A CAPITAL IDEA

While VC funds increase their exposure to proptech and drive industry consolidation, traditional property firms are also allocating bigger budgets to digitalise processes

An anecdote from Nick Romito, co-founder of proptech firm VTS, succinctly illustrates how much attitudes to proptech have evolved in the past decade. “When we first started, there was no proptech,” he says, describing the lead-up to launching his leasing, marketing and asset management platform in 2012. “Our first investor meeting was with a venture capitalist, and my co-founder Ryan Masiello and I were really excited. Well, we told the guy our idea… and he said it was the dumbest thing he had ever heard. That was very motivating!” Romito says. “Fast forward to today, and it would be hard to find a venture capital firm which doesn’t have some sort of exposure to technology.” The latest numbers tell the same story: investment capital can’t get enough of real estate’s digital dimension. Over $32bn (€28bn) was poured into technology for the built environment in 2021, according to a report from industry think tank, The Center for Real Estate Technology & Innovation (CRETI). The data, while representing a 28% increase on 2020 and a 3.23% increase over 2019, also reveals changing investor tastes, as residential real estate applications received around half of all investment. Reflecting the industry’s evolution and greater maturity, most financing went to Series D companies, at 36%, while Series C companies attracted some 31% of the share. Raj Singh, managing partner of JLL Spark, says: “Over the past year, the growth of the overall startup landscape combined with a difficult fundraising environment led to greater consolidation in the sector. In 2020, M&A activity was at a record high of $21.9bn, and in just H1 2021 it was already above $18bn. We expect to see a focus on mergers, acquisitions and IPOs in the year ahead, especially M&A, as established players seek the scale and scope required to serve the largest of commercial customers.” Zach Aarons, co-founder and general partner at MetaProp VC, adds: “Proptech is now a household name in both the public and private equity markets. The industry is truly global, and adoption is accelerating very quickly.” However, he warns would-be investors that expert insight is still required: “We have definitely experienced some choppiness in the public equity markets as the sector reaches a maturation point and analysts realise that not all businesses within the proptech sector should be valued the same way.” Singh similarly suggests that the 2021 SPAC craze may well be due a reset. “Although this trend will likely continue into 2022, the SEC has become more deliberate in its examination of candidates, which will slow things down significantly. The trend may also gain (or lose) strength based on how last year’s SPAC mergers perform as they deSPAC and start trading as public entities.” Conversely, for Brendan Wallace, founder of venture capital firm Fifth Wall, the real estate industry should be contemplating taking bigger risks. 2021 was quite a year for the firm, with $1.1bn in new commitments across Fifth Wall’s funds, over 25 new portfolio companies, and the addition of 27 new team members. Speaking recently at Propel by MIPIM in New York, Wallace noted that car innovator Tesla “was a R&D company for more than a decade, before it became a car manufacturer” and

Aaron Block, MetaProp co-founder, says that proptech has proved it can adapt to real estate’s dynamic needs

that the real estate industry should think harder about investing in innovation. He added: “Tesla massively invested in R&D for a long time while losing money. Real estate isn’t used to going cash-flow negative, which is what it required to run big R&D budgets.” However, he suggested that tech-forward real estate firms would eventually have better access to capital if they take a pioneering path. Despite this, investor confidence in proptech has never been higher. In MetaProp’s Mid-Year 2021 Global PropTech Confidence Index sponsored by PricewaterhouseCoopers (PwC), the report’s startup index stands at 8.3 out of 10, its highest ever level, and double the sentiment recorded at Mid-Year 2020. Furthermore, the investor index is at 8.9 out of 10, its second highest figure to date. Aaron Block, MetaProp co-founder, says: “The flywheel of innovation activity within the proprech industry now appears to be firmly established. It is remarkable to witness how quickly this space adapts to the dynamic needs of all those who interact with the real estate market in some capacity, from the first-time buyer of a single-family home to an asset manager with thousands of units in their portfolio.” Backing this view, Deloitte’s 2022 Commercial Real Estate Outlook, a survey produced by canvassing the opinions of over 400 real estate professionals, expects real estate company tech budgets to increase on average by as much as 10.3% in 2022. Respondents from North America and APAC predict the biggest increases (+11% and +12.3% respectively), suggesting companies in those regions are more bullish on technology spending than their counterparts in Europe (+7.7%). In reality, there is growing evidence that proptech is a global game, and in a highly cross-border industry like real estate, firms are looking to deploy tech solutions across their entire portfolio. Regarding specific technology investments, from 15% to 33% of respondents says investing in capabilities such as building connectivity, market intelligence, geospatial analysis or risk analysis would benefit their company. And more than 70% of respondents believe the real estate finance function should generate business insights and provide services such as advanced forecasting or scenario planning.

Meanwhile, blockchain, tokenisation and cryptocurrencies are also increasingly on the agenda. The Deloitte report shows that real estate professionals are interested in all forms of asset digitalisation and the digital ledger, with developers favouring blockchain to manage construction projects, and brokers more focused on the potential of cryptocurrency payments. Mike Gedye, head of the technology sector vertical at CBRE, thinks that investment capital will also be directed towards the world of mixed reality in the near future. Referring to recent efforts by large technology companies to drive the blending of physical and digital experiences, Gedye says: “Mixed reality has a lot of other applications when it comes to building management and the use of VR goggles. You can use them to integrate with BIM models, you can see where cabling is going. In short, this is a world which can really accelerate progress in asset management, and the sheer amount of funding going into it is likely to be a game-changer.”

Lydia Brissy, Savills’ European research director Brendan Wallace, founder of venture capital firm Fifth Wall

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