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The Proptech 20: Real estate capital markets’ next frontier

Proptech investing started largely as a balance sheet cost for managers to drive efficiencies in their real estate portfolios. Today, it is the focus of a whole new wave of capital raising, highlighted by PERE’s inaugural Proptech 20 ranking.

PERE Proptech 20

In February, Nordics-focused manager NREP joined a growing cohort of private real estate managers launching dedicated technology-focused funds. The Copenhagen-based firm formed a venture capital business called 2150, through which it will raise capital for investments in technologies aimed at improving the use of
properties.

2150 is one of a small but growing number of investment management platforms dedicated to property technology, increasingly referred to as proptech. For many in private real estate, this nascent movement is long overdue. “Despite being one of the biggest asset classes in the world, the real estate industry has been slow to adopt technology,” says Tanguy Quero, growth lead EMEA for JLL Spark, the real estate venture capital business of global broker JLL. “But we expect to see a significant amount of capital being invested in real estate technologies because the industry is ripe for disruption.”

Relative to the main real estate asset classes, the amounts being invested in proptech are small – and “a drop in the bucket” compared with all real estate, says Linda Isaacson, managing director and global head of innovation and technology at executive search firm Ferguson Partners. According to a 2019-20 MSCI real estate report, professionally managed real estate reached $9.6 trillion in value in 2019. “Considering the real estate sector’s size, there is an incredible runway not tapped in property technology,” Isaacson says.

The tapping of that potential is already well underway. According to global consultancy EY, venture capital investment in technologies focused on the built environment, from organizations such as NREP and JLL Spark, increased from $9.1 billion in 2015 to $24.6 billion in 2019. And despite the disruption of covid-19, $23.8 billion was invested in proptech deals in 2020, according to the Center for Real Estate Technology & Innovation.

All this investment takes funding, and managers are increasingly realizing that balance sheet resources are not enough. Those managers alive to this notion are using outside capital to place their bets now, and that pivot is resulting in ever bigger equity flows into the sector. According to PERE’s first dedicated property technology fundraising ranking, the Proptech 20, the top 20 managers raising funds dedicated to property technology investments have collected approximately $5.5 billion of equity since 2016. Of these funds, 63 percent were launched after 2018. They are just part of the sector’s burgeoning capital markets universe, according to Josh Raffaelli, managing partner at Brookfield Technology Partners, which came in third in the ranking.

Besides the dedicated private vehicles, there are funds with proptech allocations, funds investing at intersections with other sectors, corporate ventures and direct investments from real estate firms. More recently, listed special-purpose acquisition companies have become relevant conduits to investing into proptech and are already regarded as viable exit plays for private funds in the space.

According to the iREIT PropTech SPAC Guide, published in February, at least 22 SPACs targeting real estate technology companies are either in the market or are about to enter it. Collectively, these SPACs are responsible for at least $2.5 billion of equity.

With its $200 billion real estate portfolio, Brookfield is one of the largest managers drawn to the sector. The firm says it has so far invested approximately $100 million in real estate technology. It entered the sector by making investments from its balance sheet capital in 2018, and has since launched a dedicated commingled fund under its Brookfield Technology Partners arm to invest in real assets-related technology. The vehicle is understood to have attracted $500 million in equity to date.

The journey from balance sheet to third-party funds is becoming more commonplace, with three other heavy hitters making appearances on the Proptech 20: NREP, Gaw Capital Partners and logistics giant GLP.

“We think this is a good investment opportunity and we have seen growing interest from our investors and peers in it,” says Humbert Pang, managing principal at Gaw Capital. “Many of them want to get a little bit of exposure to the sector to test the waters and they naturally want to look for a familiar partner with track record in the field.” Like Brookfield, Gaw Capital started investing in real estate technology with its balance sheet capital in 2018.

For its part, NREP made five investments into real estate technologies over the past three years before raising third-party capital.

“The value we can generate for technology entrepreneurs has a lot to do with the fact that we are active in European real estate,” says Mikkel Bülow-Lehnsby, chairman of NREP and founding partner of 2150. “And by not just being a proptech investor investing money from our balance sheet, we have other real estate participants joining our dedicated vehicle and sharing the technologies that we like.” Instead of raising a real estate technology fund under the NREP brand like Gaw Capital, the firm opted to run a separate business, just as GLP has with Hidden Hill Capital. “Investing in technology companies is different to investing in real estate.” Bülow-Lehnsby explains. “Therefore, we concluded the best way for us to engage with technology was to build a separate team.”

Direct or funds?

