Has the Disruption of the Australian Real Estate Industry Already Begun?
Question: What do book stores, taxi companies and newspaper publishers have in common?
Answer: They’ve suffered massive disruption, lost millions in revenue and had billions of dollars stripped from their valuations. They also share a group of traits that makes them easy targets for digital disruption, including:
- Status Quo: They all had business models that had remained largely unchanged for decades.
- Non Differentiated: They all provided a roughly similar product or service to their competitors, i.e. whatever taxi company service you use you get pretty much the same experience.
- Middle Man: They involved a “middle man” who connected 2 parties. For example, newspapers connect journalists with readers, taxi companies connect drivers with passengers.
- B2C: They are all business to consumer (B to C) industries.
- Expensive Legacies: They have large legacy business models which can’t be easily changed, i.e. printing presses for newspapers, bricks and mortar locations for book stores.
In the real estate industry, experts agree that they are facing unprecedented times and that significant disruption particularly to the property management industry is likely to occur at some time in the future.
Latest figures show there are approximately 10,000 residential real estate agencies in Australia, managing 2.3 million rental households, generating around $3.2 billion of property management revenue. A very big market that is yet to feel any significant impact from serious digital disruption.
This lack of digital disruption is even more surprising when you consider both the sales, and property management industry’s share all the above traits that taxis, book stores and newspapers had prior to their disruption.
In fact the Australian Real Estate Industry is a text book case for disruption. Let’s look at those traits again:
- Status Quo: Has the business model of real estate agencies remained unchanged for the last few decades… Absolutely!
- Non Differentiated: Is it hard for consumers to differentiate between the services offered by different real estate agencies… Most definitely!
- Middle Man: A big yes there on two fronts. Agencies connect property managers with landlords and property managers connect tenants and landlords. The same applies in sales.
- B2C: Another Yes.
- Expensive Legacies: Traditional agencies have sizeable business model legacies. Bricks and mortar offices for a start, and perhaps the biggest legacy of all is the perceived value of existing rent rolls. It’s hard to imagine an agency principal striving to reduce the revenue they charge a landlord, when they’ve got millions of dollars borrowed against a rent roll that’s valued on a multiple of revenue.
If these truly are the characteristics of an industry ripe for disruption then there’s a very compelling argument that Australian real estate businesses are in for a big shock, especially if you consider the amount of funds being invested in disruptive real estate technology businesses around the world.
Data shows that funding for real estate technology businesses has increased over 1200% since 2012, with $2.6 billion invested in 2016, up from $221 million in 2012. Since 2012 over $6 billion has been invested in real estate related technology businesses, and that’s just the investment that has been publicly announced. Undoubtedly many smaller businesses have received funding that hasn’t been announced publicly, with the total number of technology businesses operating in the sector likely to be many thousands.
With thousands of businesses around the world with $ billions of capital working on a technological solution to displace traditional agency models, it’s almost certain some of them will succeed. So if disruption is imminent, where is it likely to come from and what should the industry do to prevent going the same way as taxis, book stores and newspapers?
This is of course the million dollar question, or should I say the billion dollar question. Following are a few of the leading disruptive contenders and a bit about their business models.
Purplebricks: Purplebricks claim to sell a property for between $4500 and $5500 commission. They are the one disrupter that everyone in the Australian Industry is talking about, because of their high profile launch in September last year. To date they’ve received $99.3 million USD in funding with their most recent capital raising on Dec 4 2015. In the UK, Purplebricks has more than 400 local property experts, is publicly listed with a value of approximately $600 million AUD and will sell between £6 billion and £7 billion ($11.4 billion AUD) worth of property in 2017. They currently operate in the 3 major east coast Australian Markets.
Compass: Founded by Israeli born Australian citizen Ori Allan, Compass has raised $193 million USD ($257 million AUD) and is valued at over $1.3 billion (AUD). The most recent round was $75million (AUD). Compass plans to use the money to expand into new locations and improve its technology for analysing the real estate market. The company, which aims to make real estate transactions more transparent and convenient through an online service, has 24 offices across the US and plans to open soon in San Francisco and other cities.
