When the world’s first pure real estate tech fund launched in May with a $212m (£157m) raise, the two former Blackstone associates behind it couldn’t believe they had got in before anyone else.
LA-based Fifth Wall founders Brendan Wallace and Brad Greiwe are still flummoxed as to how they managed to beat the rest of the investment community to the punch.
“We are genuinely puzzled as to why there were no funds already focused on this category,” Wallace told EG in an interview last month. “There are maybe 10 venture capital funds focused on education technology, which has produced a hundredth of the enterprise value of real estate tech.
“With real estate, you have this enormous industry at an early stage of tech adoption and no dedicated funds. We saw a huge opportunity both in terms of scale and timing.”
As it turns out, they may have got in just in time. While the stateside duo were the first to launch a dedicated proptech fund of this size, interest from investors in this sector has skyrocketed over the past five years. Real estate tech start-ups raised over $2.6bn in funding last year, according to CB Insights –up from $1.9bn in 2015 and just $221m in 2012.
“In 2016, the real estate tech industry grew both in terms of deals and dollars, just as it has every year since 2012,” says James Dearsley, partner at Proptech Consult.
“In those four years, proptech companies have raised around $6.4bn in funding across 817 deals.”
Interest has shown no signs of slowing down in 2017, particularly in the UK, where a total of £576m was raised in the first three months of the year, based on Tech City News Investment Tracker records. This is up 142% on funding recorded in Q4 2016 and up 80% on the £320m raised in Q1 last year.
And this has also been the year that we have seen the major agents getting their foot well and truly in the proptech door; from CBRE’s investment into Fifth Wall to Cushman & Wakefield’s global tie-up with US based accelerator/investor MetaProp NYC and the creation of JLL Spark.
So, the money is there and the agents are on board. But who are the investors eyeing the proptech sector and what is it they are looking for?
Tables have turned
Three years ago, one of the biggest concerns in the real estate tech sphere was lack of investor appetite. Now, as everyone from the VCs to institutions and high net worth individuals pile in to make the most of a late adopting industry on the cusp of major tech disruption, the tables have turned.
“There is tons of money now and that’s without question” said Philip Lewis of Kirsch Group and Realla last week at EG’s Tech Talk Live event, which delved into the profile of a real estate investor.
And it’s not just the property players who can see the potential. Tech investors with broad portfolios are also recognising the growing value of the sector.
“I think we are in a real renaissance period for real estate tech investment,” says Rob Kniaz, founding partner of Hoxton Ventures, an early stage European VC firm based in London, which was one of the early investors in food delivery service Deliveroo.
It’s a great time for tech in London and the UK where the value of property tech companies has gone up exponentially in the past five years.”
“There is a lot of capital available, you can build global companies from here in London and increasingly you can have very large outcomes of people going public or selling to bigger tech firms. It’s a great time for tech in London and the UK where the value of property tech companies has gone up exponentially in the past five years.”
Beyond the VCs, Lisa Shaforostova, director of real estate investment at CBRE, adds that the institutional investors are also now putting their money where their mouth is when it comes to tech adoption.
“We are seeing a lot more big investors listening to how tech can be incorporated into investment decisions and embracing that,” she says. “Especially on big ticket deals where there is interest in how you can capture things like non-traditional data sets and start factoring those into decisions.”
Look in the corners
With the availability of capital in the real estate tech sphere reaching new heights, another issue is arising – this time for the investors themselves.
“I’m not convinced there are many opportunities out there to fulfil the amount of money available,” says Kirsch Group’s Lewis. A point backed up by CBRE’s Shaforostova: “We are seeing very limited number of start-ups that are trying to solve the problems we are experiencing and our customers are experiencing.
“A lot of start-ups that come to CBRE, there is a trend that they don’t really understand CBRE and property and when they get to us, they aren’t trying to solve problems at the top of our agenda. There is this big gap and we are now building internal capabilities and hiring developers to try to connect our development team to the wider business.”
As for what does catch investors’ attention, the trick is to “look in the corners”, says Zak Schwarzman, who leads US-based prop tech accelerator and investor Metaprop NYC’s venture capital arm.
“One of the things that we look at when we look at proptech is looking in the corners of real estate. Some of the back waters that are huge end markets but that have almost no technology innovation and very few new players coming into the market. In recent months we have made bets in roofing inspection, commercial appraisal, and title insurance.
The kind of stuff that puts people to sleep at cocktail parties? There is money in that and often not a lot of people who have spent any considerable amount of time creating elegant solutions that address real market needs in those segments.”