Although most of the Proptech 20 funds were formed in the last two years, real estate firms launching dedicated real estate technology vehicles remain a rarity. That is because having the right talent and resources to invest in this emerging sector is a barrier for many real estate companies in making direct investments, says Morten Beck Jørgensen, managing partner at Novo Capital Investors. The investment arm of Danish conglomerate Novo Holdings is a strategic investor in NREP and in 2150’s first fund.

“I don’t think my team has the knowledge to go and do it directly,” says Jørgensen. “You need to have an expertise to really analyze these companies. And you also need to have enough capacity because it takes a lot of time.

Numerous managers have yet to start making balance sheet investments into the proptech sector. Instead, they are opting to start out by committing to the existing real estate technology venture capital funds of others. These managers represent some of the biggest backers of the funds in the Proptech 20.

PGIM Real Estate is a prime example. The asset manager of US life insurance company Prudential Financial owns a stake in Australian proptech manager Taronga Ventures and committed capital to its €63.6 million RealTech Ventures fund. It has also committed to US proptech venture capital firm MetaProp’s fund series.

“Investment of venture capital money into real estate-related technologies is a relatively new concept,” says Sara Shank, managing director and global head of innovation at PGIM Real Estate. “But as of recently, there has been much more investment into the real estate technology sector, which has led to the emergence of many more proptech companies. We decided to partner with dedicated real estate funds led by venture capital firms with a deep understanding of the space in each region to help us better filter and determine which technologies are the best for us to pilot and adopt.”

Spotlight: Hidden Hill Capital

Headquarters: China
Year formed: 2018
Capital raised from funds: $1.2bn
Fund: Hidden Hill Modern Logistics Private Equity Fund

Backed by logistics powerhouse GLP, the private equity firm was set up to invest in technology companies that will enhance efficiency in the logistics industry. Led by GLP executives Higashi Michihiro and Richard Dong, the firm’s only and flagship yuan-denominated fund will focus on China, though PERE understands the firm also has plans to raise US dollar funds. With a return target of more than 20 percent IRR, the fund has received investments from institutional investors including China Post Capital, the investment arm of the mainland state-owned postal operator.

Those investors that do take the fund route can, depending on the stipulations of the vehicle, access direct investment opportunities via sidecar arrangements too. For example, Taronga Ventures offers co-investment opportunities to investors in its main fund. “If the investors see something that they really like, they have the option to co-invest with us,” says Jonathan Hannam, the firm’s co-founder and managing director. “That gives us the opportunity to make larger investments.”

Supply and demand

More capital flowing into the real estate technology sector could lead to increased competition for the most promising start-ups, according to Quero: “As more capital becomes available for this sector, founders have benefited from a wider selection of investors to choose from.”

Spacemaker, a software business underpinned by artificial intelligence, was careful about bringing on board too many real estate investors until its Series A funding round. Co-founder and ex-chairman Anders Kvale explains that this was because “outside perspectives” and “more freedom and flexibility” to develop its technology were more important to the company at the beginning. Venture capital firms Atomico and Northzone led the Series A round alongside smaller investments from NREP and some real estate developers. “With plenty of funding options, from venture capital to corporate investors, we had the choice to select the types of investors we like in different stages of growth,” says Kvale.

“For most of the real estate technology companies, getting funding for the Series A is the most challenging, as you need to show traction in the market,” says Jeevan Kalanithi, chief executive of computer vision construction tech start-up OpenSpace. This creates opportunities for dedicated real estate funds to penetrate the early-stage funding market: “Non-proptech investors may not understand our market that well, or, to put it more harshly, may not accept excuses for lack of traction.” OpenSpace has 10 real estate technology funds on its capital table.

“The advantages brought by real estate technology funds are countless,” says Kalanithi. “Anybody entering the space, I would strongly counsel them to work with these funds if they can. They help start-ups both vet their ideas more rapidly than they could on their own and, assuming one achieves product market fit, they can help [to] be a kind of sales channel.” Indeed, in the case of Spacemaker, NREP helped increase its client base by being a user and making its investors users of the technology.

Private real estate firms with dedicated technology funds can also provide a testing ground for these technologies. “Unlike the traditional private equity or venture capital firms, we are real estate owners” says Gaw Capital’s Pang. “So, we have the properties to provide a testing ground for these technologies where we are the end users.” The firm applied sensors produced by Switch Automation, one of its proptech investments, in its assets in Singapore.

Profit or cost?

As the industry evolves and the use of space is reimagined, one of the key questions is whether real estate technology investments should be a profit center or remain a cost of doing business. Zak Schwarzman, general partner at proptech venture capital firm MetaProp, tells PERE that some real estate firms initially saw these technologies as tools to enhance their core operations in areas of customer service, sustainability and efficiency. But, as they matured and proved profitable themselves, firms began to see the potential of becoming investors too.

