An Educated Guess About the Future of Real Estate
By Cecilia Lundborg & Julie Ehrmann
Cecilia joined Daphni in May 2018 as part of the investment team focusing on international markets. Daphni makes early stage investments in tech companies across Europe, starting from €700K and ranging to €6M, with a total fund size of €170M.
Julie joined Partech in March 2018. She is an Analyst within the Partech Growth team, a €400m fund investing tickets ranging from €20m to €40m in fast-growing European tech companies. Partech is a tech investment firm with €1.4bn under management and offices in Paris, Berlin, San Francisco and Dakar.
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Real estate is central to all aspects of our everyday lives. Whether we’re talking about commercial or residential real estate, the vast majority of our lives is spent in buildings, i.e in real estate assets. Owning or renting a place to live, working in an office and shopping in retail spaces are a few examples of how dependent we are on real estate, without even noticing it.
Still, this is one of the only remaining markets which has failed in catching up with the new economy. It lags way behind most sectors in terms of technology and digitization. The industry is not only plagued by productivity stagnation, information asymmetry (agency problem) and inefficient processes, but also by many intermediary layers, high transaction costs, illiquidity. It is still widely dominated by legacy players, professionals and large institutions, defending their self-interest without being prevented to do so.
Why? Well, first of all, the real estate market is rigid by nature. When looking at the demand side of the residential real estate market, it is arguable that acquiring a real estate asset constitutes one of the largest one-time spending one will do in a lifetime. It’s a big step in every homeowner’s life and is a stressful, complicated and time-consuming process. On the supply side, planning and construction phases take even more time, as we need to keep in mind that what we build today will last for centuries. Thus, on this market, supply rarely meets demand, comprising large heterogeneous assets traded in private markets.
Another reason for this lack of digitization can be found in social and cultural norms. Home ownership necessarily reflects social status, being somewhat closely correlated with intergenerational wealth transfers and home inheritance, yet another set-up creating growing inequalities, and slowing down the innovation process in the space.
However, behaviours are slowly, but surely, changing. Expectations are set differently, both on the demand and supply side. We are starting to see tenants (i.e demand) wanting to be customers of project developers (i.e supply), and, as customers, they are expecting more personalization and flexibility. Pushing this reasoning further, we can even consider that being a customer could evolve towards not being a tenant anymore. Even our mere approach to home ownership and living might change. The same way Airbnb revolutionized our relationships to travel and hospitality, co-living, co-working and other concepts relying on the sharing economy model are already, step-by-step, changing what real estate is, what it means today and what it will mean for us in the future.
In such a big market, we — Cecilia & Julie — have decided to use our knowledge, based on what we’ve seen and read, and especially on the entrepreneurs and companies we’ve met as VCs, to share our realistic bets on how real estate will develop. You’ll see, we’ve also shared some more crazy bets. VC money has been pouring into this sector over the past years, growing from €54m in 2014 (0.5% of total VC investments in Europe) to €485m in 2018 (2.5% of total VC investments in Europe) according to Pitchbook. We have already seen an increasing number of new businesses emerging in the space, on which we wanted to elaborate further. Even though our job involves making predictions, our purpose here is not to guess what will happen in the future, but just to imagine what could happen. Whether you agree with us or not, we hope you’ll enjoy our words. And of course, you’re more than welcome to comment and share your thoughts, and even share ours!
The article is organized around four main parts, each detailing the main market trends, emerging tech trends we’ve identified as a result of those market trends, and some start-ups we’ve met in those sectors.
I/ Financing
II/ Construction & Project Development
III/ Transactions
IV/ Property-as-a-Service
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Cecilia (cecilia@daphni.com) & Julie (jehrmann@partechpartners.com)
