The Future of Real Estate Investing: Impact of Technology

Real estate is particularly vulnerable to disruption and the proliferation of "PropTech" has the potential to change the landscape.

Impact of Technology

Technology is transforming every aspect of the asset management industry, and real estate investing is no exception. In some ways, real estate is particularly vulnerable to disruption. Innovation has typically lagged in the property sector, not least of all because each project is unique. High barriers to entry also protect existing players and, as pointed out in a report by ING: “Many regulations and complex ownership structures make real estate transactions bureaucratic, complex and (opaque).”10

But data analytics are already chipping away at the lack of transparency, and those high barriers to entry may be indirectly lowered by the use of technology to develop and market more liquid investment vehicles. Real estate investment and trading platforms are proliferating, democratizing access to the asset class and changing the value chain.11

PropTech, a word coined to collectively describe various types of real estate technology, is a close cousin of the more familiar fintech. Represented by more than 7,200 companies globally,12 PropTech is poised to change the workflows of real estate fund managers and investors. A dazzling array of technologies already exist to help with property management, portfolio management, analytics, lending, listing services and a range of other applications. This is a fast-moving environment, however, and a seemingly endless stream of startups offer new ways to simplify tasks, reduce costs, or improve outcomes for investors, fund managers, developers, owners and tenants. Recent innovations include everything from roOomy’s virtual staging business to PHYSEE’s SmartSkin product, which can “autonomously power, sense, and regulate your building’s climate.” 13, 14

Figure 11: Impact of PropTech on investing over the next 5 to 10 yearsFund managers and investors are particularly excited about the ability to quickly screen a high volume of projects in more detail, allowing them to more precisely focus their investments on specific sectors or situations (Figure 11). Leigh Roumila, Managing Director at Basis Investment Group and COO of Basis Multifamily Finance, says, “The commercial real estate industry in particular is one of the last industries to really embrace technology, but at this point, if you don’t embrace it, you’ll be at a competitive disadvantage. The speed of collecting and analyzing data has led to a huge transformation. We’re at a point now where one can make decisions using real-time data.”

Next-level targeting of this sort is a good fit with the increasingly customized and dynamic portfolios demanded by investors, but not everyone is convinced. Lubeck says that his firm has assessed “systems to help select target properties and do evaluations of acquisitions, but frankly feel (their) existing methods of fundamentals-based analysis are still superior to technology-based ones.” This advance may also come with a less desirable side effect. Almost half of all fund managers and investors agreed that better matching of buyers and sellers will mean more competitors for targeted assets.

"Real estate investment and trading platforms are proliferating, democratizing access to the asset class and changing the value chain."

There is no consensus on who is likely to benefit the most from advancing technology. Large firms were more likely to think that they would accrue the most benefits as they leveraged technology to amplify the informational and operational benefits of scale. Interestingly, fund managers at the other end of the AUM spectrum take a similarly optimistic view, positing that smaller firms will become more successful as technology removes the informational and operational advantages of scale. Perhaps technology will act as a rising tide that lifts all boats. Applied thoughtfully, it can enhance the competitive standing of large and small investors alike.

Will PropTech improve economics? Fund managers are cautiously optimistic at best. One out of 3 say PropTech will meaningfully improve the operating margins of their projects. Investors are even more circumspect, with just 1 out of 5 forecasting higher margins as a result of technology.

There are a number of ways in which technology could contribute to higher margins. Gerstenlauer points out that her firm sees most benefits in the form of "enhancements to residents’ comfort and convenience as well as the increasing efficiency of buildings, particularly when it comes to energy usage.” She also strikes a note of caution, stating that, “In many ways real estate is still a high-touch vs high-tech space—someone needs to visit the buildings, understand transit accessibility and make certain the fixtures work.”

Some of this will change with the growing use of sensors, the internet of things (IoT) and artificial intelligence, but it will take time for high levels of integration and automation to have a meaningful impact, particularly outside of new developments. Ironically, technology may first be integrated most visibly into the housing market for seniors, who might otherwise be less interested in such things. Carpets that can take pulses and monitor the movements of residents are only one example of the innovations starting to be seen in this market. Lubeck points out, “Technology facilitates communication between maintenance personnel, office personnel and residents. It’s not only software, it’s also hardware. We are actively utilizing smart loT, smart thermostats, package locking systems and the like.” Users and owners are not the only ones that stand to benefit. Data streams from smart buildings also mean “more knowledge of the use of the building, which results in lower risk for financing.”15

The transformative potential of technology extends far beyond the sourcing of assets and managing of portfolios. It is regularly demonstrated in innovative building projects around the world. Some cities are experimenting with pavement that generates power by harnessing the power of the sun or the pressure of people walking on it. This power can be used for creative illumination, reducing the dependence on the grid and improving the aesthetics of the neighborhood.16 Some cities are setting their sights notably higher. A sextet of European cities recently announced that they were looking to tap artificial intelligence as part of their strategy to achieve carbon neutrality.17

In addition to enabling the reinvention of infrastructure, technology also has the potential to transform processes, allowing previously untenable business models to thrive. According to Jackson, his business “built a national presence (and is) processing thousands of loans nationally, thanks to a rigorous process and enabled by technology customized to our platform. We’re always looking for new niches and especially seek opportunities where we can apply that technology.” In addition to unprecedented scalability, their technology platform offers flexibility and a substantially improved client experience: “Our investors know how we manage the underlying loans so typically they aren’t interested in reviewing the status of the loans on an individual basis, but they are comfortable investing with us because they know that we can. As long as we have the input data, we can accommodate any reporting needs our investors have.”

A vice president at a large state-owned investment fund sums up the state of play: “Real estate is undergoing a transformation. The industry has woken up and realized there’s a lot of value to be had by integrating technology across the value chain. People are looking into disruptive plays for legacy systems across industries, and real estate is no exception.” He goes on to remind us that radical transformations are rarely easy, and the other parts of the industry may need to be reinvented to accommodate new technology. “The critical factor in an institution's ability to leverage technology is its access to a skilled staff that are trained in both investing and data science. That skillset is still a rare commodity to some degree and having to pair investment professionals with data science professionals does slow down processes. You’ll probably see investment analysts having to come through with some form of formal data science training in the next five to 10 years.”

While many firms will follow this path, others will choose the focus and agility that comes with expert partners and service providers. The real estate market is already starting to outsource their fund accounting functions, much like mutual funds, hedge funds and private equity funds before them. Various other technical functions in the back, middle, and front office are sure to follow.

“Real estate is undergoing a transformation. The industry has woken up and realized there’s a lot of value to be had by integrating technology across the value chain. People are looking into disruptive plays for legacy systems across industries, and real estate is no exception.”

Read Next Section
10 ING Economics Departments, “Technology in the real estate sector,” June 2018.
11 Matthew Argersinger, “How Individuals Can Invest in Real Estate,” The Motley Fool, January 20, 2020.
12 Total number of companies in the www.unissu.com PropTech Company Directory, February 27, 2020.
13 roOomy website: www.rooomy.com.
14 Physee website: www.physee.eu.
15 ING Economics Departments, “Technology in the real estate sector,” June 2018.
16 Patrick Caughill, “Energy-Generating Pavement Just Became a Reality in London,” Futurism, June 29, 2017.
17 “Six European cities investigate AI to move towards carbon neutrality,” Smart City Hub, January 28, 2020.

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This information is provided for education purposes only and is not intended to provide legal or investment advice. SEI does not claim responsibility for the accuracy or reliability of the data provided. Information provided by SEI Global Services, Inc.