Article Review – The Industrial Revolution remembers

Stephen Roulac
Roulac Global, Tiburon, California, USA Abstract

Accessed by: http://www.emeraldinsight.com/1463-578X.htm
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The article starts by setting the tone… Proptech is on the rise, property industry has been slow to develop and Unicorns are targeting Proptech start-ups. These are common assertions that kick-start most of the articles based on Proptech. The obvious reason is that these factors are the main premise that has led to an influx in interest in Proptech over the last few years.

So what is the interesting angle here? Well the author indicates that the Industrial Revolution left the property industry behind. Again the fact that the property industry has been slow to develop is not novel, but the link to the Industrial Revolution is interesting. Based on this we dive into the main points. Please note that the points made are not that the opinion of #proptechtalk or the author, but merely stating a summary of the key points. Personal opinions will be reserved for the end of the article. Let’s get to it!

A. ARTICLES MAIN POINT:

“(W)hile industry transformative innovative practices were initiated in other sectors of the economy at the outset of the Industrial Revolution, the property sector was more a bystander than an engaged innovator.” (381)

The quotation provides a good summary of the premise of the article. Namely the transformative factors that drove the different industrial revolutions, were non-existent in the property industry and as such, the Industrial Revolution left the property industry behind. The author thus gets into the comparison that provides interesting and controversial points.

B. Industrial Revolution brought about innovation

The change seen in the industrial revolutions brought about “value migration of physical, financial and human capital, from the prior established order to the new way of doing things.” This meant in a nutshell that the new way of doing things and new structures to cater for this change had all but made previous methods redundant. Despite the historic influence, the author then shows that “Post Industrial Revolution” development has remembered the industry and as such technology, business models and services are providing a new method for traditional services. The image below (382) provides a neat chronological explanation of these assertions:

At this point the author makes two of his most pertinent points:

1. Property Professionals are not educated enough – a bold statement indeed. The author draws comparison between the journey of a doctor, lawyer and accountant (to name a few) that start their predefined journey from University, acquiring a degree, working under some sort of apprenticeship and finally a written exam that qualifies them as a professional. This is argued to be lacking in the property industry and without the requisite knowledge being developed, the industry will remain “forgotten”. This lack of “education” is made out to be a key reason as to why the Industrial Revolution forgot about the property industry.
2. The Types of Revolutions – the author then moves on to point out areas (over and above technology) in general and not exclusively to the property industry that the Industrial Revolution targeted, namely:

(1) governance and society;
(2) enterprise organisation;
(3) markets and merchandising;
(4) capital 5-knowledge.

The author then makes the connection between these points and how they impacted the property industry. We will look at each briefly. DISCLAIMER!!! If the details of the industrial revolution are not your cup of tea, then skip this section and move down to the recommendation and opinion section.

GOVERNANCE AND SOCIETY

Change in governance and society impacted industry and drove major change in the thinking and development of new structures and products. Originally targeted in the production of goods this later evolved. The change from “state-power” and the ability of a few, evolved to the inclusion and creativity of the many. A good example is the migration from military might being overcome by the decision of the ballot box, with merit and rewards seemingly replacing birth right (Pg 383 contains a detailed list of specific factors). We will skipping through this part as it contains a lot of detail and we feel the meat lies in the next few points. Very interesting for those that wish to understand the arguments put forth.

ENTERPRISE ORGANISATION

The evolution of enterprises evolved drastically and changed the way organisations’ hierarchy operated and treated asset classes. This change has enable the handing over of power of ownership from state to many institutions and multiple different individuals who do not need the large capital outlay and status once needed to own land. This enabled an influx in property transaction. These factors directly impact on the property industry in three main areas:

Property ownership: enabled wider and multiple private individuals to own property as opposed to state owned.

Management: The role of management in general enabled the function to be separated from the role of owner. Thus separate management structures enabled properties to be managed by someone/group other than the owner, who were professionals. This enabled “passive investment”.

Management capabilities development: the “professionalism” enabled the role of management to develop from one person performing multiple jobs, to including different offerings, technology and processes to improve performance. However the level of specialisation, process and technological adaption improved at a much slower pace than other industries.

