Technology will transform the real estate market, and here’s how.

A look at the technological trends in real estate and the potential for radical disruption.

In each area of real estate there are a number of ‘disruptive’ trends currently taking place. A recent report by Thomvest Ventures identified the five areas of real estate as building, financing, sourcing, managing and asset utilisation and described the innovation taking place in each area.

Within the ‘building’ sector we see a number of projects looking at data to improve the production process. The world of construction has changed little in the last 50 years and is famously slow to change. According to a recent McKinsey report, large construction projects typically “take 20 percent longer to finish and are up to 80% over budget” . What’s more, construction productivity has actually declined in some markets since the 1990s. The uptake of Building Information Modelling (BIM) is in part an answer to this issue, although according to Statista the update with the UK seems to be sitting stubbornly at around 70% and even shows signs of declining.

One of the most obvious answers to the inefficiencies in the construction process is to turn to big data. A number of start-ups have already begun. These include nPlan, which aims to improve prediction outcomes of construction projects by collating historical data, interpreting results and comparing results across portfolios — thereby reducing risk. Another start-up, Alice Technologies, claims to ‘leverage the computational power of AI to generate the best schedules and solutions for your projects’.

Big Data has also been a big hope of asset management and utilisation, especially when combined with internet of things (IoT) technology. Facilio is a start-up which claims to ‘predict and extend asset lifecycles with data-driven property operations’ while Envio Systems “collects real time and historical data from sensors, equipment, weather and more to optimise building operations in real time”.

Within the financing sector, a number of businesses which are currently disrupting the wider economy will have an impact on real estate. These include not only the obvious challenger bank candidates, who will undoubtably disrupt the residential mortgage market and developer finance, but some of the newer financial models such as peer to peer lending who have already picked up traction amongst the developer community. The challenger bank Oak North is a well-known provider of UK developer finance for example.

Perhaps the most advanced area of current disruption is sourcing. In the UK the online estate agent Purple Bricks is already well established, having floated on the stock market in 2015. It’s proposition is a flat fee sale, with the majority of buyer/selling interaction completed through its online portal. Another online agency, Nested, aims to not only sell its customers’ homes, but also to help them find a new one. It also offers a ‘chainbreaker’ product where the company advances 90% of the value of a home at a 9% interest rate.

Sustaining vs Disruptive Innovation.

Bower and Christensen 1995

Bower and Christensen famously described how new innovations normally address niche customers with something they value, but similarly underperform on metrics that are valued by mainstream customers. Over time the new innovation improves on metrics that are valued by mainstream customers to the point that the industry starts to move en masse to the new product or service.

Bower and Christensen also make a distinction between ‘disruptive’ and ‘sustaining’ technologies. Sustaining technologies deliver incremental improvement along an accepted metric within an industry — such as storage capacity on a hard disk. Disruptive technologies on the other hand deliver ‘a very different package of attributes from the ones mainstream customers historically value’. In fact they may even perform worse along traditional industry metrics when they first hit the market.

Much of the ‘disruption’ mooted in real estate falls squarely into the sustaining category. Using data to streamline and improve the construction process is undoubtably a sensible and commercial thing to do, but the efficiencies it delivers are incremental. Plumbers and bricklayers will still turn up to site as they have done for over a hundred years. Similarly, employing IoT and big data in managing real estate assets will certainly yield economies — yet on its own it is unlikely to fundamentally change the way that buildings are used.

The more interesting question is where the radical technologies and radical disruption is likely to come from in real estate. Markides builds on Christensen’s work to suggest that radical innovations are “disruptive to consumers because they introduce products and value propositions that disturb prevailing consumer habits and behaviours in a major way. They are disruptive to producers because the markets they create undermine the competences and complementary assets on which existing competitors have built their success”. For Markides, these types of innovations will almost always arise from the supply side, not the demand side. Customers don’t know what they want before they see it — the famous ‘faster horse’ of Henry Ford.

Looking at societal trends

If we accept this premise, we are unlikely to be able to predict the next radical disruption by examining a fully-fledged, clear and present customer demand. Our best hope is to look at societal and technological trends to give us some clue about the future resonance of products and services. Just has Henry Ford himself did in 1908.

Jacobides and Reeves have suggested that the best way to identify growth opportunities in an industry is to first start by cascading ‘changes in habit’ — to drill down from a big behavioural shift to ‘identify specific products or business opportunities’. The second step is to categorise the behavioural shift as either a boost (temporary acceleration), a catalyst (lasting acceleration), a temporary shift or a completely new trend.

