James Scott, Director and Researcher for the CRE Real Estate Technology Initiative, has a recent interview published in FD. The “FD” is the largest financial newspaper in the Netherlands. It is read by 100,000s of investors, economists, and policymakers. Read the translated article below.
The biggest industry in the world is finally going digital
By: Eva Schram
Translated by: Alex Van de Minne (with help of DeepL)
The real estate sector is lagging when it comes to digitization. However, in the last couple of years, new technologies have the potential to disrupt this traditional sector. In 2021, $22B went to start-ups in the field of “proptech” – the “property technology.”
Technological innovations are everywhere. Whoever forgot an ingredient for their paella, can get a fast delivery via an app. If you do not have pocket change for a parking meter, just use an app. There are also many different providers (who are not traditional banks) if one wants to transfer money in a different currency than the Euro.
But real estate is behind in this digitization trend, even though it is the largest asset class in the world. How is this possible? “On the one hand, there is a lack of data,” according to James Scott, researcher and director of the Real Estate Technology Initiative, at the American MIT-university. “Take fintech for example, that field is driven by millions of datapoints. They will have thousands of creditcard transactions, mobile datapoints, etcetera. With artificial intelligence and machine learning (AI/ML), fintech companies can get interesting insights. We simply do not have the same amount of data in real estate, although the Internet-of-Things could change that, because smart sensors can create a lot of data.”
Another reasons the so-called proptech (property technology), the technology that revolves around digitalizing real estate, is behind compared to other sectors, is the fragmentation of the market. “Just look at the housing market worldwide; which is 25 times the value all the gold we ever mined,” says Ivo van Breukelen, one of two founders of the international consultancy bureau The Proptech Connections, a company that brings start-ups, investors and costumers together. “But that is just the housing market, which by the way can be very different from city to city in itself. However, real estate is also about commercial property, airports, and other infrastructure.”
There is also real estate development, and the many different actors that are associated with it at different points in time. Think of architects during the design phase, contractors during the construction phase, and investors and owners during the stabilized phase. This makes for an intricate puzzle, that will be hard to disrupt with just one piece of new technology.
Momentum for proptech
Still, proptech has had some momentum in the last few years. According to the data company Pitchbook, $574M in venture capital went to proptech start-ups in 2011, ten years later this was $22B. In the first months of 2022, almost $3B went to this sector. “These investments mostly go to the US,” according to Van Breukelen of The Proptech Connection, “but you do see an increase in interest in other parts of the world. I was just approached by a few Dutch investors who showed interest in proptech.”
You could see it as a turning point in the sector, but that is not completely accurate if you look at how the sector developed in the last couple of decades, according to MIT-researcher Scott. “We are now in the third wave of proptech. The first wave was in the 80s, when Microsoft Excel came on the market. This was huge for the real estate industry, because it completely changed the way we did financial management in real estate.” This was also the time that CoStar was founded, one of the most important companies in the US for data and analytics in commercial real estate. “CoStar is the framework for data analytics for everyone in real estate in the US,” according to Scott.
The second wave arrived during the dot-com-bubble, says the MIT-researcher. “Service providers in real estate started to research how they could use internet to ease some processes in the sector. You first saw this for online platforms which allowed you to watch houses.” Scott references Zillow, that was founded in 2004, but also the Dutch Funda was from this period. It was founded in 2001.
The third wave, according to Scott, began immediately after the 2008 financial crisis. “You often see that in order to move things forward a catalyst is needed. Necessity is the mother of ingenuity. In addition, technical capabilities evolved further, innovations like AI/-ML made it possible to do more with the data that was available. This led to a boom of technological real estate companies over the last decade.” And only now is the third wave really picking up steam, as investors are focusing their venture capital on proptech.
According to Scott, examples of companies from this third wave are Airbnb, which was founded in 2008, and WeWork, which was founded in 2010. Opinions are divided on whether or not WeWork is actually a proptech company. “We see them more as a buyer of proptech innovations,” says Van Breukelen. But Scott disagrees with that interpretation. “Apart from everything that happened to that company, they were very good at mapping out how an office building is used, they were using data to make property management more efficient. If you look at WeWork like that, you can’t help but call it a proptech company.”
