Real estate is the largest asset class in the world, representing about half of all wealth. By one estimate, annual sales in the global real estate market are US$2.7 trillion, with Asia Pacific the largest region, accounting for a full 40% of that market.
Of course, just because real estate is so huge, it doesn’t follow that it’s an easy way to make money. As Harvard Business School professor Arthur Segel puts it: “Historically, perhaps more great fortunes have been made and lost in this asset class than any other.”
And that makes sense. Real estate is full of inefficiencies that make it hard to make (and keep) money, including taxes, uncertainty about future growth, regulations, information asymmetry, and natural, as well as unnatural disasters. Those who can manage to find even a small advantage are likely to fare much better than the competition.
Asia’s 40% share of real estate transactions is impressive, but that share is anything but homogeneous. Geographical and political borders, drastically diverging histories, differing traditions, and many entrenched interests mean that its markets tend to stand apart from each other. Because of capital controls and other regulations, investments and other movements of money across countries come with much more friction than they do in other parts of the world. Asia’s big players, therefore, tend to be regional, not global, superstars, sticking to the areas and markets they know best. As a result, many have historically been slower to embrace technology than other regions.
At least that was true until the pandemic arrived. Among its effects were forcing property owners to reassess the value of their portfolios and to quickly change how they rented and sold their offerings.
In an August 2020 survey, Tech Adoption in Asian Real Estate, produced by Mingtiandi and Yardi Systems, 180 real estate owners and operators from Singapore, Hong Kong and China were asked about their companies’ tech and their current attitudes towards it. Seven in 10 said: “the Covid-19 pandemic led them to increase or enhance tech system adoption”. About a third (35%) of them believed that Asia was still trailing the West when it came to adopting real estate technology. That was a major change. Back in 2017, the figure was 56%.
When it came to figuring out what, if anything, was holding them back from investing in real estate IT systems, those surveyed were clear about the challenges. One-third (33%) said that changing existing behaviour was a problem, while about the same amount (35%) said it was the development and customisation resources required. Cost was the third most-named factor - at 19%.
Given real estate owners’ increased interest in proptech, it’s safe to say there’s great potential for advances that can address real needs in the Asian market. Let’s examine some of the innovations most likely to help proptech companies in Asia expand, both regionally and globally.
Digital transformation and big data
Moving to a more structured and useful software is a foundational step, but it’s also important to think about what dividends your data can provide - both now and in the future before competitors catch up. The white paper, Proptech and the Future of Work (Pi Labs, 2020) lays out the challenge this way: “If you are not already experimenting with the use of alternative big data, proprietary machine learning models, and emerging digital platforms, you are running the risk of becoming a clear casualty of the digital transformation about to take place ... we tend to overestimate the impact of a new technology in the short run, but we underestimate it in the long run. Sooner or later, the long run will arrive.”
Although big data’s “long run” hasn’t arrived yet, it will be here sooner than many people think. Hong Kong, Singapore, Taiwan, Japan, and Korea have all begun initiatives to create detailed property transaction records, which can be fed into proptech databases in the future, creating a much more accurate view of the market. As the founder of one proptech company put it: “the essentials are ready, and I am happy to see proptech is starting to heat up in Asia”.
That’s certainly true of China. According to a study that JLL Research conducted in 2020, nearly half (47%) of the real estate respondents plan to increase their proptech budget by 10-30% in the next two years. The real estate industry has awoken to proptech’s value, and it is ready to invest.
Property management
Many new buildings in Asia are being developed with Environmental, Social, and Governance (ESG) metrics in mind. Proptech that can accurately measure energy and water consumption and compare this to benchmarks will help developers reach sustainability commitments. And in a world in which social distancing will remain a major concern for tenants for the foreseeable future, IoT and other proptech solutions that can encourage social distance and guarantee adequate ventilation will be in high demand. This is as true for old buildings as it is for new ones - because most old buildings will need to meet competitors’ standards to continue to garner attractive rental rates.
The lure of augmented reality
As the lockdowns and other disruptions of 2020 forced us all to realise, a property really can be sold with a floor plan, an informative video walkthrough, and a Zoom call or two with an estate agent, if that’s what it takes.
But more immersive and scalable options are already here. Augmented reality (AR) and other proptech that lets potential buyers put themselves in the middle of an apartment or office will soon be much more than just something that’s nice to have. In hot markets where apartments are increasingly sold before any ground has even been broken, foresighted developers want virtual tours and 3D models that potential buyers can interact with and be reassured by.
Betting on the blockchain
Although other industries have benefited from jumping on the blockchain bandwagon, real estate has been slow to explore its potential uses. This is certainly true of the developers surveyed by Mingtiandi: Only 17% thought that blockchain technology would have a significant impact on the industry within five years. Other technologies — including big data (55%), artificial intelligence (42%), and the Internet of Things (32%) — were more attractive.
Clearly, new companies working in this area will need to tread carefully and be clear about what they want to achieve. Smart contracts, which use blockchain technology to create payment workflows without involving intermediaries, are one technology that is likely to be of interest in countries and regions where the rule of law is weak or unpredictable. They might also be useful in places where there are large numbers of investors who are new to investing and who would welcome the additional security that smart contracts and similar tech bring to transactions.
Eying the future
“Within all other industries, digitalisation has led to industry concentration”, the report “Technology and the Future of Real Estate Investment Management” states, and there’s no reason to think that real estate will be any different. Digitalisation and other disruptive technology will allow Asia’s real estate market to scale in ways it hasn’t been able to before, and those with the largest user bases are the most likely to succeed.
Certainly, there are many proptech companies working as a part of this effort to grow the market — in Asia alone, startups in this category attracted more than $626 million in disclosed funding in 2019 (and more than a billion the year before). But no clear proptech winners have emerged yet, leaving the field open.
As companies continue to emerge from the pandemic with a new outlook and a new urgency that is centred on survival as well as expansion, they’ll be especially motivated to seek out help from tech firms that keep their unique needs in mind. In a field with so much competition, the firms with even a slight edge are the ones that will prosper, and beat their rivals at the growth game.
Software and payments processing
In keeping with their often-conservative approach, many real estate developers in Asia have been used to running their business on just about the most undifferentiated software possible. Most use spreadsheets, rather than property management software adapted to real estate’s unique needs. A strong majority (56%) of those asked in the Mingtiandi survey said that they rely on Excel to run their business. Only about a third (35%) used a proprietary system. And one in five used “commercial off-the-shelf property management software”.
As owners acquire more properties, handling payments through Excel or other less-specialised software can lead to errors, bottlenecks, and missed opportunities. Instead, these companies need software that is made for their needs and that can turn transactions and other data into insights. This software also needs to be able to easily handle real-time payments and credits in multiple currencies, as well as a variety of workflows.
This is exactly where FX solution providers like Zai can make things much easier for proptech companies and real estate businesses alike. By seamlessly integrating with existing systems, such as Xero, the Zai platform is one example of technology that firms can use to modernise their systems, become more efficient and agile, and cut costs when it comes to processing overseas payments.
With huge potential in Asia and beyond, those companies that optimise their systems and business processes will be the ones that are able to capitalise on new growth in these new markets.
Sources:
https://hbswk.hbs.edu/item/real-estate-the-most-imperfect-asset
https://info.yardi.asia/asiaproptechreport/
https://www.pilabs.co.uk/research/proptech-and-the-future-of-work
https://www.jll.com.hk/en/trends-and-insights/research/china-proptech-whitepaper-2020
https://www.joneslanglasalle.com.cn/en/newsroom/has-asia-pacific-reached-peak-proptech
