In five charts: why we’re bullish on European construction tech
The Pi Labs team is bullish on European construction tech. Why? We’ve synthesised it into five charts. As you’ll see, European construction is at a major inflection point, driven from multiple angles (up to and including government). This presents a massive opportunity to entrepreneurs who are able to address the sector’s needs — all the while facing the potential to transcend the tightened funding we’ve seen elsewhere in venture and other capital markets during the economic downturn.
1) Europe’s digital transition
In March 2023, the European Commission published the Transition pathway for Construction, which details its ambition to transform Europe’s construction sector into a greener and more digitally-enabled state. This is motivated by a number of factors, including:
- Construction’s status as Europe’s “second most important of the 14 identified ecosystems” (behind retail);
- Undersupply of skilled labour in the sector partly attributed to its ageing workforce;
- The sector’s contribution to waste (37.5% of Europe’s 2020 total);
- Historically slow adoption of technology; and
- Recent impacts to productivity such as the COVID-19 pandemic, inflation, and Russia’s ongoing invasion of Ukraine.
The demand for technology in the European construction sector has seen resilience in the funding of European construction tech, with 2022 serving as the second highest year for venture funding in the sector (behind 2021), despite a larger drop in worldwide general venture funding (see Chart 1 below).
“The updated EU Industrial Strategy emphasises a swift green and digital transition of EU industry and its ecosystems… This transition pathway describes conditions and necessary actions for achieving a resilient, competitive, greener, and more digital construction ecosystem.”
- EU, 2023
2) Europe leads the sustainability agenda
Europe’s venture capital ecosystem has historically been smaller than the United States, but this is not the case for cleantech and climatetech. Since the mid-2010s, Europe has consistently made more annual venture capital deals in these combined sectors than the US and global regions such as Asia (see Chart 2). As most of us know anecdotally, Europe leads the charge on sustainability on multiple fronts, and this has led to European expansion into other regions. Examples from our own portfolio include London-based Contilio, which is has been adopted in the Middle East to reduce construction waste. London-based Qflow have recently expanded to the US — collecting real-time materials and waste data at source for construction teams. Poland-based Airly are now offering outdoor air quality monitoring in the US. If you intend to invest in globally-scalable sustainability tech impacting the built world, your sights should be set on Europe.
3) The UK housing crisis
The Pi Labs research team has shared its thoughts on the state of UK housing on several occasions over recent years — including a commentary on the digital transformation of social housing in 2021; the experiences of tenants in the private rented sector; the boom in “ResiTech” emerging from the housing crisis; and access to housing for “generation rent”. Soon we’ll also be publishing an analysis of the national cost of delays to the home buying process. When it comes to the role of construction in addressing the housing crisis, we’d gesture to:
- Meeting the government’s commitment to facilitate 300,000 net new homes annually by the mid-2020s (see Chart 3 below)
- Retrofitting the existing housing stock to improve living standards and energy performance (more on energy performance below)
4) Stranded assets
One of our earlier commentaries on stranded asset risk in the real estate sector was published back in 2021 in our white paper Real estate and environmental performance — Bridging the gap with PropTech. It highlighted a 2019 study claiming USD 5 trillion of commercial real estate and USD 16 trillion of residential real estate faced stranded asset risk worldwide. Since then, we’ve taken a closer look at commercial real estate in the UK and found something a little troubling. According to a Centre for Cities analysis of energy performance certificate (EPC) data in the UK, 76 percent of the UK’s commercial real estate has an EPC rating of “C” or below (see Chart 4 below) — which will render them stranded assets in 2030 when government regulations are triggered. This represents £1.2 trillion of real estate alone, and a whole lot of retrofitting over the next 6.5 years. In order to ensure these retrofits are actually making buildings more sustainable, we’re going to need much wider adoption of enabling technologies. You can read more about this in our article in The Property Chronicle’s summer 2023 edition.
5) Underutilised commercial real estate
Chances are you’re aware of the challenges facing retail and office space in many parts of the world. To put it into perspective, MSCI reduced the combined weighting of these property types from 85.7 percent in 1990 to 50.7 percent in 2020 (see Chart 5 below). Although the “new normal” post-COVID-19 is often cited as a cause of the departure from brick-and-mortar office and retail, these trends were well underway long before the pandemic arrived. Nevertheless, it did accelerate it, and many office and retail spaces currently being leased are far less utilised than they were pre-2020. This has led to many initiatives focused on converting these spaces to residential. Challenges that have been flagged include how to effectively transform a commercial area to a residential neighbourhood (if at all possible) and whether the buildings themselves are compatible with residential occupation (ceiling heights, natural light, location of services). These challenges and more are also where construction technology can serve a purpose.
Over the years, Pi Labs has invested in early-stage start-ups addressing one, or a combination of, these opportunities from various angles. Examples include Contilio, Conxai, Firmus, Greenpass, HausBots, Laiout, LandTech, LiveCosts, Modulize, Okibo, Plentific, Qflow, REalyse, SymTerra, Tangible and Trunk. We’re continuing our journey in this space, and are always open to hearing from up-and-coming entrepreneurs disrupting the way we build. If you’re one of these entrepreneurs, you can reach out to us at investment@pilabs.vc
