Real estate’s relationship with tech is maturing. Gone are the days of every Tom, Dick or Harriet believing they can set up a proptech start-up from their bedroom and attract investment. Now, when it comes to proptech it is survival of the fittest.
That was the finding of the University of Oxford’s Saïd Business School’s latest report into the proptech sector. Building on its report from 2017, its Proptech 2020 report shows an increase in the amount of investment being pumped into proptech, but a significant decline in the number of start-up businesses.
“We are seeing much, much bigger sums of money applied to the proptech businesses that are making more and more inroads into the market,” says Professor Andrew Baum, author of the report.
The report identifies five areas of development for tech and innovation in the real estate sector: smart cities, smart buildings, the sharing economy, real estate fintech and data engineering.
Data engineering
Data engineering, says Baum, is the “grimy plumbing” of proptech, but the area where businesses can make the biggest gains.
“The easy thing for any property company or organisation to do is just to evolve a very clear data strategy. A strategy which involves understanding what you’ve got, how to organise it, how to visualise it and then understand how to share it for the benefit of your own business without losing control of it,” he says.
For Baum, the future of innovation in real estate is less about the high tech and more about that which is practical, build-able and usable.
“It’s a classic sign of a maturing industry,” he says. “It is survival of the fittest now, rather than the idea that you can start a new proptech business in your garage and expect to succeed. We are also seeing Facebook, Google and Amazon all entering the real estate area through smart building technology. Those big tech giants are in there now as well as the big engineering companies, so you’re not going to make any progress as a start-up. It’s a big-scale game now.
“That era of hype characterised by cryptocurrency-backed property funds, for example, is over. People have seen through the hype and blown the whistle on the things that are plainly ridiculous – those things that just don’t have any real possibility of succeeding in the next decade.”
Baum says that the coming together of real estate and tech professionals over the past three or four years has enabled them to learn and start to deploy investment more efficiently.
Blockchain and tokenisation
One of the big hypes that was around in the early days of proptech was blockchain and tokenisation and, while real estate fintech forms one of the Proptech 2020 report’s five key trends, whether tokenisation will form a significant part of that trend is unclear.
“It’s a classic example of the post-financial-crash, millennial-driven new world of hippies that circumvents the traditional financial system,” says Baum of the idea. “It’s a lovely idea. It’s very elegant and appealing, but it won’t work as it currently stands because of a lack of understanding of all the things that get in the way and all the things that you need to do to be able to make this work.”
To truly tokenise a building it would need to be put into a legal structure such as a company, partnership or trust. That structure would then become a regulated investment entity, meaning it could not escape the rules and regulations of the Financial Conduct Authority. A manager would then need to run that investment. Then to trade the tokens, a blockchain-based system would be needed, which, says Baum, might actually be the easiest part of it.
“But, to go through all of those stages to create a market where the demand is by no means proven is a huge leap,” says Baum. “It’s clunky, it’s expensive and it’s not obvious that it makes any sense for anybody to do any of this stuff.”
A less clunky way
Regulated securities exchange IPSX has yet to trade its first asset but hopes that it can offer a less clunky way to democratise the ownership model.
“IPSX is a very interesting example of non-tokenised fractionalisation project,” says Baum. “The only problem with IPSX is whether it can prove the demand for units in buildings.”
IPSX has the benefit, says Baum, of being both regulated and founded on the concept that every building is in a company. It does not use a blockchain, however, and the benefit of a tokenised system using blockchain is that in the long run it could be cheaper and faster to trade units.
So while IPSX may well be an option for a fresh, new, digital way of trading assets, it might not be the solution.
Where Baum does see opportunity for the progression of tokenisation within real estate is in the institutional sector as funds are already in the right legal format, are regulated entities and are already split into units.
Regardless, Baum still is not convinced that tokenisation is the future of real estate. He is not convinced that the loss of control for the building owner and the potential for mis-selling and for people to buy things that they shouldn’t be buying are worth the elegance of a tokenised system.
“That’s my fundamental problem with all of this,” he says. “Some people call it democratisation. I’d call it dangerous. Funds exist for a very good reason: because they’re managed by professional people and are diversified and regulated. And all those things are good for investors, or should be.
“I suppose one of the reasons people are attracted to tokenisation is that they lost so much faith in the fund management industry in the global financial crisis and I think this idea that you can do better than the system is still pervasive. But hopefully that sort of idea will fade as the investment industry starts to prove its value again.”
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