PROPTECH 2020: The Dawn of REACT Funds
By Toby Wilde and Alexander Shepherd of OPARO.
As we enter a new decade the smoke signals for U.K. Real Estate look positive, as the industry maintains a transition towards professionalisation and institutionalisation (due largely to government intervention); and what of PropTech 4.0, how will it influence the sector and ‘REACT’ to these changes over the next decade?
The overwhelming Conservitive Party majority in December's General Election sent a positive shockwave throughout the U.K., and sentiment towards real estate changed literally overnight. RightMove in December predicted a 2.0% price increase in the U.K. residential market and higher transaction volumes in 2020, and what transpired was a 1.7% price increase in December 2019 alone, according to the Halifax*. There is also anecdotal evidence indicating a renewed resurgence in international investment and capital allocations into the UK market, which was supported by a significant increase in domestic investment during 2019.
The same market forecasters who predict a revival in the residential market, see the polar opposite for the more traditional institutional real estate asset classes (excluding industrial), specifically retail and offices. Technological advancements have caused a downturn in fortunes for U.K. retail and office investors, in addition to the well publicised decline of the high street (those who failed to adapt to online shopping), causing insolvencies. The natural evolution in modern working behaviour has seen a move towards a flexible decentralised attitude from employers (largely aimed at millennial workers) and resulted in an increase in demand for serviced office and co-working spaces, and consequently an even greater decline in demand for traditional long term leases or the need for larger office spaces.
When M&G suspended activity on their Property Portfolio Fund, Mervyn Howard, the Executive Chairman of Apache Capital (£2.6bn AUM over 6,000 residential units) lead the conversation stating that residential: “assets are labelled as alternative when all of them are about putting a roof over someone’s head — as fundamental a real estate sector as you can imagine”*. Institutional investment in housing has traditionally been reserved, due to the decentralised nature of the assets, cost of management, maintenance and the human capital requirements; which make it prohibitive.
PropTech has now come of age, management tools like CRM software Konnexsion, outsourced viewing services like ViewBer and the availability of data, which mitigates many of these barriers. The future of Real Estate and PropTech over the next decade will be what we have defined as REACT (real estate and computer technology) Funds, which use algorithms (data and technology) to improve appraisals, significantly reducing uncertainty and systemising management. In effect this new wave of investment firms will transform real estate from an alternative into a mainstream investment asset class.
Companies like Oparo (in the U.K.), Skyline (in the U.S.) and IMMO Capital (in Germany) have all been discreetly working on building the necessary tools for years now, and actively raising capital for direct real estate investment to target blended returns of rental yield and capital appreciation, via value enhancement acquisitions. As more and more of these algorithm driven deals evidence the improved efficiency and effectiveness of this new computerised method of identifying value add real estate assets, the larger private and more institutional investors will take note and want a slice of the action. We see the number of REACT firms growing from just a handful today, to potentially thousands globally over the next 5 to 10 years.
The negative impact on real estate investment roles will be significant, as Investors and Developers realise the speed, accuracy and cost effectiveness of technological capital, overwhlemingingly surpases that of human capital, as happened in many sectors of the banking and finance world. This realisation could result in a further reduction in job opportunities and a result in a further squeeze on employee earnings.
However, from another perspective, imagine being a large scale developer or fund manager who in addition to having to generate a ROI (return on investment), no longer feel the burden to deploy capital in order to meet a hefty payroll each month. We believe this could result in improved bidding standards and capital deployment across the sector, something often criticised in boardrooms and led to countless insolvencies.
REACT Funds will revolutionise Real Estate investment through speed of appraisal and informed decision making in the same way Hedge Funds disrupted securities trading, ushering in a new era of PropTech that no longer relies on subscription services. Potentially the biggest real estate disruptor in the 2020s.