Not so long ago, hearing swathes of investors discussing the strategies they have employed to ensure they don’t miss out on the most valuable innovations in the proptech sphere would have been a fairly uncommon occurrence.
Today, the money is there in its billions and it is a trend that is unlikely to show signs of slowing down any time soon. Not least because as far as some of the biggest spenders are concerned, the opportunities are endless.
“The industry is such a late adopter, and because what exists today is so low-tech, most ideas in this space are good ideas,” says Fifth Wall’s Wallace. “By that, I mean you don’t face the same big questions that you would in most other kinds of venture investing. Like ‘does it work? ‘Can you build it?’ ‘Is it better than the status quo?’ In most cases in this sector, the answer is yes. For that reason, I think everything in proptech is on the table right now.”
The industry stalwart
Philip Lewis, Kirsch Group, and chairman of Realla
What does the proptech environment look like right now? Is there a lot of investor interest?
It’s certainly growing, and there’s certainly a lot of interest. But we still have to be sure that the investments can be proven to be sensible, logical and ultimately make money.
Property’s been slow to change, but right now there’s huge interest in helping the industry modernise and ensuring that the people embrace so many of these new ideas.
What are investors worried about when looking at tech opportunities?
The most important thing for investors is to be sure that we don’t discard the old regime on the basis that the new digital world will be transforming everything that we’ve got to learn and love over many, many decades. It’s important that the new and the old work together to benefit the industry as a whole.
Are there any areas of proptech that are becoming saturated right now?
If we look at car hire, one used to just get in a black cab. But now you’ve got a whole plethora of choices: Uber and others who are, without question, saturating that market. I don’t see that happening right now in property. We’ve got a long way to go, because we are still finding our way as to what are the best tech solutions to help the industry modernise.
How is the UK market doing compared to other markets in Europe or across the world?
As always, we’re probably behind America – their market’s so enormous – but ahead of most of Europe. I think Australia is looking a bit like the UK – lots of interest – and I think English speaking jurisdictions make it easier for investors to understand.
This is a marketplace that can be replicated across the English-speaking world and property and its investors have become incredibly international, so I don’t see why new tech businesses shouldn’t be able to do the same thing.
What are you working on in proptech right now?
We’ve got our hands full with Realla. We’re one of the founder investors and significant shareholders in the business.
What is the most important thing you think about when investing in businesses?
The most important thing for us when we invest in new businesses, whether it’s old world or new world, is the management. I think that gets forgotten when tech investors look at these new opportunities. I think it’s really important to have an industry focus and a tech focus in the business.
We’ve got that with Andy Miles, who was at British Land, he understand the property business. Our tech guy understands the way the internet works and the digital world is growing. I think that for us was as important as the Realla business itself.
The VC investor
Zak Schwarzman, MetaProp NYC
What have you noticed from your perspective as a US-based accelerator and investor in terms of proptech funding?
There has been a real ramp up over the past five years of dollars flowing into proptech. You see a lot of people recognising this opportunity and finding compelling companies within real estate and proptech that they want to fund and finance.
What is fuelling such an exponential uptick?
One is the sheer size of the real estate market and the scope of the value chain. The number of different aspects of the real estate sector where new innovation can be brought is fairly staggering and stacks pretty well compared to other industries. Also, there is the validation following the maturation of the earlier generation of proptech companies. These are companies that are now producing real value. That gives investors comfort that there is someone there to pick up the next round.
What about the role of traditional property firms and their adoption of technology?
The real estate industry at large is definitely leaning in to early stage proptech. The sector is far keener to be an early customer now. The big challenge has always been distribution and it is now becoming a bit of a smoother process if you know where to look. The customer base is getting there. You do have a changing face of the personnel rising up and now who have decision-making authority in large real estate firms. And what you see in your own life – demand for immediacy, convenience – that is now present among the people making software buying decisions within real estate companies.
Is there anything else that you have noticed really bolstering the real estate tech sector growth in the US?
A not insignificant piece of the funding uptick is the fact that there is a lot of capital coming in from generalist venture companies looking for a place to go. They could invest in the next VR company or the next autonomous car company. Or, the can look to a huge pool of GDP which still has a massive amount of room to grow.
Our TechTalk Academy, in partnership with Pi Labs and CBRE, is on the hunt for the hottest new proptech start-up.
Find out how you could secure up to £150,000 of investment at www.egi.co.uk/news/techtalkacademy.
EG is also partnering with MetaProp for New York Real Estate Tech Week, which takes place in Manhattan from 9-15 October.
Find out more at www.realestatetechweek.nyc
