How should landlords respond to the PropTech revolution?

There has been a lot of hype in the property media recently about the PropTech revolution and what it means for the mainstream property industry, which has typically been viewed as being slow to adapt to new innovations. While some people in the industry view it as a fantastic opportunity to get involved in the most exciting period of change that our industry has probably ever seen, others see the rise of technology and Artificial Intelligence (AI) as a threat, destroying jobs, disrupting traditional business models and taking business away from traditional property players.

Some PropTech commentators also believe we are approaching the peak of the ‘PropTech Hype Cycle’, where we are so disillusioned by all the new tech disruptors and innovations that we risk missing out on great opportunities which could be transformational for our industry and the way we operate. So how should property investment managers and landlords respond to it? Is now the right time to invest? If so, what do we think will be the biggest technological innovations and digital game-changers to shape and transform our industry in the future?

PropTech is an opportunity, not a threat

In a recent survey by KPMG of more than 130 real estate decision-makers from 36 companies globally, 86% of respondents said that they viewed digital and technological innovation as an opportunity, rather than a threat. The vast majority also acknowledged that PropTech will have a very significant or somewhat significant impact on their business.  Yet when asked where they would rank their organisation with regards to digital/technological innovation maturity – zero being well behind the curve and 10 at the cutting edge, more than half (53%) ranked themselves at five or less, with just 13 percent considering themselves to be at the cutting edge of PropTech.

Where would you rank your organisation with regards to digital/technological innovation maturity? (0=behind the curve, 10=cutting edge)

Source: KPMG Global PropTech survey, November 2017.

So what is holding them back from moving up towards the upper end of the scale and embracing the digital age of real estate? The mainstream property investment management industry is generally known for being fairly risk-averse and reluctant to adapt to changes in working practices and new technology quickly. As a highly regulated industry with strict fund regulations and accountability in place, it can be difficult to respond quickly to emerging technological change. But it can happen if all employees are closely aligned with senior management’s objectives of driving the tech agenda forward.

When is the right time to join the 'PropTech Party?'

It is also difficult to know at which stage of the technological cycle to dip your toes in and invest. An industry peer recently described this to me as like not wanting to be the first to arrive at a party, as even though the champagne will be freshly chilled, there will be no-one else to talk to and you could end up standing on our own or facing awkward silences. But neither do you want to be the last to arrive, when all that’s left is the lukewarm prosecco, with a lot of guests having already left.

We are now heading towards a ‘tech tipping point’ in the industry where major commercial real estate players and investors recognise the huge potential of technology and the need to get involved. However, most have yet to make the leap and bridge the gap in terms of the skills, knowledge and investment required between the way they operate today, and where they want to get to in the future, in order to embrace the digital future.

We believe that collaboration is the key. Mainstream property players need to engage and work with the PropTech developers and service providers in order to let them know the sorts of challenges they face, the opportunities they want to pursue and the processes that need to be more efficient. This is what is required to add value to our businesses and ultimately, increase the bottom line. In return, PropTech companies will benefit from greater engagement with the wider industry and gain a better understanding of the key issues.

Five game-changing technologies for investors and landlords

Here are five major technological trends which we believe are already making an impact and which will transform the way in which property investors and fund managers will do business:

1. The transformation of ‘Big data’ to ‘Smart data’, improving efficiency and providing greater insights to corporate data-driven decision making

2. AI and automation making property management and operational processes quicker, cheaper and more efficient. For example, driverless car and truck technology transforming city urban design and creating more efficient, automated logistics supply chains

3. Internet of Things (IoT) increasing connectivity within buildings and leading to a greater awareness of the tenants’ needs and a closer landlord/tenant relationship

4. Digital technology enabling the flexible use of office space, including serviced office use and co-working

5. The emergence and greater acceptance of blockchain technology in the property sector, e.g. for ‘Smart contracts’ and greater efficiency in investment transactions

Each of these tech innovations has the power to transform the property investment management industry in the future, with a myriad of potential applications. For example, many internal data-driven systems and processes such as tenant records and accounts could be automated, centralised and linked to a variety of external data sources, instead of relying on a small pool of comparable market data obtained from subscriptions with agents and other providers. The portfolio valuation process could also be made more efficient and timelier by automatically incorporating valuation data from external valuers into internal databases in real time. This would avoid the need for labour intensive manual inputting, making data systems more interactive and dynamic, while also potentially changing how external portfolio valuations are carried out, making them less subjective and more data-driven.

