The Growth of Real Estate Technology In Australia.
After investigating nearly 200 real estate technology businesses over the last 18 months PieLAB Venture Partners, who manage the Real Estate Industry Venture Capital Fund, know more about the changing landscape of the real estate industry than any other organisation in the country. Here’s their view of what is most likely to change the industry over the next 3-5 years.
Fact: More people have more access to more computer processing power at a lower price than at any time in history and the price of access to this technology is decreasing.
As a result, technology is changing the world, industries are being transformed, and incumbent businesses across the globe are having to reinvent themselves in order to survive. Nowhere is this more relevant than in the real estate industry, a $35 trillion industry in the US alone, which has changed little over the past 50 years.
This massive opportunity has caught the eye of some of the worlds best venture investors and investment in real estate technology for the 2017 calendar year reached $7.65 billion, 36 times higher than it was just five years earlier in 2012 when a total of just $212 million was invested in the category. These figures only include publicly announced investments and so aren’t fully reflective of the scale of investment in the sector.
Research conducted by global consulting firm and investment group Bain Capital has identified 3 phases of development that the US sector has gone through, which have mirrored in Australia.
The first phase saw the development of software, data services and market places that assisted the incumbent real estate industry to operate more efficiently. In an Australian context this included businesses like Console, Rockend, Realestate.com.au, Domain and RP Data.
The second Challenger Phase, is where we saw predatory businesses trying to disrupt the incumbent real estate industry. In the US this includes businesses, like Redfin, Opendoor, Compass and Airbnb. In the US the challengers to the incumbent real estate industry have grown rapidly off the back of access to huge amounts of capital, that has allowed them to rapidly take market share without the need to generate profits to sustain growth.
While in the US the real estate technology sector is entering its third phase, we are still in the infancy of the Challenger Phase in Australia. Unlike the US Challenger phase, we’ve not yet seen large scale disruptors with huge war chests of money to spend on gaining market share, partly due to the lack of capital available to potential disruptors in Australia. However, we are seeing a plethora of new entrants into the market developing more efficient tech enabled low cost business models specifically aimed at taking market share away from the incumbent industry.
The Australian Real Estate Technology Landscape Map developed by PieLAB Venture Partners, groups these challenger businesses into categories like:
- Tech Enabled Property Management: which includes property management disrupters like Real Renta, Different, and Cubbi,
- No Agent Needed business models: characterised by businesses that cut the traditional real estate agent out of the transaction completely, and
- No Principal Needed: which includes businesses like Rent 360, @Realty and Haven The Agency which cut the cost layer of the traditional real estate principal out of the business model.
As the challenger phase matures in the US and UK markets and lags in Australia, it’s likely we’ll see more foreign owned challenger businesses come to Australia like Purple Bricks has done. It’s also likely that the flow of capital into Australian challenger businesses will grow, just as it has on a worldwide scale.
The third phase of real estate technology is likely to be more similar to the first phase complementing incumbent business models as they adapt to the changing market caused by the new tech enabled business models of the challenger phase. This phase has already begun in the US but once again lags in Australia.
According to Bain Capital Venture Partners, “This phase will likely include companies that leverage sensors and virtual reality to create smarter spaces, machine learning to standardize and draw insights from industry data and platforms to more efficiently manage transaction services.”
Looking forward the key questions the incumbent industry should be asking is how do we use technology to improve efficiencies, reduce unnecessary costs and generate revenue from other sources of income? This is a key question given the declining revenues from commission rates in both sales and property management. Working with suppliers to the industry to reduce workloads on staff and offshoring non-critical administration roles are just two ways of improving efficiencies and reducing costs.
One business that has taken advantage of the need for traditional real estate agencies to reduce costs is compliance business Detector Inspector. Having morphed over the last 4 years into a technology company they are now able to save traditional property management departments hundreds of hours of labour normally involved in ensuring smoke alarms are compliant in rental properties. This value add to its customers is what has enabled them to grow by more than 60% over the last 12 months a rate that dwarfs their competitors.
For the disrupters entering the market, the challenge is more around how do they use technology to rapidly scale in an industry that has typically been people intensive, a trait that normally reduces the scalability of a business model.