MAGAZINE Navigating the proptech jungle

Technology presents something of a conundrum for the European real estate market. It is perceived as both an opportunity – an enabler to help developers, investors, asset managers, financiers, and professional advisers work faster and more intelligently – and a sprawling jungle to navigate, obscured by hype and, sometimes, ostentatious salesmanship. There is little doubt within the real estate industry that technology will drive considerable change in how the sector manages and operates assets, but there is no silver bullet yet.  What is evident so far, is many smart and some trivial ideas to reduce the ‘grunt work’ and ‘pain points’ of non-digitalised work.
In part this has led to some oversaturation of solutions and overhype of all things technology. Navigating beyond this and identifying the genuinely exciting solutions for real estate practitioners is challenging but entirely worth the time and effort because technology’s role in how the sector works is not going away. On the contrary, one day the hype will recede, and the industry will clearly see how technology can improve how we work and the work we do.
It is, perhaps, helpful to consider the proptech spectrum in the following two classifications: first, across the supply and demand side of real estate, and second: across the real estate lifecycle. Every element of the supply and demand of real estate and each stage of a building’s lifecycle is undergoing digitalisation.
‘What we are finding is there are two sides to the digital journey,’ explains Mike Gedye, executive director at CBRE. ‘First is the standardisation of technology infrastructure so that systems built by different developers can interact. Second is the standardisation of the data language that is being used to codify information so that the system correctly identifies the right building, floor, tenant, asset or portfolio.’

More fragmented 
The European proptech sector is more fragmented than the US market, which is also considered to be three to five years ahead in terms of development. This is driven by large and small differences between markets: from currencies and languages to nuances in market regulations and practices. This helps explain why many of the hubs of proptech innovation across Europe tend to be localised to national markets. For example, Amsterdam’s proptech scene has developed office community apps like Office App and is home to several start-ups in the 3D printing space.  Berlin is home Leverton, an artificial intelligence (AI)-powered platform which extracts, structures and manages data from documents in more than 20 languages. All in all, there has been an explosion in proptech start-ups – believed to be in the many thousands of apps, tools and platforms.
But while the European proptech sector is fragmented, the underlying fundamentals of how real estate works and is managed are more similar – and there are powerful drivers at play which is leading to ever greater global standardisation. This is coming from the continued institutionalisation of real estate as an asset class by global investors. ‘The way real estate is valued, operates and functions is undergoing a standardisation globally,’ explains Charlie Wade, managing director of VTS, the leasing and asset management platform. ‘Major global investors with pan-European – even global – real estate mandates are now demanding a standardised approach to how capital is spent and accounted for, as well as how assets are operated and how landlords interact with their occupiers, the customer. This is going to lead to more and more convergence in this industry. ‘First, we have to solve the problems digitally for how each market works. Once those are solved, convergence will be easier between markets.’
This is where the digital real estate ecosystems come in. VTS tracks allow users – owners and brokers – to collect and aggregate their own data generated in the leasing and asset management process which in turn generates new types of data and insights. On the investment side, there is a raft of platforms digitalising workflows, such as Coyote, which spun out of pan-European investor and asset manager M7 Real Estate, Oxane Partners in the UK, and Xplore Markets, which has an early focus on the Danish real estate market.  In loan servicing, Mount Street and Gresham Technologies have developed a debt servicing platform for loan management called Clareti Loan Control.

Holistic solutions
‘The reality is none of us can do this in silos,’ says Oli Farago, CEO and co-founder of Coyote. ‘The tech community and the property community have to start a dialogue of how they can help one another. That leads to understanding how best to collaborate.  We hear it all the time: our customers do not want to log into 20 different places to solve the 20 different problems – what they want is a holistic joined-up solution.
‘It is really important for our community and for all of us to create open APIs [Application Programming Interface, ed.] and to collaborate, even if that sometimes means there might be two platforms that are in some way competing because the nature of competition is changing.’
It is notable were Coyote’s success has come from. ‘Over the course of this year, we have seen a lot more demand come in from Germany and from the Netherlands.’ After the UK, where Coyote is based, its take-up success correlates to where transactions are among the highest in Europe, arguably were the need for the efficiencies of technology solutions is greatest because deal flow is strongest.
Farago describes a philosophy common to many of the emerging real estate proptech companies which accepts that no one platform can adequately deal with the entire lifecycle of commercial real estate. Instead, the attempts across Europe are in building partial solutions that ease some of the critical ‘pain points’ associated with non-digitalised working.

