From blockchain to smart cities, the real estate world is going through a period of extraordinary change. Thousands of extremely clever people backed by billions of dollars of investment are working hard to change the way it is traded, used and operated.
While 93 percent of tech start-ups fail to last more than three years, those that prosper will have a radical impact. That is why the Saïd Business School at the University of Oxford has launched the Oxford Future of Real Estate initiative; to enable the academic and commercial real estate communities to work together to prepare for a period for unparalleled challenge and opportunity.
Our first report – Proptech 3.0: The Future of Real Estate, published in May 2017 – analysed the objectives and orientation of more than 200 companies that had applied for support to a London based Proptech accelerator, Pi Labs, over the previous four years. A total of 51 percent of all applications were focussed on what we defined as the ‘real estate fintech vertical’.
Within the real estate fintech space, 75 percent of the applicant companies were primarily concerned with transactions. Plenty of people clearly think real estate fintech will change the face of the property market.
Up to 2016, real estate crowdfunding had raised $3.5 billion for 125 companies in the US, around 10 percent of global crowdfunding capital raised. Debt crowdfunding and mortgage platforms are in place, as are residential co-ownership sites which propose to help prospective homeowners without adequate deposits co-invest with equity-rich capital providers. There is no reason why mortgage comparison sites should not become the standard route to a property loan, with sourcing of debt for commercial property similarly becoming more automated.
Yet real estate fintech has clearly been slower to catch on than mainstream fintech businesses such as PayPal, Amazon and online banking. There are two possible reasons for this.
The first is the very limited velocity of trading in the real estate market. According to Savills, the global real estate market is worth $217 trillion, 75 percent of which is residential property. Annual real estate trading has averaged $683 billion since 2007 and reached $900 billion in 2015. This represents turnover of around 0.3 to 0.4 percent of the capital stock. Inventory turnover in the S&P 500 company averages around 15 times, a multiple compared with global real estate of approaching 5,000.
This affects investors and innovators, for whom the pickings are not as rich as might appear from the size of the real estate capital stock, and it also affects potential end users. The repetitive nature of online banking, PayPal and Amazon transactions means that consumers gain confidence in their ability to use the technology and form habits around the way they shop or manage money. This frequency of use is clearly somewhat absent from the real estate fintech sector, both in residential, but also commercial transactions, where personal agent-to-agent interactions are ingrained.
Second, the size of each transaction is likely to deter end users from making rapid and irreversible transaction decisions. This will inhibit the adoption of blockchain technology in real estate equity.
However, real estate debt may be a different matter. Banks are reportedly investing in blockchain as a way of storing property data to support lending decisions. More non-bank lending platforms will appear, while general partners and limited partners will be brought together for both equity and debt by matching technology.
Because banks are most closely associated with fintech, the commercial debt markets may provide the foundation for the blockchain/fintech powered property market of 2030.
Andrew Baum is chairman of Property Funds Research