The frustration behind proptech investment

Investment in proptech has exploded over the past five years. In 2013, some 128 proptech finance deals were struck and $519m of capital was pumped into real estate technology companies, according to CBInsights research. Just one year later, this had more than doubled to $1.23bn – a 72.8% rise. When Blackstone invested $3.3m into commercial real estate asset management and leasing platform VTS in January 2015, it was widely accepted as a watershed moment. This deal marked the beginning of institutional investor interest in real estate technology and, soon after, specialist venture capital funds such as MetaProp NYC and Concrete VC started to emerge. The rate of proptech investment has slowed since the 2014-15 boom but it remained on an upward trajectory until last year, according to CBInsights. The total value of investment deals struck in 2015 increased by 36.6% to $2.89bn in 2016 and $3.94bn was invested in proptech between January and October 2018. The big question is: will it last? After years of record-breaking investment from venture capitalists, Q1 2019 got off to a slow start, according to research by KPMG, and questions are now being raised over the role of the real estate companies themselves as potential future investors. But how much skin do they really have in the game? Embracing the future Taken at face value, it looks like a fair bit. Toronto-based property giant Brookfield Asset Management launched its own VC in April last year with plans to invest $200m-$300m over the next three years. Meanwhile, property heavyweights including Altus Group, PGIM Real Estate, RXR, CBRE, Cushman & Wakefield and JLL’s proptech arm JLL Spark are all limited partners in one of New York-based VC MetaProp’s investment funds. Real estate companies often write very small cheques, between £200,000-£1m… They will also put a lot of pressure on tech companies as well On the other side of the pond, London-based Concrete VC has seen real estate investor interest in proptech rocket over the past six months, according to its general partner Taylor Wescoatt. He says property companies are starting to acknowledge that technology could pose a serious risk if they are not prepared to embrace it. “They want to understand what’s coming, understand how they can change, accelerate their business and embrace what is happening, getting involved early so they don’t get caught flat-footed,” he says. Indeed, L&G, U+I and Town Centre Securities made investments straight from their balance sheets into WiredScore’s £7m Series A funding round in October last year. Another major milestone was marked in 2017, when JLL announced the launch of JLL Spark, a global venture fund with plans to invest $100m into proptech start-ups and headed up by former Groupon senior executive Mihir Shah. Shah said JLL Spark’s goal was to help start-ups tap into JLL’s resources and business lines so these new businesses could “succeed in rapidly growing their companies”. So far it has made more than 10 investments into proptech companies, including Honest Buildings, project management software designed for construction projects; Skyline AI, which uses artificial intelligence to precisely measure real estate investments; Vergesense, an internet of things platform that measures space utilisation; and Hubble, a flexible office space platform based in London. Its cheque sizes range from a few hundred thousand dollars up to several million, however the $100m fund is “far from fully allocated”. Start-up frustration The launch of JLL Spark undeniably marks the industry’s step towards embracing proptech but have these start-ups felt the benefits of this yet? One founder of a successful proptech company says, in their experience, real estate companies want to be seen to be spearheading developments in tech but many are not prepared to invest in or use the products. The founder claims real estate companies that are interested in investing will do so in minimal amounts but they often place demanding conditions on companies in return. “Real estate companies often write very small cheques, between £200,000-£1m,” says the founder. “They will also put a lot of pressure on tech companies. “One company will barely write any money but expect traction to come within a year. But how do you get that traction in with just £200,000 in your pocket?” Vanessa Lee Butz District Technologies founder Vanessa Lee Butz agrees that there are pitfalls to bringing on real estate investors but she is quick to add that there can also be advantages, as long as you choose these partners wisely. Butz advises start-ups to assess what their prospective real estate corporate investor’s risk appetite looks like. Investors planning to pump funding into start-ups straight from their balance, for example, may place more demands on start-ups than those investing into a venture fund. “What is not the right attitude to have is real estate companies thinking: ‘I’m going to invest £1m and get 10% of your company and you’re going to do 1,000 buildings for me for free’,” she says. Start-ups should also consider their own risk profile when deciding whether to take on propco investors, Butz says, otherwise other real estate companies are unlikely to buy your product. She says the way to be smart in the market is to take at least two or three real estate companies on as equal investors, so the rest of the industry will still buy your product. If only one propco investor is taken on, their rivals will assume your company will be bought out or incorporated in-house by that investor and will be reluctant to buy your product as a result. “If you can get three or four strategic investors, it can help a lot if they deliver on what they tell you,” she says. However, she admits: “I would much rather have a corporate collaborator as a client than as an investor. I would rather have a tech investor who really understands how to build this product.” Emmanuel Lumineau, founder of BrickVest, shares the same philosophy. He says his company adopted a strict policy of viewing real estate investors solely as clients, taking on a global set of angel investors, investment from three VC funds and two banks as well. However, he says this philosophy was born out of a learning process. “The problem is that property tends to always want to have control. We wanted to get the buy-in from property in our first fundraising, and said: ‘Let’s have the majority of our investors come from the property world’. But we got offers such as: ‘You want $1m? You can have $1m, but I need 50%.’ “That’s the issue with the property sector. You need to have the right governance and say this is not a toy for one person, this is a toy that benefits everyone,” he adds. The future of finance It seems that the appetite for real estate companies to invest in proptech – and for proptech companies to take on these companies as investment partners – still has a long way to go. KPMG’s real estate technology and innovation lead Eden Dwek says: “There are very few real estate companies making direct investments yet, but certainly more are making investment through a VC fund which they are limited partners in,” he says. “Real estate companies are still very used to investing in real assets. That is how business is traditionally done, so at the moment they are sticking to what they know well.” Some proptech start-ups also remain sceptical, predicting that many proptech companies will go bust as the real estate industry remains resistant to change and to introduce tech into their businesses. They believe investment into tech from this source will most likely be channelled into developing tech in-house. However, Concrete’s Wescoatt thinks that change could be on the horizon and predicts a more diverse range of property companies, not just sector heavyweights, will begin to make deals in the future. “We’ll see all real estate private equity funds investing in this space, from Blackstone down,” he says. “We’ll see the ones most at risk – mediators, brokers – increasingly investing to not necessarily get high returns on their investment but to learn what they need to learn to stay relevant.” To send feedback, e-mail lucy.alderson@egi.co.uk or tweet @LucyAJourno or @estatesgazette