Digital marketplaces
Another example of how technology can simplify through online platforms is Stowga, in which CBRE invested in December 2017.  Stowga is a digital market place where users can rent, lease or sub-lease distribution and logistics space, a sector where tenants’ space requirements often seasonally fluctuate. Stowga matches supply and demand of multiple suppliers and customers through an online auction. ‘Stowga simplifies an otherwise complex process. It is of pure brokerage gone digital,’ explains CBRE’s Gedye. It is not difficult to envisage how this solution could be scaled up to source space requirements – whether short or longer term – across different property sectors, products and geographies.
While these kinds of innovations sometimes prompt pushback over fears of disintermediation and disruption, there is another perspective. Technology solutions may reduce the number of people working in brokerage beats, for example, but those that remain may be empowered to make more money while those that are no longer required are re-skilled in other parts of the value chain of their business. Technology solutions like Stowga also make less profitable – but equally time-consuming – small leasing deals viable again.
Data – how it is collected, analysed and exploited – is paramount to the proptech revolution. New types of data are starting to emerge and  technology is enabling the development of different CRE datasets and sources. New tools, apps and platforms will help users – whether developers, landlords, investors, asset managers or financiers – interpret these new datasets to enable them to make better informed data-led decisions.
‘New technologies and service providers will emerge to help the industry make sense of all this new data,’ says VTS’ Wade, adding: ‘That is where the real disruption and excitement will be. But who are going to be the winners and losers there, who knows?’
There is a lot – beyond the hype – to be excited about in European proptech, just be wary of liberal uses of terms like ‘paradigm shift’ and ‘transformational’.

Two ways to classify proptech
The proptech spectrum is vast and growing and can best be classified in one of two ways. First, in terms of the supply and demand side of real estate. On the supply side are developers, landlords, investors and financiers. The demand side centres on the operational end of managing real estate; the tenants, or technology terms, the customer. This focus on tenants as customers forms part of the transformation of property from ‘a product’ to ‘a service’ in the WeWork-inspired context.
The second classification of proptech is across the real estate lifecycle: from planning and construction, to transactions, valuations, leasing, asset management, facilities management to the ever more important customer experience. And then full circle back to redevelopment and planning.
Every element of the supply and demand of real estate and each stage of a building’s lifecycle is undergoing digitalisation. The created tools, solutions, apps and platforms run a spectrum:

• from the trivial (such as ordering a cup of coffee, booking a yoga class or digitally controlling the height of your desk – all through a smartphone app);
• to the simple yet effective (such as smart keys for PRS assets; managing a building’s heating, lighting, lifts or personalising meeting room preferences; independent building ratings for sustainability, energy, digital connectivity and even wellness: ‘wayfinding’ apps which link to amenities in the neighbourhood);
• to the ambitious (such as: digitalising workflows – across due diligence, asset management, leasing and financing; creating digital ecosystems to facilitate transactions, peer-to-peer capital raising, to digitalised secondary markets for equity and debt transactions and crowd-sourcing public data capture).

It all begins with data…
In Europe, the proptech market is still very much in the early throes of the first stage of digitalisation – and it all begins with data. Data sources, access and types are increasing and expanding. Technology is enabling the capture of ever greater amounts of data – at a faster rate – which can be automated, formatted, interpreted, translated, searched, benchmarked and analysed.
New types of data are already starting to emerge.  Technology is enabling the development of different CRE datasets and sources. New tools, apps and platforms will help users – whether developers, landlords, investors, asset managers or financiers – interpret these new datasets to enable them to make better informed data-led decisions. ‘Data will become ubiquitous,’ explains CBRE’s Gedye. ‘The value will not be from who has got that information but who can provide insight based on the data. Providing the data of transactions – whether investment, lease or loans – is not going to be enough in the future. In the future, it will be: what does this data mean for potential movement of rents? Can you provide us with analytics which allows us to predict future patterns?’
Step one is aggregating and standardising the data already available. Step two is adopting technologies which provide insight into parts of the CRE market that were previously unimagined or thought untrackable. VTS, for example, tracks information like: how long does it take to convert a lease inquiry into a viewing? How long does it take to turn a viewing into a proposal? And a proposal into a done deal?  What is the conversion rate of your pipeline? How long does it take to convert an existing client? How happy is that client?
On the investment side, Coyote applies machine learning, a sub-branch of AI which enables machines to write their own code, or algorithms, to solve problems and automate tasks. Farago: ‘For clients tracking their tenants, sometimes trends in payment history emerge such as spotting a tenant starting to pay rent a little slower each quarter which coincides with a fall in their credit rating. ‘A scenario like this could be a red flag, or at least, it might be something to look at when you are considering a lease renewal and deciding what level of rent deposit you might charge in future. I think these new metrics are super powerful.’

Expanding the metrics
All these extra layers of data are expanding the metrics involved in property valuations. Another example of this is new building ratings, such as Wired Score, which measures office buildings’ digital connectivity.
William Newton, president and EMEA MD at WiredScore, explains: ‘Landlords engage with us, firstly, from a leasing perspective – they want to lease buildings faster and at a slightly higher rent. Secondly, from an asset management perspective, over half of the buildings that we work with improved their rating from when we presented their initial report to when they go public. Landlords believe it is important for asset management but also for reporting.’ In the US, CoStar Group estimated that each additional WiredScore banding equated to a 7% higher rent, based on a sample of offices in Manhattan. In Europe, UBS’ real estate equity analyst team followed up this research by identifying adoption of WiredScore in markets it operates – the UK, France and Germany. Derwent London and Helical topped the table, but the developments of British Land, Great Portland and Gecina are all engaged.