Proptech Capital, a new venture capital fund and accelerator in Europe launched by Odysseus, shares its view on the Proptech market today through a mapping of various startups involved in Proptech. This mapping is built mostly through Proptech Capital’s network and dealflow, and from the attendees of MIPIM 2018 & 2019. The geographical scope is mainly Europe, North America and Asia. The startups represented operate both in the commercial and residential real estate markets.
A definition of Proptech given by CB Insights is the following: Proptech (also referred to as property technology or real estate technology) is a set of cross-industry technologies changing the way we research, rent, buy, and manage property.
The map is divided in three main areas: Search, Supervise and Sell. These three concepts refer to the different steps in the commercial or residential real estate customer journey, both for real estate professionals and end-customers.
This article first provides explanations on each area and sub-area, and then gives further insights from Proptech Capital on some solutions of particular interest to the fund. It also gives a brief overview on some of the use cases Proptech Capital built on these solutions, and for which it is looking for strategic partners – contact Proptech Capital for detailed information.
I/ Proptech Venture Map
1. Search Phase
The Search phase corresponds to activities related to searching for a property – for the end-customer to buy or for real estate agents to list them.
Brokerage Services: list and search activities carried out by an individual or a firm related to the sale or purchase of a property in exchange for a commission on the transaction.
Marketplaces: companies offering a platform designed to match two populations and make a transaction happen between them.
Data, Valuation and Analytics: companies whose activity consists of providing data, analytics and valuation tools to property managers and investors in order to enhance their opportunity-screening process and automate the valuation process, sometimes using Artificial Intelligence and data science techniques.
Virtual Viewing solutions: services dedicated at offering cutting-edge viewing technologies such as 3D and VR/AR/MR, to tour a property or improve the collaboration process in a development project.
Lease Guarantee and Financing solutions: companies offering innovative solutions to have financial access to a property, either by providing a lease guarantor or securing the financial deposit required.
2. Supervise Phase
The Supervise phase corresponds to activities carried out in the day-to-day activities of real estate professionals or related to the supervision of their core activities.
Investment and Crowdfinancing: this category includes platforms that allow individuals to invest in real estate, notably using blockchain, and also crowdfunding platforms that list investment opportunities for individuals to take a part in.
Manage & Operation solutions: companies in this category are providing products and services that help manage a property and supervise the relationship between landlords and tenants.
Space-as-a-Service and Smart Buildings solutions: this category includes startups building or operating a network of shared spaces – co-working and co-living, or offering smart building solutions using Internet of Things to improve one’s use of a building.
Agent tools: companies in this category are providing real estate agents with tools to assist them in their activity.
Project Management solutions: this category refers to startups that are building products designed to help construction stakeholders manage a real estate project by offering digital and technological solutions.
3. Sell Phase
The Sell phase corresponds to the last step of the customer journey, where a property is sold through different channels.
iBuyer solutions: the term iBuyer refers to online estate companies able to purchase a house in a quick period of time at a discounted price and then sell it through an online channel.
Hybrid agents: this category gathers startups that are offering online brokerage services disrupting the traditional estate agency model, with no physical touchpoints and low-fixed costs to sell a property.
Insurance & Closing: startups in this category are offering insurance for homebuyers and legal services aiming at protecting the buyer against any risks during the selling process.
II/ Insights from Proptech Capital
From its investment theses and its convictions on where the highest growth and most innovative opportunities are, Proptech Capital has taken an interest in some of these sub-areas beyond the broader overview and done further analysis and research on relevant trends.
1) iBuyers
iBuyer solutions are one of these sub-areas.
As mentioned, the term iBuyer refers to companies able to make quick online offers at a discounted price for properties, and which then sell it at a profit through an online channel. Companies in the US such as Opendoor or Offerpad have shown that this offer could fill a gap in the market as they provided distressed sellers with a convenient and quick process to sell their property, while still having a price around 90% of the market value. They quickly gained exceptional traction and revenues, with investors confident that they would keep growing. Opendoor raised $400 million in funding in May of 2018, totalling a $1 billion dollars in equity funding, while Offerpad raised $150 million dollars in both debt and equity. Knock also raised $400m in 2018.
The iBuyer market started in the US in 2014, with the inception of Opendoor. In 2018, in the United States, iBuyer companies accounted for c. 15,000 purchases and c. 10,000 sales, for a 0.2% market share in the country. This figure comes, for a large part, from the very limited geographies in which iBuyers currently operate.
However, in Phoenix, currently the main market for iBuyers, these companies accounted for c. 6% of all transactions, showing the large potential of these companies in the US.
Their growth also led traditional actors like Zillow or Redfin to launch their own iBuyer solutions. Meanwhile, the exceptional traction of US iBuyers is contributing to the emergence of a similar trend in Europe.
Proptech Capital's analysis shows indeed that similar opportunities exist in Europe, where only few actors have this type of offer, often without having significantly scaled so far. Market trends show a growing demand for quick and efficient processes in real estate transactions, as an alternative to lengthy closes in purchases, as well as endless showings and negotiations, at a discount of 8 to 12%, which is well below those offered by traditional agents targeting "distressed" sellers. Indeed, selling a real estate asset through traditional means takes on average 4 to 6 months in Europe, with uncertainty that can make the process even longer, and a large part of sellers are ready to accept a moderate discount to avoid this. New valuation technologies using machine learning and data analytics algorithms are able to fill this gap and provide a meaningful competition to traditional real estate agents.