The author mentions that although certain changes are underway (not mentioned at this point) the slow development in the property industry means that development will lag behind in the catch up act.

MARKETS AND MERCHANDISING (M&M – not the yummy chocolates just an abbreviation)

M&Ms have been transformed by the increased manufacturing capabilities and workforce. This enabled Globalisation that has changed the way markets and industries operate. Efficiency became the name of the game, with delegated workforces (e.g. sales teams) operating from different locations often representing the power of a brand! Payments changed to credit and flexible options (think installments, letters of credit etc.), with rights being provided to the buyer whereas before seller held all the cards.

The author seems more optimistic in his assertions by indicating that property companies are improving their M&M, but how? Here’s how:

Market: developed to a global market including property industry.

Finance: mortgages are being replaced with more flexible means of financing purchasers, with sellers afforded protection from reckless lending practices.

Payment: cash payment replaced by Landlord equity (or other) investment into the tenant business.

Brand: without stating how, the author indicates an increased move towards “merchandising” approach in property company brands. Think – “Redefine – We are people, not landlords”

BUT!!! And isn’t there always a but… One cannot help but note the prevalent underlying notion that the brokerage system in place annoys the author, stating that they lack “systems, technology, training and specialization“. Despite the “emerging global organisations” (not sure exactly who this points to – perhaps the likes of We Work?) looking to supplant these brokerages, their merchandising potential remains uncertain.

CAPITAL 5 KNOWLEDGE

Everyone knows about the influence of markets on the global economy and everyday man. But have these developments positively impacted the Property Industry? The author argues that, largely, no they have not in that they represented Pre-Industrial Revolutions rather than Post Industrial Revolutions. Hang on for the reasons:

Transaction Cost and Mechanisms: as a defining characteristic to Proptech, the author highlights that the high cost in transacting is far higher than many other investments, which further impacts on liquidity (this point will come up in articles to come over and over again). Transaction Mechanisms also remain cumbersome in comparison to other industries (not sure if author only refers to sales here). (more detail on page 391)

Securitisation: the author makes some interesting points that the advent of securitisation enabled organisations to alter the way of investing. He uses the example of buying into Walmart, where previously you would need to outlay capital and management capabilities to buy a Walmart store and then manage it and invest in operational functions and take on massive risk, whereas markets now allow individuals to invest in Walmart (Shares etc.) as opposed to buying a store. This way you carry no operational risk and simply become an investor. Author then argues that this approach has only changed recently in the property industry.

C. FINAL TWO POINTS

Following the identification of the key Industrial Revolution points, the author makes two important points before ending with recommendations/summary.

(1) Knowledge Revolution

A major sore point to the author is education in the industry which represents a Pre-Industrial state. The main points made here are:

Licensing: the profession focuses more on a “guild” and trade structure over formal professional education, with the focus being fixed on preparing to obtain a license. Certificates etc. have minimal value. If you are screaming at the screen now, yes we are aware of the Property Professional Act in South Africa, and we will get to that soon. But don’t lose the context of this article.

Knowledge development and Transfer: mainly “on-the-job” education with learning based on self-assessment, newspaper or articles with questionable sources.

Has this changed… Author says in some ways yes, but in some ways no, as explained below:

Trade and Guild Orientation (a yes and a no here): Despite professional schools popping up there is still a “guild mentality” at the core of these organisations (although the alternative is not exactly spelt-out… As with our comment above, how does this relate to our new Act?).

Improved Education and Certification (Hell yeah): organisation’s emphasize professionalism and education, with more interest on professional certificates with professional associations being created.

Innovation (yes…WOOOHOOOO): visible focus on investing in research and innovation to improve skills.

(2) Largely forgotten processes

“If the production and transaction processes of other sectors of the economy could be described as advanced, then the property and real estate sector is primitive. This primitiveness creates obstacles and barriers, but also opportunities and potential.” (394).

