What is the Real Estate Fintech vertical?
The third vertical of PropTech is Real Estate Fintech. Startups in this vertical enable faster and more convenient trading of real estate assets helping to lower the illiquidity of the notoriously solid asset class.
Read about the first two verticals here.
Out of all the transparency these technologies will bring, the strongest impact will be on the turnover rate. Vertical market-networks are the next generation service marketplaces that will not only provide a platform for matching supply and demand but also industry-specific workflows for facilitating long term business collaboration.
The global real estate market makes up more than half the value of all mainstream assets in the world
In other words, these platforms will attempt to not only match but also keep the parties online for the entire lifecycle of a transaction (e.g property letting and management).
While the Shared Economy vertical is mostly driven by the recent changes in the economy and mindset of peoples, then Real Estate Fintech is driven by the relatively stable, massive size of the global real estate market.
The realization that today’s technological advances can massively reduce illiquidity of the real estate assets is galvanizing businesses to invest more in the Real Estate Fintech.
Let’s look at that in numbers.
The global real estate market makes up more than half the value of all mainstream assets in the world. From that, residential real estate is worth around $190tr.
From that $190tr, roughly 0.5% or $1tr is being traded annually from which the commissions and fees are around 5% or $50bn. From this, just a 10% increase in efficiency would already release a potential revenue of $5bn. These are strongly conservative numbers and we can expect the turnover to increase to around 5% making the efficiency gains produce more than $50bn.
A dominant platform reducing the inefficiencies of property trading might now easily compete with the top biggest global companies whose earned revenues range from $17bn for Facebook to $100bn for Amazon.
Looking at these numbers and the lack of players in the sector, it’s fair to believe that the sector will see additions to its current 25 Unicorns. PropTech is the next greenfield marketplace.
Real Estate Fintech is a large sector. Let’s break it down to six key categories and look at who are some of the players in each.
Research and information businesses
Companies in this category were formed during the first PropTech wave. These were information and analytical businesses that today are under pressure from new challengers. Businesses using modern technological solutions like machine learning while leveraging the growingly available massive sets of data. Some of these companies are Datscha, Kensei, and Geophy who all collect, aggregate and visualize real estate data converting it to actionable insights for its customers.
Residential sales and letting engines
This category is mostly made up of the late PropTech 1.0 players like Zillow, Rightmove, and Zoopla who are all aggregators of information. They all operate in the sales and rent space of a real estate.
As they mature, they are being challenged by the new-comers of PropTech’s second wave with the likes of HouseCanary and Purple Bricks. These companies make use of advances in machine learning and publicly available data.
For old and new alike, the trend here is towards developing smart algorithms and models that will allow valuing residential property in real-time. Examples of these are Zestimate from Zillow.
Crowdfunding and equity
Real Estate Crowdfunding is equity raising under the shared economy model. This model exists mainly due to the difficulties experienced when raising equity in the traditional way. These problems usually present themselves during the vetting and sales process as difficult time and quantity requirements.
In addition to making investing less time consuming and complex, crowdfunding opens investment possibilities up for larger audience potentially increasing the available capital.
Just as in other verticals, here too, the PropTech 2.0 newcomers are replacing the long-established information providers. They can do this by offering better workflow tools and analytics for investors by using technological advances in computing and data processing. Examples can be seen in iCapitalNetwork gradually replacing Indirex and Property Funds Research.
Some crowdfunding platforms are also working on making ownership possible for the underbanked by offering co-investment opportunities for those without adequate deposits. Platforms like The Unmortgage and Stride Up, do just that.
Debt and mortgage
Separate from equity raising platforms, debt crowdfunding and mortgage platforms are seeing increasing investments and revenues.
Mortgage Tech companies are aggregators which facilitate the mortgage application process. They do not lend or service the loan and are thus different from crowdfunding or lending companies.
Examples of companies in this space are Trussle in UK and Interhyp in Germany.
Digital mortgage companies, on the other hand, are online lenders which both facilitate the mortgage application process and service the loan. Within this category, Homegate in Switzerland and bijBouwe in the Netherlands come to mind.
Recognition that leasing and portfolio management is painful for owners has given rise to new PropTech businesses operating in the following two categories.
Portfolio cash flow analysis is an important job but one that doesn’t scale without becoming overly complex for traditional data tools like Excel. Here too we see the players of PropTech 1.0 being challenged by the new and more tech-advanced companies.
An example of which is Reoptimizer. A commercial real estate optimization tool that attempts to ease lease management by providing lease workflows and documents management.
These firms enable owners and managers of commercial real estate to monitor and tenants to spectate the letting process in real-time.
Leverton is another example of a tech firm creating efficiency in the leasing and portfolio management process.
With rivalry, there is coopetition. It’s here that we can see established, traditional companies partnering with more tech-advanced businesses.
Example of this is the collaboration between JLL and Leverton. The former is a global real estate financial services firm. Leverton with is experience in data science is powering the key administrative processes in its lease management.
Currently, transactions with leases required the lessor’s consent in an oldfashioned offline process. The efficient storage and management of leasing data will open up possibilities for much greater liquidity in the class.
iBuying — disposal and secondary market exchanges
The illiquidity of the real estate asset class has always been a barrier to first-time buyers. To lower these barriers and increase liquidity, online sales sites have moved into iBuying (i.e flipping homes) and by doing that, have created a secondary market platform for homes.
Companies like Opendoor, Nested, OfferPad and Knock provide liquidity as a middleman by buying homes and suggesting to sellers who are trying to liquidate quicker, that they can sell their homes more efficiently but for a service fee of around 6%.
Opendoor will buy the home, whereas Knock uses an underwriting model where it guarantees a price and will transact on the seller’s behalf. If the house does not sell in time, they will buy it.
Rezi takes long leases of residential property and rents out the space on shorter terms at a profit performing market arbitrage facilitated by the greater reach of a tech platform.
At the same time, the commercial market is moving to the opposite direction as we can see attempts made to unitize assets and to trade these units on platforms.
IPSX, the International Property Securities Exchange, is a new exchange for the trading of shares in single asset property companies. FCA approved, they launched the platform just early this year. The exchange offers investors direct access to the specific underlying property assets relating to their investment, as well as clarity over the revenues and associated costs as well as tax efficiencies typically conferred by REIT status.
Real Estate Fintech is perhaps the largest of the three verticals in the current PropTech wave and driven by the revolution in the broader FinTech sector.
Next up we will look at the third wave of PropTech- the AI summer.