A look into the most developed REIT market & its attitude to PropTech
In these series of articles we have been ranting and, frankly, complaining, about how South African REITs (“SA Reits”) aren’t taking Proptech seriously. Yes, there are a handful of companies that are using Proptech & are either beginning to reap or are reaping the rewards (Emira & Stor-Age [more on this in another article later]), but for the majority of them they are following archaic operating models that need to change or they will be forced to shut up shop & contribute to the country’s & world’s ever-increasing vacancy rates across all property types. Their operating models are old-school and it feels like they are down-playing the power that Proptech has or they are just ignorant? Who knows? It feels like they are The Springboks underestimating the Japanese in the World Cup 5 years ago…
While we have been slamming SA Reits (sorry guys ~ again I was part of this world once upon a time ago) we can look overseas to other REITs and see their attitudes to this broad topic. Who know, there could be some learnings for us here in South Africa? One of the most interesting markets is the US… the notion of Real Estate Investment Trusts were actually created as a concept in the land of the free (see below the creation of REITs – if you not interested skip 3 paragraphs).
Creation of REITs [Wiki]: REITs were created in the United States after President Dwight D. Eisenhower in 1960. The law was enacted to give all investors the opportunity to invest in large-scale, diversified portfolios of income-producing real estate in the same way they typically invest in other asset classes – through the purchase and sale of liquid securities. The first REIT was American Realty Trust founded in 1961.
Since then, more than 30 countries around the world have established REIT regimes, with more countries in the works. The spread of the REIT approach to real estate investment around the world has also increased awareness and acceptance of investing in global real estate securities.
As of December 2017, the global index included 477 stock exchange listed real estate companies from 35 countries representing an equity market capitalization of about $2 trillion (with approximately 78% of that total from REITs).
REITs exist to diversify investors portfolios… sure you can invest in equities & bonds, but here’s another option…. an equity that is linked to property ownership and leases therein. You will get dividends that are driven by rental income, it’s in its nature a very vanilla way of operating, as you know what escalation you are getting and can peg the dividend you will receive to that. But what if rental income comes into question? Eish, time to rethink one’s operating model, yes?
Let’s get to it, lets look at Proptech in the birth place of REITs…
First thing to say is… what do we understand is Proptech… lets recap: PropTech refers to technology and tech ventures that are targeting the real estate industry, including planning, construction, property management, marketing, and finance ~ it is incredibly broad, which is powerful but also dangerous. You can get the sense that the parameters are quite fluid ~ in some cases PropTech overlaps with FinTech – for example companies that help finance tenant deposits for rental space OR companies that too assist with mortgage originations. PropTech generally encompasses all the cross-industry technology applications that are aimed at innovation in the real estate industry and are changing the way properties are researched, transacted, operated, and managed.
Blake Liggio, a partner in Goodwin’s Real Estate Industry group, says “The core objective is to optimize real estate management and operation, in many instances by reducing friction costs,” he says. [Friction costs are the direct and indirect costs associated with a financial transaction].
There has been a crazy interest and growth in PropTech over the years (see below). Reasons for such a ramp up in investment is that venture capitals understand that there is an opportunity to make returns from re-shaping a stagnant industry.
Okay, so re-shaping the industry… here’s a comment that’ll put it deeper into context, from Norther American REIT assoication (https://bit.ly/3qpl7gI): “Commercial real estate companies today that are not looking closely at incorporating tech innovations are now the exception and are viewed by industry experts as those that likely aren’t going to be successful.”
The key thing here is real estate companies are utilizing technology to gain a competitive advantage. The best example of which, according to Blake Liggio ~ a partner to Goodwin’s REIT (one of the oldest REITs in the US), is in the data and analytics space, where PropTech has helped real estate companies better manage existing properties, research new acquisitions with more precise metrics to make sounder decisions, and gain more insight into vacancy rates. “It’s all furthering the optimization of bottom-line results,” Liggio says. “It’s caused most if not all REITs to take a close look at tech and how it might help grow the business.” https://bit.ly/3qpl7gI
There is no doubting the fact that REITs in the US are becoming more data driven in their approach, leveraging on both internal and external data to make better investment & operating decisions. PropTech is playing a wide variety of roles in supporting this evolution in data. This includes systems or platforms that; provide data, developing tools such as sensors and other tech to capture internally generate data, and establishing analytic capabilities to utilize data to make intelligent decisions.
So, the 1st point to make is: the rise of data & data analytics is driving a competitive advantage for REITs in the US. But we must note at this stage that there are a wide range of options…. But the thing that US REITs are struggling with is: WHICH ONE TO BLOODY CHOOSE?!?! I’d imagine that it’s a similar situation for SA REITs as well.
The struggle is real… you have a means of innovation, but which means should you choose to best suite what you want to achieve? And moreover, the tech created might lack the insight into the specific property info you are looking for… proverbial hammer vs the nail. So, what needs to happen here? Collaboration. This is happening a lot in the US market… Heck, there are some US REITs that are in fact buying the technology and developing it themselves to optimize the tech for their business model.
The unique thing wrt PropTech and REITs is that you have a pool of investors actually investing in PropTech and forgoing investments in REITs themselves… what does this tell you? It surely says or shouts as loud as possible… adapt or die? It’s a story of PropTech VS REITs… yes?
Think about it, its true… VC’s are investing in co-living, coworking and short-term rental companies that are providing solutions directly to tenants, and are thus minimizing or cancelling out the property owner’s involvement in the chain of events.
For REITs, this poses a dilemma on how to respond… should they, copy them? Partner with them? Invest in them? Or ignore them? (eish, not sure about that last one).
Some of the areas in which activity in PropTech exists:
Okay so what is the aim of the game? What have US REITs invested in and/or have used to better themselves… and where is this going?
The aim of the game: investors are scrambling to squeeze more yield out of existing assets given the length of the current economic cycle. This NAREITs argues is part of the previous wave… a wave that has focused on things like revenue management systems and property management software. While companies are still adopting these strategies, there is a second wave of innovation… new tools that tend to focus more on the experience of individuals within buildings. This includes; Tenant community engagement apps, and new customized services such as delivery, dog walking or even fridge replenishment, etc.
The crux of the matter is as technology progresses traditional owners and operators are facing tenants that expect more. Tenants are used to getting everything on demand, and at the same time are less willing to sign long leases or put up with traditional procedures. Technology helps bridge the gap between what tenants expect and what many buildings currently offer.
A case study:
PropTech firm VTS, founded in 2012, developed a web-based solution that helps landlords streamline their leasing process. Blackstone tested VTS’s solution for 8 months and decided to roll it out across its massive commercial portfolio.
Leasing data used to be a lagging indicator that investors reviewed only a few months after deals actually happen, sometimes only at the end of the year. With a system like VTS, portfolio managers can track leases in real time, see what has been signed, how much has been paid, what type of tenants are more active at which cities, and identify real-time trends.
At the end of the day Blackstone was so impressed with VTS that it decided to invest in the company and help it grow to new markets. As a result, VTS is now becoming an industry standard.
What does the future hold? PropTech companies will form the basis of change within the industry… they are doing this currently in the US. The difference is that there will be winners and losers, and consolidation as the clear winners & losers will be determined. While this is the case REITs are adopting approaches to integrate these systems in their operating model.
SA REITs should follow suit surely?