So what are the key societal trends that relate to real estate? The shift to homeworking is one of the obvious ones. According to a study by Cardiff University, homeworking in the UK had increased from 1.5% in 1981 to 4.7% in 2019. This was dramatically increased by the Covid crisis, rising to 43.1% in April 2020. What’s more, “nine out of ten employees who worked at home during the lockdown would like to continue working at home in some capacity with around one in two employees (47.3%) wanting to work at home often or all of the time”. We can assume that there will be some rebalancing once the crisis passes, with a return to office work for some, but it would be brave to assume that things will return to the place they once were.

Another key trend that will pertain to real estate is the increased fluidity of global populations. According to the World Economic Forum the number of people living in a country other than where they were born has tripled since 1970. It’s true that the majority of this has been driven by people from poorer countries such as India, Mexico and China migrating to richer countries such as the USA and Germany. However we can also observe an increase in the outward migration of professionals from richer countries to poorer countries to take advantage of cost of living disparities — the so called digital nomads. Recent research from MBO Partners (2019) found that 7.3M American workers described themselves a digital nomads in 2019 — an increase of 2.5M from the previous year. “United by a passion for travel and new adventure, digital nomads enjoy the ability to work anywhere they can connect to the internet”.

A third trend that I believe to be relevant is the shift from products to platforms. We have seen clear evidence of this in the technology sector — five of the top 10 most valuable companies by market cap in 2015 were platform companies. Perhaps most crucially a number of these started off as product companies initially, moving into platforms at a later date. Even for the tech companies that still sell products, there has been a clear shift in pricing strategy, moving from one off pricing, to subscription based service pricing — the so called SAAS and PAAS models.

We have seen this trend roll into other industries. Rolls Royce’s move to ‘Power by the Hour’ is a great example of this. Yet, for the most part, the real estate industry still operates on a product basis with one off pricing by far the most common business model when it comes to property sales.

Putting it all together

What do people really want in a home? Is it an asset? Is it a roof over their head? A status symbol? Clearly this won’t be the same for every customer but getting to the bottom of this question may be the key to figuring out where true radical disruption will come from.

As an asset, when you remove leverage, residential property in the UK has performed poorly in the 20th and 21st century. Investing in the UK stock market would have netted a real rate of return of 5.5% annually between 1900 and 2017, while house prices saw real increases or just 1.8% per year. There’s no denying that the British public have a strong cultural attachment to owning property. But while that’s certainly the case amongst baby boomers and generation x, has that permeated down to millennials and gen z? Besides, exposure to the property market can be generated in other ways REITs for example — or maybe via tokenisation of individual property assets in the future.

Asset considerations aside, traditionally the way to get a ‘roof over the head’ in the UK has been to either buy property or rent it on an assured shorthold tenancy (AST), but the past cannot be assumed to be a predictor of the future. I believe that the way we ‘consume’ property is likely to change in the next 50 years.

The signs are there already. Companies like Quintain Living are reinventing the rental model with a Blue Ocean strategy — providing a fully furnished, hassle free, move straight in ‘property as a service’ product, only distantly related to traditional ASTs. WeLive sought to blend the WeWork model with residential property in the US — providing fully furnished accommodation on a short or long term basis, with amenities, game centre and fitness studio all thrown in.

Some companies may go further. What if by paying a subscription I was able to buy a certain amount of accommodation every year at different properties around the world? Perfect for a digital nomad. And what if I was able to incorporate underused hotel inventory into the mix, reclaiming some of the money that’s undoubtably left on the table in hospitality?

Thinking even more laterally, is there an opportunity to completely reinvent the property business model and shift it from a product (albeit subscription) based to a multi sided one? Could I subsidise rent for my users by providing some value to a third party (data, eyeballs etc).

The main route to power in the property development industry remains scale economies. The biggest players get access to the best sites and can develop them at the most cost effective ways. But by introducing new business models, could this be an opportunity to leverage network effects and switching costs for challengers as a route to power? After all, what better way to lock my consumers in than by providing them with unlimited accommodation, services and amenities in a number of cities around the world?

It’s hard to imagine from our current cultural viewpoint. But in 1981 it was hard for IBM to imagine that personal computers would one day take over the world and that mainstream computers would become antiques. In 1996 it was hard for Kodak to imagine that the world would one day do without film.

That’s the hard thing about radical disruption — most of the time you don’t see the iceberg until it’s too late.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Tim Bichara

Digital product consultant and entrepreneur. Writing about product strategy and optimisation — timbichara.com