The growing appeal of the residential market among real estate investors is undeniable. While the pandemic has proved its resilience, the structural shift in portfolio weighting towards the living sectors continues to take hold. According to JLL H1 2021 data, residential accounts for 26 percent of global real estate investment, behind only office, which accounts for 27 percent.
Parallel to the increasing appeal of residential assets, technology adoption has been accelerated by the covid-19 crisis. Residential developers and managers have been taking advantage of an array of smart home solutions not only to add value to their properties and improve customer experience, but also to achieve greater operational efficiency. With the pandemic, this adoption has leaned towards solutions that allow people to interface without close contact, to reduce the potential for viral contamination.
“Over the last 18 months, most real estate managers have realized that tech is the way to go, particularly as they have had to manage things remotely,” says Faisal Butt, founder and chief executive of London-based property technology venture capital fund Pi Labs.
One of the technologies proving most popular among residential players during the pandemic is self-guided tours, which allow prospective residents to take a tour at their convenience through smart access controls and without the need to interact with an agent in person. Scott Berka, who leads the brand and customer experience department at multifamily giant Greystar, has been piloting this technology across the US with success.
“That has been a big unlock for us. In some of our properties, we are seeing more than half of the tours that get taken are either self-guided or virtual tours. We have seen a huge adoption in this space,” he says.
Berka notes that people who take a self-guided tour tend to lease an apartment about as much as those that do a walk-through with a person. “That is hugely valuable for us because it allows us to make sure that we are adapting the way that we support these properties from a team member standpoint, to make it as efficient and as effective as possible with things like tours and signing leases.”
Similarly, Nick Whitten, head of UK living research and chair of the EMEA research technology hub at JLL, argues that residential operators are starting to use automated platforms to streamline and speed up the letting process.
“All the process where a lettings agent shows a property and signs up a tenant has required human interaction in the past,” Whitten says. “But today, there is an automated process taking place, whereby people can get all the way up to the stage of being shown around the home, have all the referencing done, all the booking and checking on properties done using effectively automated machines.
“We have found that we can handle a hundred lettings versus around two or three per letting agent as a result of this automated technology,” Whitten explains. “So, think about the speed of the process for lettings: the only realistic thing that affects lettings right now is just how much the market can accommodate, because the technology has made it so seamless and so efficient.”
Another developing area where technology is improving efficiency in the residential space is repair and maintenance. One growing platform in this segment is Plentific, whose software helps landlords find, vet and communicate with its 16,000-plus contractor network.
The company raised $100 million in August from investors including Brookfield Technology Partners — the VC arm of the Canadian real estate giant – to expand its presence in the US and globally. During the pandemic, lockdowns caused disruption for supply chains and resulted in a backlog in repairs and maintenance works, which accelerated tech adoption and increased Plentific’s growth trajectory, said Cem Savas, the firm’s chief executive and co-founder, when he announced the company’s expansion plans.
“Beyond the benefits of this digitized end-to-end repair and maintenance platform, like increased efficiency of multi-unit residential buildings at large scale, one interesting thing is the direct environmental impact. A better maintained building is also a more environmentally efficient building,” says Butt, who, through Pi Labs, was the first VC investor in the company.
What are residents looking for?
While residential managers increasingly adopt technology to improve the letting process and building operations, residents progressively drive growth in the smart home industry. According to a study by MarketsandMarkets, the smart home market is projected to grow from $84.5 billion in 2021 to $138.9 billion by 2026, at a compound annual growth rate of 10.4 percent from 2021 to 2026.
Thanks to covid, this rise in demand for smart home products is expected to accelerate. With more people staying at home, their dependency on the internet and digital gadgets has increased in the past year – as well as their disposable income – contributing to an increased adoption of smart devices, including work-from-home solutions.
Projected value of the smart home market by 2026, growing at a CAGR of 10.4% from 2021-26
This creates an interesting opportunity for real estate players in the residential space to incorporate smart home solutions and attract prospective tenants. Some developers, such as CapitaLand, have seen this type of demand coming for some time now.
“Even before covid-19, CapitaLand has strived to enhance home designs by creating a more conducive environment for homebuyers to work remotely in light of the growing prevalence of agile working,” says Chew Peet Mun, managing director, investment and development at CapitaLand Development in Singapore.
At the same time, there has been increasing interest from homebuyers looking for a smart home set-up where they can control appliances within their living space and calibrate home settings anytime and from anywhere. The incorporation of such smart home features offers benefits for both residents – it helps them to cut costs – and CapitaLand, enhancing the appeal of its residential projects. Nevertheless, homebuyers also take into consideration key factors including locational attributes, unit layouts and lifestyle amenities, Peet Mun says.
Despite an evident proliferation of devices and increased interest in smart-home solutions, the market still has a way to go before it reaches its full potential, industry participants admit. Berka, for instance, notes that, according to recent Greystar research, most residents still see things like smart thermostats, secure access or smart access control as ‘neutral’ or ‘nice to have,’ with around just 10 percent seeing these features as ‘need to have.’
“Things like appliances, flooring and countertops are still way more important to residents and renters than smart building technology,” Berka says. “You have to meet those other criteria first, and then they start to think if smart thermostats, smart lights or smart appliances are also included. So, people are interested in this technology, but it is still not at the level of, ‘I need to have this before I rent an apartment.’”
The cost challenge
One of the reasons why we have yet to see explosive growth in the adoption of smart-home technology is cost. For tenants, the cost of smart home products is high and involves upfront expenses like installation as well as maintenance. Some residential managers, on the other hand, have adopted cheaper technology, such as apps to accelerate the leasing process or operate buildings. But other technologies like cleaning robots or facial recognition have a high initial expense, which has slowed down their adoption.
“New technology always costs a lot when it is first adopted. And then it reaches a critical-mass point, which is usually around 3 percent adoption level,” Whitten says. “When you reach this market penetration level with new technology, you then see an exponential adoption curve and the cost starts to really come down. So, cracking that first 3 percent is crucial.”
“New technology always costs a lot when it is first adopted. And then it reaches a critical-mass point”
Another key aspect for managers when it comes to technology is to strike the right balance of what is valuable for tenants and cost efficient to the property. “That is by far the biggest challenge,” Berka says. Objectively measuring the benefits of smart home technology is an added difficulty. “I don’t think we are at a point yet where we can directly attribute resident retention or rent growth specifically to smart home technology. We are not seeing that yet, although the trend is heading in that direction,” he notes.
For Whitten, direct attribution of rental growth to technology is probably more of a theoretical question at this stage. However, he highlights the value that tech solutions add for an income-driven residential model, particularly to drive down void periods.
“We have found that all these tech-driven service provisions have increased tenancy lengths by up to 50 percent. Tenants are happier and therefore staying longer and that has a proper effect on the bottom line of your business,” he says. “The operating margin of different residential asset classes varies quite a bit, so it is quite hard to say it goes from X to Y [thanks to technology]. But, certainly, having efficiencies in the system means that you could drive cost down by a few percent, which is more profit at the end.”