PropTech In The Light of Coronavirus
Looking at the impact of the pandemic today and tomorrow.
“There are decades where nothing happens, and there are weeks where decades happen” — Vladimir Ilyich Lenin
“May you live in interesting times” is an English expression which purports to be a translation of a traditional Chinese curse. While seemingly a blessing, the expression is normally used ironically; life is better in “uninteresting times” of peace and tranquillity than in “interesting” ones, which are usually times of turbulence [1].
Such “interesting times” have arrived and since the start of 2020, we’ve been facing unprecedented social, economic and business challenges across the globe caused by the Covid-19 (also known as Coronavirus) pandemic.
As active PropTech investors at Concrete VC, we’re eager to share what we’ve gathered will be the possible temporary and lasting implications of the Coronavirus outbreak, focusing on the Financial Markets, the Real Estate Sector and Startup and Venture Capital scenes.
Financial Markets Are Feeling The Pressure
In response to Covid-19: the Fed has already lowered rates for the past few weeks, culminating in an effective 0% rate of last week.
Despite global rate cuts and various financial packages aimed at reviving the economy, public markets remain increasingly volatile, primarily driven by fear, emotions and uncertainty.
On the other hand, the market generally has been looking for a reason to reset after the longest bull market in history. While it’s unlikely that we’ll see another financial crisis as there is no systemic risk at the moment, it’s expected that those turbulent times will bring a significant reduction in M&A activities and IPOs impacting important liquidity events for early-stage investors.[2]
Real Estate Pain
We haven’t heard of any long term impacts to office or residential sectors so far, but we do think some asset classes will be hit so hard or for so long, that meaningful changes will arise.
Hospitality
The chilling effect of the virus has come as a hard blow to a market that was only recently experiencing all-time highs. According to AirDNA’s data, AirBnB’s bookings in Beijing plummeted by a whopping 96 percent, from about 40,000 the week of January 5 to 1,655 the first week of March [3].
Among victims of the current situation are not only startups but also large multinationals with the likes of Marriot which stock has experienced a 66% plunge from $150 to below $50 per share.
However, according to Barry Sternlicht, the CEO of Starwood Capital Group, we are poised for a “V-shaped” bounce for the market, meaning a quick down and a quick rebound.
“I ran Starwood Hotels through 9/11, through SARS, through the financial crisis. Hotels came back. Everything came back. This will be even faster because this is really a health-care scare. And all the bad news is roughly out there [4].”
Government imposed border closures and quarantines, in the name of safety, may put a long-term dent in hospitality-focussed businesses. De-globalisation and shift towards more local supply chains, however, may revive their focus on local customers, but we’re not ready to go long on that yet in the venture space.
Retail
Online shopping is experiencing an unlooked-for surge as a result of social distancing, with e-commerce giant Amazon looking to employ an additional 100,000 temporary workers to cope. Offline retailers, however, are struggling and are contemplating temporary lay-offs or company voluntary arrangements as a result of significantly reduced footfall. In response to such a situation, many more agile, omnichannel retailers started to shift mainly to online channels in order to offset the lost sales.
We do believe human nature will bring social animals out of isolation, with governments relaxing restrictions each according to their own programs. Retail, inherently local, should come back pretty quickly. We do believe there will be even greater resistance to long-term lease models for the next year or so, so flex models, like Appear Here, should do well out of this situation in the medium and long term.
Industrial & Logistics
As a part of a wider and long-term trend towards eCommerce, logistics & industrial real estate is once again triumphant among other asset classes. The current situation has dramatically increased the demand for online food deliveries and items sold via e-commerce channels.
According to Prologis Research Report, post-Covid 19 era will be also characterised by increasing efforts to move the production closer to the consumer as well as supply chain resilience rising in national priority predominantly across western countries.
On the back of more domestic supply chains, we can also expect to see an increasing interest in previously more niche ways of usage of industrial real estate such as urban farming. The current events might prompt manufacturers to consider growing food closer to end-consumers in purpose-built warehouses with light and climate-controlled conditions all year round. Up-and-running schemes include Ocado’s Growing Underground in Clapham, London and SEGRO’s Business Park at La Courneuve in Paris (pictured).
Tech is needed more than ever
Transactions will continue, but if anything, the need for better solutions has become more acute in certain aspects of the value chain. None of this “we will get to it” stuff anymore. Deals that should have closed quicker got left in the lurch in the last few weeks, and many more that should be closing now will take 5–6 months longer. But imagine if you could push a button and surface all the documents you needed on a given building? Leases analysed. Rent-rolls compared. Title and survey risks automatically ranked. Configurable CAPEX scenarios pre-supplied. Virtual tours at incredibly high resolution available to anyone on the planet. PropTech has solutions for all of those, and they aren’t blockchain.
