“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth,” said former US president Theodore Roosevelt. While his words may be as true today as the day he uttered them, just over 100-years ago, the process of “well-selected” may have changed somewhat as cities matured, data emerged, and then data emerged in real estate. Today, property investment decisions rely on data and those properties that can provide more data can increase their chances of being “well-selected” by investors.
Sister trends, fintech and proptech, may have similarities due to the shared big-data age concepts they were born from but these technology groups face very different business landscapes. The property industry deals with the real world of land and weather, concrete and steel, where real-world data is used by engineers, security managers, and space optimizers. The world of finance is not so real, a place where theoretical projections guide growth for theoretical money that only truly becomes real when it leaves the financial sphere.
Most elements in the finance world can be broken down into measurable parts, be it currency, interest rates, or risk-reward ratios. As a result, fintech has blossomed in this world of mathematics and is now a key driving force in the investment decision-making process. Proptech, meanwhile, is still finding its place in the less quantifiable world of property, and doing so through the gradual process of quantifying the real world of space, movement, machines, and people. As a result, a messy new real estate landscape full of data has been created for investors and fintech to try and understand.
“Despite the large market size, the information flow [from real estate] has historically been opaque and fragmented across dispersed sources. The infrequent and typically private nature of CRE property transactions combined with the heterogeneous nature of properties makes it difficult to access accurate data,” says Luis Valdich, Managing Director of Citi Ventures, the corporate venture arm of Citi. “Connecting data together is difficult, at times the real estate and financial industry speak different languages.”
Citi Ventures are very active in their search for proptech investment opportunities, with Valdich citing the problems associated with real estate data as a key motivator. The problem they face is a property landscape rich in data and held back by fragmentation and limited standardization, meaning that data does not easily fit their fintech data models. As data increases in real estate, however, so does the opportunity for data-driven real estate investment decisions.
“As the finance industry starts to look at its interaction with real estate it has realized that, unlike in the broader financial industry, essential property data is not always accessible in an easy-to-understand format. This is a problem that has plagued the real estate landscape for decades,” says Saidat Giwa-Osagie in an article for Propmodo. “But, thanks to the help of technology, the finance industry is increasingly able to better understand real assets by designing the same types of data sharing systems that it has used for stocks, bonds, and commodities for decades.”
Almost a year ago today, on February 7th 2019, financial intelligence firm Moody's Analytics launched its Commercial Location Score (CLS) for Commercial Real Estate (CRE). CLS allows CRE investors, lenders, and developers to evaluate the suitability of over 7.2 million commercially-zoned parcels in the US. It computes a numerical score for each parcel, which can be used to complement existing site risk and investment assessment analyses. The score lets users compare parcels across the US and within the metropolitan statistical area or region through relative percentage rankings. A big step in the fintech quantification of real estate.
“We always start from our customers in all the innovation we do. The core of our client base has historically been with the banks and insurance companies,” says Keith Berry, Executive Director of Moody’s Analytics Accelerator. “As we talked to them, one of the things that’s very clear is that they’re holding more and more commercial real estate on their balance sheets. It’s becoming a key asset class for them to be aware of, and that was really what started to get us interested in the space.”
The CLS allows investors to introduce figures for commercial viability of real estate into their own financial models. This opens up a new way of investing in real estate, be it long-term forecasting of large-scale property investments or comparative assessments of various real estate portfolios. Suddenly investment decisions become clearer, with the simple addition of standardized data on real estate value. The impressive $60 million Series D for real estate analytics firm Reonomy last year, led by Citi and Wells Fargo, suggests that a real estate data race may be forming in the financial sector.
It’s not all about location, however, investors are also exploring the inner workings of buildings in order to help them make decisions. Take sustainability, for example, where the financial community is beginning to apply climate change risk models to potential real estate investments. In doing so, they have triggered a new motivator for property developers and managers to increase the sustainability of their building portfolios. In addition to environmental responsibility, cost-saving efficiency, and attracting tenants who demand green credentials for branding and recruitment, the financial cost of sustainability may also drive adoption of smart building systems.
“Central banks have already made the link between climate risk and financial stability, calls for mandatory climate-related disclosures are intensifying and it’s clear that the longer the real estate industry delays in addressing risks associated with climate change, the more disruptive the policy response will inevitably be,” says Roxana Isaiu, GRESB director real estate.
GRESB provides an evaluation system for measuring the sustainability performance of property companies and real estate funds. Their assessment method involves evaluating performance against seven different environmental building aspects to produce a GRESB score that contributes significantly to making the real estate sector more transparent on sustainability issues. According to GRESB’s 2019 results, only 130 of the 486 private funds or portfolios that reported said they achieved their 2018 targets.
“For transition risks, investors are looking to engage with their managers on decarbonization targets and pathways needed to remain within 1.5 and 2.0 degrees [Celsius] of warming. For physical risks, investors are expecting managers to provide more transparency on the exposure of their assets to location-based climate risks and whether these risks are being well-managed,” Isaiu continued.
As the climate change issue continues to rise in importance across society, regulators are also increasing efforts to incentivise green practices and punish poor building sustainability. The Netherlands government, for example, has introduced a policy that requires office buildings to meet the minimum energy performance requirements by 2023 or they cannot be rented out to any tenant. This and similar regulations planned UK and New York State create another financial case for improving building sustainability in the eyes of investors.
In our economics-driven world, it is the markets themselves that have the greatest influence on the property sector and on government policy that aim to balance environmental responsibility against economic growth. In October 2019, real estate firm DWS announced its European real estate business’s goal to cut carbon emissions by 50% by 2030 for its entire portfolio of European office properties. This would result in an estimated reduction of 61,000 metric tonnes of carbon dioxide annually – equivalent to removing 24,000 diesel cars from the road or saving around 23m litres of diesel fuel consumption.
“By setting a goal to reduce carbon in our portfolio, DWS can measure, manage and track progress on this commitment,” says Jessica Hardman, the head of the UK real estate group at DWS. Hardman says not only will this process help DWS to enhance the efficiency of office properties, “but we expect these targets to impact positively on the return for our investors, by reducing operating costs, and providing more attractive, quality buildings to tenants and investors alike”.
Real estate depends on investment as much as any industry and these developments in the financial sector will be highly influential in the property sector as investors feed more and more real estate data into their models. However, CRE firms are also privy to this data, which can empower them and drive their own improvement and investment decisions in order to make their property portfolios more attractive to investors. As a result, the increasing use of property data in financial models for real estate may soon become the key driver for adoption of smart building technologies.