While other start-ups struggle to access new funding, Compass was able to raise money because its revenue is growing quickly, thanks in part to a strong US housing market. It’s been widely reported that Compass generated well in excess of $US100 million in revenue in 2016, a figure roughly triple that of 2015. As people buy, sell and rent properties on the site, Compass takes a small percentage of the proceeds. About $US7 billion in sales run through the site annually. Compass was founded in October 2012. They have already publicly stated they will be coming to Australia.
Zenplace: Zenplace is a technology-led property management company. It combines property management professionals with artificial intelligence (AI), machine learning, and chatbot technology, and is rapidly growing its market share in the $55 billion US property management market. (Yes that’s right, US property managers share $55 billion in management fees!)
The team at the helm have impressive credentials having come from global tech giants like Google, Yahoo, Facebook and Nest. Given their pedigree, it’s not surprising they have some impressive technology. For example, using data analysis and artificial intelligence their system can give a heads-up to property owners that, based on usage and life cycle, a property’s hot water system could start leaking in 3-6 months, and suggests potential options to mitigate the issue before it occurs. Zenplace also features an AI-powered service that works using chatbots and through devices like Amazon Alexa and Google Home, makes it effortless and convenient for tenants to pay rent easily, extend their lease and report issues with the property 24/7.
OpenDoor: If you opt to sell your property on OpenDoor, you will be given a valuation from the startup. Once you accept it, OpenDoor pays you for your home and effectively “flips” the real estate, seeking to sell it for a profit. This completely radical model is unique in that OpenDoor owns its own inventory of homes. While the predictive analytics the company employs to project home resale value are complicated, the experience for buyers and sellers is fairly streamlined. The service is able to provide a smooth and fast process to sell your property.
To entice buyers, OpenDoor allows for self-guided property tours at any time, made possible by smart locks and security cameras. If you buy a house from OpenDoor, you also receive a 180-point inspection, warranty and 30-day money-back guarantee. If it sounds like a gimmick then think again. The company just raised $210 million (USD) and is valued at over $1 billion (USD). Why? Because OpenDoor solves two of the biggest issues that home sellers have. How much will I get and how long will the sale process take!
Cozy: Cozy is another software based property management platform that allows owners to easily manage their own properties without the services of a traditional property manager. The platform is currently managing over 100,000 properties on behalf of approximately 75,000 landlords. The platform is also processing half a billion dollars (USD) of rental payments and last year raised a further $8.5 million (USD) in capital. The round was led by American Family Ventures which is the corporate venture capital arm of one of the world’s largest insurance companies American Family Insurance which has over $8 billion of revenue.
OpenAgent: Based in Sydney and founded by former McKinsey & Company analysts Zoe Pointon and Marta Higuera in 2013, OpenAgent has more than doubled in size every year. OpenAgent is the most successful of the “Find Me an Agent” services in the market. They help consumers choose the “right” sales agent for the sale of their property, using data analytics client reviews and feedback, and a range of other metrics. They currently have over 2% of the national sales market and collect 20% of the commission for each listing opportunity that they generate. These numbers would indicate that their revenue would be greater than many franchisors who have a nationwide presence who are household names. Why? Because they’ve been able to provide the one thing to salespeople that franchise groups have not; the name and phone number of someone who wants to sell a house in the next 30 days. They’ve achieved this significant market share in just a couple years, with a low cost model. And by the way Westpac Bank is one of their biggest investors.
What’s clear is that technology is unquestionably going to change the way the suburban real estate agency in Australia operates. Disruption is coming and almost all disruptive technology becomes disruptive because it provides an equivalent or better service at a lower cost.
So what do traditional agency businesses do to ensure their survival?
Experts agree that the best defense is to invest in technology that keeps traditional businesses at the forefront of the industry and at the same time reduces operating costs so they can more easily compete with low cost technology alternatives. This strategy of investing ahead of the curve to protect themselves is not just limited to overseas corporates. In Australia AMP, Westpac, News Corp, Telstra Optus, Wesfarmers and 7 West Media are just a few organisations with venture capital arms to their businesses. Many of these are investing directly in real estate technology businesses.
This is much harder to do in a fragmented market, where very few of the 10,000 real estate agencies around the country have the financial capacity to run their own corporate venture capital arm. The big question is can the Australian Real Estate Industry put their differences aside and collaborate to ensure their own survival?