Startups Should Brace For Impact
Sales cycles will increase
As your client base is focusing on crisis-proofing their primary business and protecting their bottom line, it will become increasingly difficult to acquire new customers or close deals with those undergoing trials or POCs. For the coming quarter or two, innovation will not be a priority, so you should expect delays.
Stretch your cash runaway
Alongside a likely drop in MRR due to increased sale cycles, any plans to raise capital in the next 12–18 months may no longer be an option. As a crisis CEO, you need to keep your burn rate as low as possible, halt any hiring efforts and focus your attention on making a detailed survival plan for the coming six months, working alongside existing investors to secure funding if necessary.
The right models will win out
Economic slowdowns often have ‘Darwinian’ consequences for small businesses, decimating over-leveraged companies and unfeasible business models. Therefore a clear path to profitability and sound unit economics are becoming more important than ever to secure venture backing.
While it all seems like doom and gloom now, such events are proven to be a very important lesson for CEOs who survive and learn how to deal with adversity — as the saying goes “what doesn’t kill you makes you stronger”.
Venture Capital Will Become Even Pickier
Downturns are never far from a VC’s mind, and their playbook is standard. Slow down deployment, double down on your winners, and look for great new deals that can thrive in uncertainty. Downturns like the global financial crisis can produce superstars, think Airbnb, Pinterest, Dropbox, Slack, and one of our local London heroes, LendInvest [5].
Additionally, from an investor standpoint, the coming months present a chance to find some solid deals at possibly much lower valuations than it might have been possible just weeks ago. While it’s too early to really understand how various stages of company growth will be impacted, over the years, investing at the bottom of a cycle has proven to provide a better investment value and therefore likely higher returns.
Some things will never be the same…
“Shut-in Economy” shifts in consumer and business behaviour are many at the moment. Society will definitely get back to the hotel, mall, pub, and conferences, but we believe online meetings, work-from-home, and online grocery delivery will sustain a big part of the lift they are experiencing today. We believe this will impact the real estate world in a few ways, such as:
- On-demand everything — Online delivery businesses might emerge as the biggest beneficiaries of the current situation with the likes of cloud kitchen companies and other no-contact retailers altering the current ways of consumption.
- Video everything — In the post-Coronavirus world, we foresee a wider acceptance towards video interactions as we’ll finally notice time-saving benefits of such solutions. Adoption will be visible across social media, education, telehealth or remote viewings in the context of real estate.
- Flex Retail & Office — In the uncertain times, both traditional and digital will search for a cheaper and more flexible alternative for presence.
Institutional Investors & LPs Take Their Time To Reassess The Situation
One has to remember that VCs have to raise money from their limited partners(LPs) too. In the light of current events, many institutional investors may decide to adopt a ‘wait and see’ strategy when it comes to new fundraising commitments and will certainly be more diligent in assessing the risk and rewards of investing into funds focusing on hard-hit sectors such as hospitality or retail. However, in general, we believe the following 2 trends will continue to see meaningful inflows of capital into PropTech in 2020 and beyond 1) Increasing allocations of institutional investors from volatile public markets to more stable long term private markets. An example of this trend in the pension fund market is the Swedish parliament that in Jan 2020 increased the ability of their AP pension funds to invest in illiquid assets from 5% to 40%. 2) Institutional investors with exposure to real estate assets are increasingly recognising that investment into tech solutions (through venture capital) will have a substantial impact on the performance of their real estate assets in the future.
All in all, we expect that after a short pause in Q1/Q2 2020, that appetite from institutional investors to invest in venture capital and technology will continue its significant growth trend in the later part of 2020.
Conclusions
While our team aren’t personally enjoying the prospect of a sustained shut-in, we unequivocally believe this will benefit the PropTech sector. When the sun is shining, make hay. When it’s not, sharpen your tools. PropTech are those tools for the real estate sector.
Stay home & stay safe. And learn about how technology can help your real estate business come out of this ahead.
About Concrete Ventures
Concrete Ventures is a leading European PropTech investment and advisory platform. By working closely with its group of world-class global real estate partners, we identify the key problems the sector is facing and find the talented founders creating real solutions. Concrete helps its partners invest in and roll out impactful changes for their portfolios.
Find out more about us at www.concretevc.com or follow us on LinkedIn or Twitter.
[1] May you live in interesting times
[2] Don’t Apply 2008 Thinking to Today’s Crisis
[3] Airbnb Bookings Plunge Amid Coronavirus Pandemic
