Digital innovation is playing a central role in the real estate sector. The introduction of pioneering technological solutions (IoT; Big Data; Blockchain) is leading to a change in real estate rules, changing the way in which we build, manage and sell a property and, consequently, the creation of innovative services which, in this phase, are complementary to rather than replacing traditional services.
PropTech defines a new real estate business model which comes from the integration of property and technology services, laying the foundations for new opportunities for growth and introducing new forms of asset enhancement.
Digital transformation is one of the 10 priority actions for real estate in the post-COVID phase indicated in the PWC Report Emerging Trends in Real Estate 2021, moving towards a proptech model using technology in all phases of the real estate cycle.
The 4 macro-sectors driving real estate innovation
Digital innovation businesses fall into 4 macro-sectors, as defined by the Prop Tech Monitor of Politecnico di Milano:
- Real Estate FinTech: focusing on the transactional phase of real estate ownership, including the related supporting information on commercial transactions. This sector, however, also includes real estate investments based on crowdfunding strategies, mortgages, portfolio management and the conversion of residential buildings via secondary markets;
- Smart Real Estate: facilitates the running and management of real estate assets on different scales. Smart Real Estate concerns both buildings that use and buildings that support high-tech platforms;
- Sharing Economy: this, on the other hand, focuses on the use of buildings; in particular, on the so-called “collaborative consumption”, which includes the sharing of residential spaces as well as work and commercial spaces;
- Professional Service: finally, this focuses on technological solutions able to replace technical figures in different sectors; it includes different entities providing services to the real estate world, from blockchain with automated property management and land registry services, to consulting, marketing and territorial surveys.
(Prop Tech Monitor 2020 – III Edition)
The introduction of digitalization in services offers many benefits, with great impact and importance for the various fields in which it is applied, creating added value both for the tenants and the owners and managers of the properties.
Digital transformation and disruption in real estate: the affected areas
Big Data – “Data is the new oil” - Clive Humby
The use of Artificial Intelligence, through the use of Machine Learning applied to Big Data and IoT activities, is revolutionizing the real estate sector, introducing innovative business models.
A study by McKinsey (Getting ahead of the market: How big data is transforming real estate) analyzes a 2015 report by Zillow, one of the most important real estate databases in the USA, highlighting the importance of the non-linear relations that are often hidden by the huge amount of data available.
For example: In Boston, house prices within a quarter of a mile of a Starbucks store increased by over 171% between 1997 and 2014, 45 percent more than all the houses in the city. In a decade, in Seattle the value of residential buildings within a mile of specialty food stores such as Whole Foods and Trader Joe's has increased quicker than others.
Although these trends are well-known by operators, in this case the main value is that provided by a non-traditional data, a non-linear relationship found also in other US cities. House prices are not driven only by the fact of being close to food stores but, rather by their access to the right quantity, mix and quality of the characteristics of the community. More is not always better, having two specialty stores within a quarter of a mile is correlated to the increase in real estate prices, but having more than four within the same distance is correlated to lower prices.
The possibility of having a machine learning system that analyzes and cross-references traditional macro data and hyper-local relations (granular trends within a block rather than at city-wide level) allows to identify, among the huge amount of data available, those inputs that are useful to real estate operators to take the most advantageous decisions.
In marketing, these applications, able to process big data on consumers, help to create lead generations and run targeted campaigns, introducing new engagement models.
There is a wide range of possible solutions, known as Mar Tech (Marketing Technology) and used to manage and analyze data to correctly and accurately identify the target, produce multimedia contents and present them to the selected target at the right time, automate the activities for acquiring and managing potential customers and turn them into actual customers. The combined use of these solutions allows companies to run more accurate marketing campaigns, focusing on a correctly profiled target and with the ability to act in real time, as well as the possibility to perform predictive analyses used to identify future scenarios on the basis of historical data.
Valuation: AVMs and iBuyers
In the real estate valuation sector, AVMs (Automated Valuation Models) are being used more and more. In Italy, AVM technology was introduced in 2014 and has progressively been used to valuate granular portfolios. These applications use a combination of mathematical models and algorithms with technology, to analyze huge quantities of data and extract statistically significant values from them to support the determination of the most probable market value.
In the United States, AVMs are commonly used also to estimate individual assets, and are the mechanism used by iBuyers, companies that use technology to provide sellers with an instant purchase offer.
iBuyers represent a radical change in the way people buy and sell homes, and in many cases are an alternative to traditional trading. The operational approach used by iBuyers depends on the chosen business model, but they share the same underlying principle linked to the estimation of the house value and the purchase offer made to the seller within 24 hours and, if accepted, the completion of the sale within 30/60 days, with cash payments and a fee paid by the sellers in line with the US real estate market average.
iBuying is a new business model fueled by billions of dollars of investments, the two main operators (Opendoor and Zillow) alone have profits of over 4 billion dollars. In Italy, one example of iBuyer is Casavo.
Real estate brokerage activities are undergoing significant structural changes, also following the COVID-19 pandemic which accelerated the trends already in progress, with increasing digitalization that also affects working methods and anticipates the inevitable evolution of the sector.
Today it is normal for sector operators to be able to have virtual tours of properties, reducing site visits, which certainly influences the sales and rental processes, introducing new and different elements compared to the traditional customer management and negotiation methods.
Chatbots and Virtual Assistants are increasingly used by sector operators as an authentic support for providing information on the characteristics of the properties, able to trace a customer profile and set appointments for visits carried out using 3D virtual tours.
The 2021 RealTrends 500 report demonstrates the significant growth of three brokers which in just a very few years have become national leaders in the U.S.A.: Compass, eXp Realty, Redfin.
Each of these manages a traditional brokerage business model including technology as an element of competitive differentiation.
Real estate auctions
The real estate auction sector, generally marked by slow paperwork, has seen innovative start-ups like Reviva which, applying a method combining artificial intelligence, big data, predictive models and experiential marketing, aims to liven up the auction market by introducing it to as many users as possible, helping them to understand the real value, with a machine learning system able to offer a percentage estimation of the probability of winning the auction.
Easy Rent: a concrete example of digital disruption in the real estate world
A significant example of how the application of digital technology to services impacts the business model, changing it drastically, is the partnership between Morning Capital and Tecma Solutions for the launch of “Flat Tower Parco Vittoria”, the innovative Easy Rent digital platform that clearly demonstrates the meaning of digital disruption applied to real estate management processes.
The challenge of real estate digitalization
The real estate sector is not excluded from the digitalization process taking place in the job market and production world, a new industrial revolution that is radically changing work processes and spaces. We can say that we are still in the initial phases of technological development, many of the activities and services “reinvented” by the application of technology have high profitability and low margins. The challenge for real estate is to offer a cross-sectoral and inter-disciplinary response, reinventing the sector with new services, new business models, new skills and new forms of business organization leading to an (economically and socially) sustainable digital transition.
Article by Augusto Vassallo, Ufficio Studi e Reporting (Studies and Reporting Office), Morning Capital