What does Proptech actually mean?
Proptech broadly covers the application of technology to the Built Environment. It covers everything from hardware and software to AI and Smart Cities, with a great deal more in between. Proptech also describes the innovators behind the technology, whether established real estate players or upstart disruptors.
As advisers to asset owners, developers, occupiers and tech companies we have seen both the range of Proptech applications and the interest surrounding them expand significantly in recent years.
Why should investors care about Proptech?
Whatever form Proptech takes, it is typically applied to make buildings and spaces more responsive, more adaptable and more efficient. It follows that this should benefit all stakeholders – owners, developers, tenants and individuals. From an investor perspective, owning and operating good, user-friendly buildings, and doing so in a sustainable manner, should translate to better returns.
Looking specifically at sustainability: increasingly a “green building” has to be a “smart building”. The focus is no longer just on building sustainably; through the use of data tracking (as an example) we can now ensure that buildings are also used sustainably. This can be as simple as tracking the area usage to ensure that lights, heating and cooling are managed appropriately or using more sophisticated technology to maximise the use of space, light and ventilation to contribute positively to staff wellbeing and productivity.
More efficient buildings should deliver better returns – operating costs should be lower and space can be used more efficiently allowing, in turn, for a higher concentration of, and/or better paying, tenants. This comes with a warning for investors, however: if demand for space is going to fall (which looks more likely due to Covid), then owners of older stock may struggle. It is harder to work smart in a dumb building.
So, can the best returns only be made in smart buildings? The answer is clearly no, but tenants’ basic asks have shifted in recent years and landlords who can satisfy them should see the financial upside, particularly if “smart” also means “green”. The jury is still out, however, on whether the smartest buildings deliver the highest returns. There is only a thin pool of occupiers prepared to pay the premium for a super smart building, so for now the appetite amongst investors seems to be for buildings that are “smart enough”.
Aside from the buildings themselves, Proptech and specifically decentralised ledger technology (DLT) (aka the blockchain) has the potential to transform the way assets are owned and traded. Although in its relative infancy, the tokenisation of real estate, whether of funds or individual assets, should be one of the Proptech success stories of the coming years. DLT offers to “cut out the middlemen” in a property transaction, increasing efficiency and, in theory, liquidity.
And why should developers?
Now more than ever buildings need to be future-proof, which means that developers should be right at the forefront of Proptech developments – the good ones definitely are. Buildings, places and spaces need to be designed with one eye on the technology of tomorrow, so, for example, data/sensor capabilities must be considered carefully during the development stage.
Developers and constructions companies are themselves users of Proptech and the construction industry in particular is ripe for disruption – a clear example being data-driven pricing, which should contribute to more cost certainty, earlier.
During the design phase virtual / augmented reality can be used for virtual walk-throughs and quality assurance checks, whilst “simple” tech such as drones and tracker devices can be used to enhance on-site safety.
In a nutshell, for the developers Proptech helps de-risk projects and deliver faster, cheaper builds.
Will real estate corporates and asset owners meaningfully engage in PropTech?
Yes. Eventually, whether they like it or not.
However, the use of Proptech and the adoption of disruptive methods is not a switch that all groups can easily flick. Some groups have the cash and appetite to invest in teams or individuals who can champion disruption within an organisation and some don’t. Many will have to be influenced from outside or dragged along by the market.
If the economics don’t force their hand then sustainability might, as we have seen happen with the transport and energy industries over the past two decades. These sectors have been subject to ever more stringent legislation and a squeeze on traditional models and practices has represented both threat an opportunity, with high profile disruptors emerging on a global level.
Has Covid led to an embrace of technology by the traditionally conservative real estate industry?
Covid has forced the whole world to embrace certain technologies like never before and has probably advanced the discussion on flexible working by five years in the space of as many months.
However, in our experience across Asia and globally, the real estate industry’s immediate focus has not been on technology, but on the very tangible and present tenant issues that have arisen during the crisis.
Once the dust (hopefully) settles, Covid will of course force all of us in the real estate industry to re-examine some of the truths that were hitherto universally acknowledged. Technology will of course be a key facilitator of the “new normal” whether that means fewer people in the office, a rethink of retail, less business travel or new and different types of client interactions.
Which countries are seeing proptech thrive? Where is it booming? Where are the opportunities?
Proptech should, in theory, be borderless in terms of its potential and certainly we are seeing innovators and disruptors emerging from every corner of the world.
In terms of occupier demand, there is naturally more demand from the large financial hubs where tenants may have more choice and more capital to deploy.
If instead you look at where is benefiting most from Proptech, or from tech as a whole, then you could look at the data centre opportunities in India or the logistics / warehousing opportunities that may emerge in China over the coming decade.
Lawmakers and regulators play a role as well and, for example, jurisdictions such as Germany and Switzerland have been seen to be pragmatic supporters of tokenised assets and funds. As is often the case, however, the tech is outpacing the law.
Will data really begin to drive decision making?
When we look at Big Data in the context of Real Estate or generally there are two key questions: (1) does more data mean better data? and (2) who is making the decisions?
The answer to question 1 is a definitive “no” – the challenge for asset owners and occupiers is what to do with the enormous amounts of information that they now collect. Machine-learning and Artificial Intelligence (AI) are making huge advances in this area and that represents one of the biggest potential game-changers for the Real Estate Industry. AI can help with everything from office lighting levels to planning for natural disasters.
With regards to question 2, the trend is increasingly for some decisions to be left to machines (AI) rather than people. This creates myriad challenges, with which the world’s greatest minds continue to grapple without reaching any definitive view. If you accept the premise that “every company is a tech company these days” then the Real Estate industry must educate itself as to the challenges presented by AI.
Are we seeing push back with regards to privacy concerns?
Push back? Maybe, but as individuals we are definitely now more aware that our data is being collected, even it is not always clear by whom. Lawmakers are playing their part in protecting our data with countless new data privacy laws hitting the statute books worldwide.
There is inevitably a trust issue with regards to data collection, as has been shown during the Covid pandemic. Citizens, generally, do not trust their governments to use and protect their personal data. This is why many contact-tracing apps are doomed to fail.
Similarly, for landlords and employers who want to collect, use and indeed monetise our data, they will need to prove that they can be trusted and that any perceived loss of privacy is balanced by a better built environment.
Matt Nortcliff is a partner at global law firm CMS and heads the Real Estate and Funds practices in Singapore. CMS is recognised as one of the world’s leading real estate law firms for real estate and a leader in technology law, both in Asia and globally.