CAPITAL WATCH

Investment in proptech is on an upward trajectory as the market continues to respond to the growing demand for innovative proptech solutions What kind of opportunities is proptech targeting? The opportunities largely fall into two buckets: efficiency gains and value-added experience and analytics, both of which have the potential to create competitive advantage for incumbents. According to Bain Capital Ventures, tech start-ups have three primary propositions to create value. The first are complementary activities that use software and data to add value to incumbents, (e.g. Radius Exchange). The second are challenger activities that seek to improve existing services provided by incumbents (e.g. WeWork and Airbnb). The third are synthesis activities that utilise sensors, big data and platforms to create value (e.g. City Zenith and Esri); all of which provide investment opportunities for real estate incumbents. From an investor / operator perspective, proptech can be used to improve occupier experience leading to new sources of service revenue. In the office world this revolves around productivity, community and bolt on commercial opportunities. It could also reduce the overall running costs of an office building through the implementation of facilities management systems provided by companies such as Demand Logic and Locale. For a property consultancy, proptech provides the tools to give clients more granular insights on the market, (e.g. GYANA / Placemake). It also leads to process efficiency opportunities, with companies such as Bowery automating elements of the valuation process, and VTS streamlining the leasing process. activity. The corporate will usually take a mentoring position within the fund and has varying levels of influence over the choice of companies in which the GP arranges investment. Examples of the funds that a corporate might partner with include Fifth Wall, MetaProp and Navitas Capital. The third, and most popular, option is to become a limited partner (LP) in a venture capital fund. This is when a corporate invests in a fund for return, but also to gain market awareness and exposure to an emerging market. The GP then uses the funds invested by the LPs to invest in businesses that match the mandate of the fund. While LPs are not typically hands-on in the choice of investments, they are able to draw from the knowledge of the GP and the companies within the fund, and their risk is pooled across a number of investments. Investment in proptech is on an upward trajectory as the market continues to respond to the growing demand for innovative proptech solutions. The next 5 years of the proptech sector are likely to be characterised by maturity and consolidation of Proptech business as market leaders begin to emerge in their respective sectors. How is private equity investing? The emergence of real estate specific funds such as Metaprop NYC, Fifth Wall Ventures and Navitas Capital provide vehicles for capital to take positions in the sector. These funds have also found favour with real estate operating businesses looking to gain exposure to the proptech market without the added risk and efforts of investing directly. MetaProp NYC’s latest oversubscribed $40m fund and Fifth Wall’s $400m fund have a long list of Limited Partners from the real estate industry who want to keep a microscope on what’s happening in proptech, in the process creating real options on bringing this tech into their businesses. While the vast majority of investment is delivered in the US, the UK is leading the way for European proptech investment, accounting for 59% of proptech investment in 2017, helped by UK proptech companies such as LendInvest and Unmortgage raising $40 million and $12 million respectively. There are a number of options available to real estate companies looking to gain exposure to the proptech market, each having their relative merits. The first is corporate venture capital, which is a direct equity investment made by a trade investor into a privately held business. These investments are made in companies that provide operational synergies to the trade investor and promotes their existing business. Recent examples of these include Allen & Overy investing in fintech company Nivara. So far, these types of investments have been limited in the real estate sector due to the risks associated with directly investing in a proptech company and the business support that a start-up would require. The second is to take a position alongside the general partner (GP) in a fund. This is a less hands on approach whereby corporates will partner with GPs whose investment fund compliments their business Navigating the Proptech Funding Landscape # TRENDING Proptech VC Real estate and venture capital are poles apart, but the combination of the two is a potent force for change. Venture Capital firms invest in high-growth, fast moving businesses that require quick decisions and rapid due diligence. The real estate industry typically concerns illiquid, lumpy assets and multiple layers of careful consideration before any decision can be made. It is these conditions that make the real estate industry a target for proptech companies, who have spotted an opportunity to enter a market that had undergone little innovation for 100 years. Since 2011, $6 billion has been invested in the proptech sector across the globe. Whilst a relatively small figure when compared to proptech’s older brother fintech; a closer look reveals that 70% of that investment occurred in just the last two years. So, what is that Venture Capital funds have spotted that makes proptech investment so attractive? Size The global real estate market is valued at over $200 trillion. The built environment touches work life, social life and home life. This provides a large market, where solutions are scalable quickly. Opportunities There are multiple angles for proptech companies to innovate in real estate, including not just the way that the industry operates, but also the way in which people interact with physical space. Untapped Proptech (certainly at its current scale) is a relatively new phenomenon for the real estate sector. 52% of total UK investment in proptech from 2009 to date has been very early stage (seed / angel level), and in many areas there is a lack of firmly established platforms. The relative immaturity of the market presents first mover opportunities to deliver the next ‘home run’. Precedents Venture Capitalists need look no further than to the fintech industry, from which there are many clear crossovers into proptech to see the commercial opportunity. According to KPMG, fintech funding for H1 2018 hit $57.9 billion across 875 deals. 1. 2. 4. 3. By Futures Futures@ cushwake.com futures. cushmanwakefield. co.uk/ CUSHMAN & WAKEFIELD CUSHMAN & WAKEFIELD 35 #TRENDING 34 #TRENDING