Tech Live: Defining ‘alpha’ in the world of real estate technology

COMMENT: In the world of investing and portfolios, the term “alpha” is used with a lot of gravitas, writes Tripty Arya, founder of Travtus, a technology driven platform for property management It often conjures up images such as the Wolf of Wall Street: intelligent men in suits taking home multimillion dollar bonuses. Alpha is a quality that is aspirational and inspirational. In the economic definition of the word it is what makes someone’s performance exceptional; alpha is the secret sauce of a winner. It is what makes them stand above the rest. Join us for our #EGTechLive broadcast on How to Achieve Customer Closeness. #video #live #data #te… https://t.co/u0Eo5113jP — EG (@EstatesGazette) June 12, 2018 In portfolio return analysis, all excess returns are attributed to two coefficients: an alpha or a beta. While beta is the well-established coefficient for risk and volatility which has now been defined as a science, alpha still is just calculated based on the difference between what was achieved and expected. A bit like a filler. Alpha is what goodwill is on a balance sheet; a number that helps us define the unknown. Data inefficiency The question is, how real is alpha? Alpha is often just an illusion. It is the perfect explanation for the existence of an inefficient market. A market where there is no level playing field due to the inequality of information and data. And there is no industry that represents an inefficient market better than real estate. It is an asset class that represents leakages and inefficiencies at every stage of the its lifecycle. The investment into real estate usually starts with a capital raise, which often attracts an agency fee in the form of management. The next steps involve deal sourcing, which again attracts agency fees. Add leasing and management fees to this transaction. During disposition the process starts to dilute value again in agency transactions. The real estate industry has thrived on inequality of information to amass its perception of alpha. But this alpha is not real. It is the opportunity that is born out of inefficiency. The role of technology is to introduce informational efficiency and when it does so, it removes the artificial alpha like those masquerading in most agency relationships. You no longer need to have created a network or connections in order to source deals in a certain market. The existence of online listing portals has already diluted that edge. Similarly, you no longer need to have the knowledge of all the local authority regulations, they are already being pushed to more transparent mediums like websites and databases. New York City is the perfect example of this with APIs now easily available from the government database directly for global consumption. If you represent any form of agency relationship in 2018 and think that you have a secret sauce, the chances are that those secrets are no longer secret. As the world of real estate becomes more data driven and transparent, what will be the true alpha for an individual or organisation? Innovation is key We are often reminded that real estate is a 200 trillion dollar industry and yet it continues to be a fragmented industry with no clear winners. There is not a single player who has real scalable alpha that can dominate the industry. With this realisation, the question must follow of what exactly is the alpha that needs to be cultivated? The only true response to this existential question lies in the promise of innovation. True alpha can only be generated through research and development. It can only be real when it is a product of trial and error. Innovation is the real alpha. View all the pictures from the Tech Live event: [gallery type="slideshow" size="full" ids="929855,929856,929857,929858,929859,929860,929861,929862,929863,929864,929865,929866,929867,929868,929854"]   This hypothesis is not a new age theory but a lesson from history. No story defines the role of data and in the creation of an entire industry and a way of life than the invention of the aeroplane. Prior to finding success and immortality, the Wright brothers were the champions of failure. Their goal to defy gravity resulted in multiple instances of remaining grounded. In order to calculate “lift” for flight, the brothers used well known data metrics of that time, the Smeaton Coefficient and the Lilienthal data. These had been the standard for calculations over the past 150 years. After a few failures, the Wright brothers decided that the data that was being used for the coefficients needed to be questioned. As a result, they spent time collecting raw data to confirm the industry standard data tables. Not to their surprise, they noticed that there was substantial adjustment required to the coefficients for the calculation of lift. They made the corrections and the rest is history. Is it worth the risk? This story is the perfect analogy for the attitude and setbacks for data and innovation in the real estate industry. We often hear incumbents claim that they own data. But often this is not usable or even relevant. In an industry that is notorious for pushing risk to the lowest denomination, usable data collection is often lost in risk mitigation. And if you are not trying to lift a plane off the ground, how much do you care if the coefficient is right? So what would be the alpha of a company with the operational history of 150 years versus that of a new entrant? The industry is a level playing field where the advantage will lie to those who build real alpha instead of finding short term gains from inefficiency. In conclusion, we bring the discourse back to alpha and beta. The availability of information and the advent of technology will ensure that any artificial alpha will be eliminated. The dilution of alpha then leaves us wondering about the strategy for exceptional returns. Any outperformance in the market will therefore have to be defined by placing all bets on a higher beta. Unlike alpha, the reward from risk is incremental. It is a multiplier. And innovation requires risk. The appetite for research and failure needs to increase in order to retain real estate’s position as an investment class. In the battle for survival, we need to encourage those who think that we can fly. Listen to Tech Talk Radio co-hosts Emily Wright and Samantha McClary speak to Tripty Arya about her property and project management start-up Travtus.