- Proptech 1.0 – The availability of Microsoft Excel in the 80s started the first proptech wave, and management changed erratically. CoStar was founded in the use, improving data and analytics in real estate.
- Proptech 2.0 – The second wave started in the late 90s, during the dot-com-bubble. Internet was used to ease entire processes in the sector, online housing platforms are an example of this.
- Proptech 3.0 – The third wave began right after the financial crisis of 2008. Technological capabilities improved, especially in the field of analytics and data availability. Sustainability also plays an important role.
Data and Sustainability
According to Scott, one of the most important developments in the real estate industry right now that proptech is capitalizing on, is the importance of sustainability. “There’s no real estate player in the world that doesn’t have that in its list of priorities.” Edmee van Dijk, CFO at Dutch proptech start-up Physee, can attest to that. “Over the past year, we’ve seen a substantial increase in demand for our products,” she says.
“When the founders started the company seven years ago (Van Dijk joined the company later, red) no one was interested, but now we notice that, because many investors include sustainability as part of their investment mandate and banks sometimes do not want to give loans for buildings that don’t have a good energy label. This has an impact on how real estate developers and owners look at their buildings.”
Seven years ago, Physee started developing fully translucent windows that generate solar energy. In the meantime the company from Delft has pivoted towards smart windows, in which sensors provide data on light temperature and air quality, which can help the property manager make decisions. For example, the data can be used to anticipate when a building should be cooled or heated. “Seven years ago, real estate was responsible for 40% of greenhouse gas emissions, and that’s still the case today,” says Van Dijk.
There is therefore much to be gained in terms of sustainability in the in the real estate sector. “At the same time, the energy bill for a manager of a commercial building often accounts for only 1% of the total cost. So we also capitalize on the fact that with smart solutions like ours to create a more comfortable environment in the building.” In other words, in an office building with smart windows colleagues no longer have to argue about when to open or close a window.
Physee, that currently focusses on commercial real estate in Europe, raised $9.67M in seed capital in May of 2021 at an unknown valuation and is currently looking at raising even more in series B capital. Already, the scale-up’s technology, which includes both the hardware (the sensors in the windows) and the software to process the data is already being used in office and residential towers in Amsterdam, The Hague and Utrecht.
In October, the start-up struck a deal with NSG Group, an international glassmaker, to produce 15,000 smart windows, which will be installed in various office buildings in Europe. “The great thing is that our windows can be installed like any other. It does not require a special installer, which would slow down the complex construction process even further,” says Van Dijk.
Using the solar power generation technology that Physee previously had in its windows, it now powers the sensor in the window so that the system functions wirelessly. The sensors then communicate with a gateway, a kind of computer box, in the building, and then Physee’s software can process that data. “Right now we’re focused on making sure that our hardware is implemented as much as possible, that buildings being built now are ready for the Internet-of-Things,” says van Dijk. “A bit like every Tesla car has all the necessary hardware to perform certain tasks, and that this hardware can be turned on or off according to the wishes of customers.”
Dutch housing market
The Dutch government has the intent to build 900,000 new houses as of 2030, reducing the shortage of housing in the Netherlands. However, the big question is how to do this. And can proptech play a role?
The short answer is: perhaps. “The issues on the Dutch housing market are complex,” says Van Breukelen of The Proptech Connection. “Demographics and policy play an important role, and make the issues at hand a challenge.” MIT-researcher Scott also doesn’t believe current technological innovations, can directly impact the Dutch housing market.
“On the supply-side there are interesting development when it comes to the 3D printing of building materials, and the use of modular technologies,” he says, referring to a technology whereby parts of houses are assembled on-site after being produced elsewhere. “But none of these innovations are currently deployable on a large scale. And that becomes relevant only when non-technological problems, around permits for land use, are solved.”
On the brokerage-side of the housing market are several processes that could be accelerated with new technologies, “but there is not one all-encompassing technology that would make the realtor obsolete,” says Scott. “Blockchain technology, for example, could help create smart contracts, and I can see it going in that direction, but then again I don’t see blockchain bring about substantial changes in how we record ownership of real estate. This will simply be done by means of deeds of purchase stored in a national register.”