It is at this juncture that the author ties his research into the wider Proptech aspects being that the industry is far too cumbersome, slow to develop and transact, innovates slowly and as a financial asset class, contrast with other financial assets that are more dynamic and flexible (to say the least). These points are summarized by the author as shown in below (Pg 394):

The author then makes interesting points on the “Design-Build-Bid” process to construction, which look at the misalignment between the different functions and parties (e.g. with the Architect and Sales person). This feels like a divergence from the main points discussed above so we will not cover them here, but interesting read nonetheless if this sparks your fancy.

D. RECOMMENDATIONS: HOW TO MAKE THE INDUSTRY REMEMBER AGAIN

So based on the above, how does the author foresee change and what main points does he reintroduce. The main recommendations are highlighted below, with a few more you may like to read about in the article itself.

Innovation, Information and Technology:

Dedicated investment on an industry and organisational level encouraging investment in innovation, with onus being on leaders to incorporate strategies with this development in mind. Research to be brought to the forefront with organisations keen on gathering vital information.

Education, Education, Education (did we mention Education?):

Here is the golden thread of the findings in our humble opinion… Education (in case we did not mention it in the article). The main drive is the inclusion of higher education that not only looks at the obvious property related functions, but the broader issues of social, physical and behavioural sciences (I like this point because of the broader focus on non-property specific issues). Property related curriculum to focus on real estate, property and facilities, whilst including markets, process and players. Again targeting broader perspective and knowledge while including market and corporate structure know-how. Continued learning needs to be instilled to ensure the industry does not lag behind again.

E. PERSONAL OPINIONS

The assertion that the Industrial Revolution is moving ahead with these new Proptech developments is widespread, so it is actually nice to see an article explain this link by looking back. Going through other articles (in fact even my thesis) you will see this statement with limited backing. The reasons are mainly two-fold, firstly it’s a lot to condense into an article talking about the vast angles on Proptech, and secondly its sexier to get into the technology angle. My thoughts are presented below, which talk to broader aspects of the industry and not necessarily any “weakness” in the study.

Education to build credibility: Yes the world always needs education and there is something about carrying a degree that makes the consumer feel safer. Part of my study found that customers do not trust brokers as much as a dentist or lawyers. A broker himself indicated that this slight hurts. Just because he does not have a degree, it does not mean he is not knowledgeable. This intersection is an interesting one which I explore in my study further. My study touched on this by showing the strength in the transacting model is the trust built normally in area specialists, but the weakness is the lack of trust in the broker… Paradoxical to say the least. Is education the answer to getting over this curve?

Out with the old… in with the not-so-old: In a time when the world is calling out for new ways to educate people, where does the call to traditional modes of education fit in with this paradigm? Is the next revolution not premised on driving a new way of learning? The author has not regarded the role of technology and more disruptive innovation potential that may impact new ways of looking at education as a whole, in a pioneering manner, which would be a great angle to add. The traditional modes of transacting may be redundant completely in 10-15 years from now, so the influence of traditional modes of transacting may lead to increased applicants but job loss in the end. There is obviously no guarantee that automation or technology will make anyone redundant, but it may happen of course, making this a point to consider.

Strategic Thinking: Is the author maybe positing in a defensive manner to increase offerings and services that combat future harm that may fall on the industry? Maybe and if he is… well done. The undertone of the article has been a lack of education and to an extent innovation, but another interesting point is the lack of strategic thinking. This does not imply that boards and top property people cannot think strategically, but maybe the element of innovative thinking is lacking that leads to stagnant growth. The accountant in a property organisation might have innovative accounting strategies, but how does that relate to innovative property strategies? Food for thought!

The Future of the Industry:

Where is the industry going? Not just because of Covid 19, but looking closely at the commercial property sector, you will see an interesting increase in vacancies and change of landscape. Is the whole landscape about to change with the extreme of white elephant malls acting as the new Acropolis to a forgotten era, or is this the wake up call to provide alternatives? And the residential industry? Expanding on the industry perhaps someone could study the revolutions and the different impacts they had on the two segments.

So what did you think? Let me know about the article and the format. Was it easy to read or not really? Any articles you want me to review or you have reviewed? Send them through.