Eyal Malinger, investment director at Beringea, takes us through the latest trends in VC investment in the UK’s PropTech market.
The Brexit vote has had an undeniable effect on sentiment in the UK property market. Property technology (PropTech, CreTech or ReTech), however, has continued to show strength despite political uncertainty; this year Property Partner raised £15.9m and LendInvest raised £17m (albeit before the Brexit vote) and more recently BuzzMove closed a £6m round.
Given the sector’s strong fundamentals, we expect PropTech to continue drawing significant investment in the short to medium term. Even in a (God-forbid) declining property market, firms and individuals will often invest in technology as a way to improve efficiency and reduce costs, resulting in continued tailwinds for PropTech.
Globally, PropTech continues to see increased investor interest, with H1 2016 investment flows hitting a record high (according CBInsight data). The UK itself accounted for a tenth of H1 deals.
Why the sudden interest?
PropTech isn’t new. Perhaps the term is, but property as a sector was an early adopter of technology. CAD systems have been the de-facto standard for architects and engineers since the early nineties. Rightmove, the UK’s leading property portal, was founded in 2000 and IPO’d in 2006.
So why the sudden surge? Early application of technology in property revolved around the most visible uses: automating manual processes, improving work efficiency and web-enabled marketing. The fundamental business models of the property market, however, haven’t changed much. Neither have those of industries in the wider value chain. Recent trends – the sharing economy, crowdfunding, disintermediation (or uber-isation), social media and mobile require a business model paradigm shift, but such changes are difficult to undertake, explaining both the low penetration of new technology and the opportunity we see in PropTech.
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Why the UK?
Professor Michael Porter, creator of competition analysis framework ‘Porter’s five forces’, developed a model to try and understand what gives a certain region or country a competitive advantage.
Nicknamed the ‘diamond model’, it looks at the conditions that make industries competitive in specific locations.
When applying his model to the UK PropTech industry, we can see the structural advantages the UK, and London in particular, enjoys:
- Factor (input) conditions – very positive: thriving venture funding market providing capital; London is one of the most attractive locations for top bright talent; existing industry bodies and organisations like the Royal Institute of Chartered Surveyors (RICS) and the British Property Federation (BPF) supporting the sector; academic institutions producing research and students – Reading, Henley and Cass to name a few.
- Demand conditions – very positive: research shows the UK is Europe’s largest commercial real-estate market and an active and sophisticated residential property market.
- Related and supporting industries: like the casino industry in Las Vegas is assisted by the proximity of neon sign manufacturers, the PropTech industry benefits from London and the UK’s pre-eminence in digital media, digital marketing, FinTech, software development, artificial intelligence, architecture and 3D gaming development.
- Context for firm strategy and rivalry: the UK’s (relatively) flexible employment laws, ease of incorporating a business and government support – in the form of various tax efficient schemes such as Seed Enterprise Investment Scheme (SEIS) – create a fertile ground for emerging startups.
Any such analysis is not complete, though, without some limiting factors: internet speeds in certain London boroughs are abysmal; Brexit has created high levels of uncertainty for European developers and entrepreneurs; staff costs are high (as is expected from a successful ecosystem drawing the best and brightest); and availability of housing limited.
Could PropTech change the face of commercial real estate forever?
Venture capital loves big markets
We would all love to invest in a business that captured 1% of a £10bn market, or even better, 20%.
Property is about as big as it gets. As the main store of wealth for most of the world’s population, an industry generating 12.3% of the UK’s GDP, property is almost second to none in terms of market size.
The Brits have something of a mild obsession with residential property.
It is, without doubt, one of the most popular topics of dinner conversation, and ‘getting on the ladder’ has become a rite of passage and symbol of success.
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Add to this the fact that over 90% of residential properties are owned by individuals, and you get a huge potential market of homeowners and buy-to-let landlords looking to get the most out of their most valuable asset.
Exciting times ahead
A number of trends and technologies could have a revolutionary impact on real-estate and the companies that operate in the sector. Take virtual and augmented reality.
VR gives the ability to view and experience off-plan or existing properties remotely, saving millions on marketing, travel and show home costs, all while improving sales conversion and enabling up-selling of options visualised in VR.
Meanwhile, AR allows contractors to overlay architects’ plans on physical sites, providing early identification of mistakes and avoiding expensive snagging costs. Similarly, 3D printing and robotics can help to complete construction tasks more precisely, safely and cheaply while drones are expected to be used for building surveys, maintenance and aerial photography. The Internet of Things is another area of huge potential innovation for PropTech.
Not all innovation relies on rocket-science – we see new industries sprouting around emerging giants: entrepreneurs have seized opportunities for business model innovation.
Managed hosting services and smart door locks emerged to serve AirBnb hosts and leasing companies now provide attractively priced cars to Uber drivers. New incumbents, by necessity, create supporting industries.
We see new technologies penetrating every aspect of business and personal life. The property sector, the largest source of value in the world, while an early adopter of some technologies, is still largely analogue, and here lies the opportunity for investors, entrepreneurs and businesses.