a long way when dealing with future property transactions and it’s the only way to stay nimble in a changing market.
Properties & Pathways is an experienced and knowledgeable commercial property investment business. We don’t set the trends, but we like to ride the cycles. Get in touch with us today to find out how you can invest alongside us.