Below is a map summarizing the main existing iBuyers – or companies with a similar hybrid model, such as Nested – identified by Proptech Capital in the US and in Europe – i.e. a focus on the "iBuyer solutions" sub-area of the whole map:
In the context of Odysseus’ Asset Building approach, Proptech Capital is considering the launch of a real estate fund that could leverage this trend with investments in residential real estate assets at a discount. This fund could target the growing demand for quicker online processes, as well as for equity release, which is another growing real estate trend in Europe caused by the aging population and the projected growth in old-age dependency ratios. Equity release indeed offers new liquidity means to seniors, as it enables owners to access their property's value for more cash in retirement, and similarly to iBuyers, equity release platforms are appearing to answer this growing demand.
With the required funding, Proptech Capital could invest in European iBuyer and equity release platforms and co-develop its own real estate valuation algorithms and sourcing strategies with them, to build a real estate portfolio and ultimately conduct an IPO that would bring NAV premium returns to its investors.
2) Alternative real estate financing
Another trend Proptech Capital looks at with a particular interest is the alternative financing options for property investments, both on the supply side (property development and construction) and the demand side (mortgage loans), as well as the new valuation and investment methods relative to blockchain and real estate asset tokenization.
Proptech Capital mapped the main European actors in these three areas below - i.e. a focus on the "investment & crowdfinancing" sub-area of the whole map. This mapping focuses exclusively on Europe.
a. Real Estate Asset Tokenization
The rise of blockchain, tokenization of assets and smart contracts can facilitate the development of real estate investment platforms and reduce transaction costs, making such investment more accessible. Most of the applications of blockchain in Proptech focus on using blockchain for data management or applying it for transactions.
Proptech Capital observed that there is a growing base of users that are more eager to have access to real-estate investment. On the business side, similarly to iBuyer trends, there is an incentive for real estate stakeholders to make transactions directly to reduce the cost structure in the distribution process of a real estate product. Blockchain thereby enables users to trade directly real estate assets using tokenized assets.
Meanwhile, smart contracts allow fast, secured and recorded transactions in a digital ledger that cannot be hacked, drastically reducing the number of required intermediaries.
b. Mortgage Loans
Proptech Capital noticed a growing number of real estate debt platforms which facilitate mortgage loans for individuals or companies with debt capital from alternative financing sources, such as crowdfunding, P2P lending, or non-bank institutional debt funds. These individuals back their loans on the property they are purchasing it with or on a property they already possess. Lenders invest in these loans with flexible amounts, fast processes and low fees.
A growing demand trend for these products is based on the buy-to-let approach, for individuals seeking to increase their rental portfolio and willing to secure a bridging loan in order to purchase a property. Some platforms, such as Landbay, are specialized in these buy-to-let mortgage loans.
Indeed, traditional credit actors are increasingly selective in their mortgage financing offers for individuals or companies looking to purchase real estate assets or make property-backed loans, offering an opportunity to these platforms.
This trend is especially attractive to Proptech Capital, which identified around 10 of these alternative finance mortgage credit platforms in the EU and mapped the main ones of the graph above.
Some of the mapped actors focus exclusively on mortgage loans, while others, such as LendInvest or EstateGuru have them as one of multiple offers.
With the necessary funding, Proptech Capital aims to aggregate some of these platforms and co-develop a build-up strategy in credit mortgage with them in Europe, to accelerate their growth and to create business synergies through tech integrations and consolidations.
c. Property Development Credit
Many actors have identified a need for property development credit and have developed platforms to provide that. Their observation is that traditional credit actors have become very rigid with credit to SMEs in construction or property development after the 2008 crisis and many of these property professionals struggle to find credit options.
These platforms provide professional property developers with access to equity and debt capital coming from private institutional investors, P2P lending and/or crowdfunding finance, depending on the platforms. As for mortgage loans, amounts are usually flexible, processes aim to be as fast as possible and fees are reduced to a minimum, in order to provide a convincing alternative to traditional investment options for investors, and to traditional liquidity means for borrowers.
As summarized by Wellesley Finance, the applications for these credit loans include:
New residential construction/developments
Commercial / mixed-use developments
Medium to heavy refurbishment
Permitted development rights
Bespoke Bridging opportunities
Structured finance
Similarly to credit mortgage, this opportunity could lead Proptech Capital to adopt a built-to-scale strategy with strategic funding partners, by investing with an SPV in this vertical and enabling these property development loan platforms to scale together in the European market.
About Proptech Capital
Proptech Capital was launched by Odysseus Partners, an Asset Builder that provides emerging businesses with access to both equity and alternative finance investments.
Proptech Capital identifies and invests in technology companies that positively impact the property environment, either through their business model or product innovation.
The Fund sources, secures and manages investments into early-stage technology ventures in Europe and across the continent, supported by a team of investment management executives with deep sector expertise and venture capital experience.
For real estate corporates willing to kickstart a VC arm to innovate in Proptech outside their organization, the Fund has been designed to complement their innovation and venturing strategies.
As a result, benefits for corporates as limited partners include exclusive access to best of emerging technology startups in Proptech and facilitating opportunities for active business partnerships.
Contact Proptech Capital to discuss a partnership or for more information:
Minh Q. Tran, minh@proptech.capital