The merger of digital and physical space is creating new opportunities

Increased connectivity within buildings via IoT could also lead to more efficient use of space by tenants and energy efficiency savings. Digital technology and customer tracking devices via smartphone apps and specialist software are already being used by retailers, shopping centre managers and co-working/flexible office providers such as WeWork. They are using technology as a communication tool to raise awareness of their brand and book their services, such as meeting rooms, desk space or ordering products online and using click and collect facilities in retail stores.

Already, the merging of digital and physical space in retail, and the concept of the office as a service enabled by technology, are key trends which traditional landlords are starting to embrace in order to compete with PropTech disruptors and co-working/serviced office providers. This is due to the growing demands of a new generation of tenants for more flexible office space with enhanced amenities and services such as events, club houses, leisure facilities and shared community spaces.

Elsewhere, although blockchain has still not been widely accepted by the property industry, interest in it is growing. While it is being increasingly used by the global investment banking and fintech industries, in the property sector it has been mainly used by some companies abroad working with land registries to put the title deeds onto blockchain as it is seen as being more efficient and resistant to fraud. While the technology is still being investigated by the Land Registry in the UK, it is starting to be used for ‘Smart contracts’ in the residential sector, thereby avoiding the need for lawyers and other intermediaries.

As it becomes more widely adopted by the commercial property sector, it could make property transactions more transparent, less costly and more efficient. So far, it has only been used for fairly simple transactions, which do not require the expertise and negotiating skills of a specialist lawyer. However, the technology has the potential to be used in ways in which we probably have not even imagined yet and there is a lot of work being carried out internationally to investigate and trial its potential behind the scenes.

Opportunities will outweigh risks

These new and emerging technologies carry risks as well as opportunities, though. Greater use of big data, AI and online information sharing will inevitably lead to increased risks of hacking, security and data breach concerns.

As a result, increased investment in cyber security and data storage will be required, and the regulatory environment will also need to catch up with the rapidly changing technology. Also, while some job losses may be inevitable, for example in back-office data processing and data management positions, others will be created, especially in more value-add, quantitative, analytical and decision-making roles.

Nonetheless, we believe these risks are outweighed by the opportunities that embracing these new technologies will lead to in terms of long-term efficiency gains and cost savings, better insights for strategic decision making, as well as understanding and anticipating customer and tenant demand better. In the words of Anthony Slumbers, a well-known UK PropTech specialist: “The differentiator going forward is knowing what technologies you can use to complement your human ingenuity, skills and creativity in the service of a robust, solid and scalable business”.

Now is the time for traditional landlords to start to embrace the PropTech revolution. The key to success and avoiding ‘tech disillusionment’ is having a focused corporate digital and innovation strategy and collaborating via a holistic approach. This strategy should be driven by senior management and include a team of relevant internal stakeholders and external PropTech specialists, consultants, industry bodies and regulators.

If property landlords and investment managers do not get involved now, we risk missing out on some potentially great opportunities by not responding to the changing requirements of our tenants, who have the option of voting with their feet and relocating elsewhere. We also run the risk of being left behind while the fintech and PropTech entrepreneurs and disruptors take over.

Important Information

The value of investments may fall as well as rise and investors may not get back the amount invested. 

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CLI01041 Expiry 13 December 2018

Joanna Turner

Joanna Turner

Head of Property Research

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