PropTech: Blending Old and New
In part 1 of this series we introduced trend investing. It examined one of the main drivers of current popularity and outperformance of trends funds: technological transformations. In this article, an interesting trend that is driven by technological transformations will be analyzed: property technologies, commonly known as PropTech.
Just to give an idea of the relevance of this trend: US$20 million was invested into PropTech startups in 2008; 10 years later this number had reached US$4 billion. What exactly is this trend in which so much has been invested?
PropTech is the use of Information technology (IT) to help individual companies research, buy, sell, and manage real estate. PropTech basically uses digital innovation to address the needs of the property industry. Its goals are to minimize costs and resources associated with real estate transactions, maximize efficiency, save time, and personalize property management. Property technologies exist in three major segments:
• Smart homes, which are digital platforms that monitor, manage or operate specific property assets in homes. A well-known example is Amazon Echo's Alexa. Other examples include apps that regulate the temperature of a room on devices like smartphones.
• Sharing real estate, which is the technology that facilitates the processes involved with sharing or renting real estate assets, a notable example being AirBnB.
• Real estate FinTech, which are applications that involve trade in real estate assets. Real estate FinTech includes platforms that offer smart contracts and platforms that reduce the amount of paperwork involved in being approved for purchase.
PropTech started with the growth of online listing sites of real estate in 2007. As the use of data analytics and virtual reality increased, PropTech developed and offered more specialized services for customers. Customers could now have a look inside buildings through their devices and data analytics helped analyze how offices can be installed most efficiently. The newest developments in PropTech include experimentation with emerging technology such as drones, virtual reality tools, and blockchain. Blockchain, which was explained in the article "Market Basics: Bitcoin (BTC), Ripple (XRP), Litecoin (LTC), Etherum (ETH)" and referred to in part 1 of this trends investing series, is expected to play a major role in creating a secure infrastructure for real estate payments and smart contracts.
Based on these developments in the PropTech industry, let's focus on interesting companies that could potentially benefit from this trend.
Firstly, smart homes: We think Google has strategically benefitted from the PropTech trend by developing itself into one of the key players in the smart home domain. Its application, Nest, offers services such as managing your doorbell, security cameras, thermostats, and smoke alarms through your smartphone. Besides Amazon Echo's famous Alexa mentioned earlier, Philips has come up with another interesting strategy regarding smart homes. They offer products to let customers control the intensity and color gradient of their lighting through applications, allowing the setting of schedules and timers for brightness.
Secondly, sharing real estate: One very interesting, promising company seems to be Wework. The New York-based company that is at the forefront of the shared workspace industry and has been growing incredibly fast. Wework's business model is as follows: they either rent or buy buildings from property owners, transform and update the interior and then rent them out to multiple clients for higher prices. What makes Wework a great example for PropTech is that all the transformations they apply to the design of the interior are architecturally data-driven to make working inside more comfortable and efficient. The number of chairs, the type of smart home devices in a building and the location of the office's coffee corner is all data-driven to make companies more productive and pleasant to work at. Wework is still private but is expected to go public in 2019. Its main investors have been private equity funds. After its last funding round (February 2019) its value has grown to US$48 billion. The Private Equity article series on the AMSA newsfeed explain the structure of such Private Equity investments. As Figure 1 shows, each round of funding has added billions to its valuation.
Figure 1. Wework's valuation with each funding round, indicated by its series number.
Real Estate FinTech, Compass Inc. is yet another example of a private equity funded PropTech. It has built an online platform for real estate agents with all the tools needed to sell a property. Examples are dashboards showing neighborhood data and a Pinterest-like app for organizing home listings, which make real-estate agents more productive. Besides their services, they have now developed a saleable product as well: The Compass 'for sale sign', which is a similar sign to the ones that stand in front of houses that are on sale now, but trackable on the navigation app Waze. Its last funding series (October 2018) has valued Compass at a whopping US$4.4 billion (Figure 2).
Figure 2. Compass Inc.'s valuation with each funding round, indicated by its series number.
A public real estate FinTech company that has grown rapidly is Fiserv. Fiserv uses technology to facilitate lending, risk management and loan origination. Increasingly, banks are relying on Fiserv to process transactions related to real estate. This is a company that was founded well before the FinTech revolution, but has moved into advanced technologies as the financial services industry has evolved. It is disrupting the traditional lending process by moving transactions quickly and providing lenders with accurate information on borrowers quickly to reduce risk. Below, you can see the stock price increase of Fiserv in the past year.
Figure 3. Stock Price of Fisery 2018-2019
To conclude, the PropTech trend is very interesting to analyze. The challenge for trend investors is to pick the right companies that can benefit from this trend. However, as this trend is still in its early stages, not many companies are publicly listed yet (Wework and Compass Inc.) and are funded through Private Equity funds. It is expected though, that some of these companies will not wait long until going public, since gaining market share in the real estate business demands big investments. Therefore, we recommend to keep an eye on the performance and strategies of companies that are entering this market.
Editing by Tom Handels