Some are already making impressive returns. NREP, for example, is understood to have achieved an approximately 2.5x multiple from the exit of Spacemaker to software provider Autodesk after holding the investment for less than two years, PERE understands. The firm remains a user of the technology after its exit. Gaw Capital’s investments in Naked Hub and Beike are also understood to have been profitable.

“As the real estate community has begun to recognize the financial return potential of real estate technology investments, in addition to their strategic value, the flow of real estate capital to the proptech sector has continued to intensify,” says Schwarzman.

By Pang’s reckoning, a proptech investment is only viable if it is relevant to many users. “Some real estate technology might only be a real estate enabler if it is being applied to a single asset,” he says. “But if it is being applied to a broader real estate portfolio like the ones we have, it can become a profit center.”

Biggest money still waiting

Although the proptech sector is receiving ample interest from the real estate community, most larger institutional investors are still on the sidelines, according to Michael Hoffman, founder of capital advisory firm Prospective Advisors. “[Proptech managers] need to create later-stage or growth-oriented fund products that are large enough to be able to attract much larger investors,” he says. “I think most of the real estate technology funds today are still being backed by either strategics or smaller investors such as family offices, foundations and endowments.”

Half of the real estate technology funds in the PERE Proptech 20 are below $150 million in size. Their average equity ticket is therefore lower than most institutional-level investors are willing to engage with.

Spotlight: Fifth Wall

Headquarters: Los Angeles
Year formed: 2016
Capital raised from funds: $1.4bn
Funds: Fifth Wall Ventures I, Fifth Wall Ventures II, Fifth Wall Real Estate Technology European Fund

The firm is the world’s largest dedicated real estate technology venture capital firm. Investors and partners include managers Gaw Capital Partners and Azora, and broker BNP Paribas Real Estate. Most recently, the firm successfully launched its first proptech SPAC with a $345 million IPO. With around $1.3 billion in assets, the firm has started to invest beyond real estate technology into sectors such as climate and retail technology. Its real estate portfolio includes online platform Opendoor, co-working provider Convene and custom homebuilder Homebound. It is also an investor in retail brand Allbirds and in-store execution platform Retail Zipline.

There has also been a debate around whether the investment in real estate technology funds should come from an institutional investor’s real estate, private equity or venture capital bucket, says Johnny Adji, senior investment director at investment consultancy Cambridge Associates Asia. “There is increasing interest from investors in real estate technology,” he says. “But not having a dedicated team to execute the strategy or allocation for the asset class is the real question. You need to convince board members to do that. For a lot of investors, because of the small size of investment, they think it is not worth the battle to fight for this particular allocation.”

For Novo Capital Investors, the investment in 2150 was made from its venture capital allocation due to the business’s risk-return profile. But both the firm’s real estate and venture capital teams worked together on the
investment.

“If I am a private equity guy looking into a property investment, maybe I will need the real estate guy’s advice telling me whether this is applicable to our assets,” says Jørgensen.

Nevertheless, Adji tells PERE it is easier for institutional investors to invest in a dedicated real estate technology vehicle of a private real estate firm that is already in the fund space rather than outside of it: “If fund managers are raising it together with their real estate fund, they can easily convince their investors to allow a minor exposure to real estate technology under its bucket.” It is understood Gaw Capital’s proptech vehicle received investments from investors also in its main funds. Moreover, the proptech fund invests in companies in the later stage of funding, which tends to mean bigger commitments are required, according to Pang.

“As more real estate tech companies mature and reach growth stage, we can advise investors they are no longer taking a VC risk but a growth equity risk,” Hannam explains. “And for that, we are seeing that many investors have a larger allocation of capital.”

The firm’s flagship fund focuses on venture capital investments ready to scale. Most of its investors are corporates and real estate companies, which typically invest approximately A$10 million ($7.8 million; €6.5 million) each. But the firm is exploring alternative investment structures too and is planning a second fund to invest in growth-stage companies, which Hannam expects will enable more institutional investors to participate.

Hannam adds that an increased focus on ESG from global institutional investors is driving many real estate developers and managers to allocate additional funding and resources into real estate innovation and technology: “We have a very large allocation to environmental opportunities, carbon reduction or sustainability initiatives. As we track and measure outcomes for each, emerging technology investments are ideal for investors that want to drive their own internal benchmarking for operating in this environment.” Taronga currently has around 30 percent of its fund invested in ESG-related technologies.

Ann-Sofie Østberg Bjergby, chief financial officer at Danish developer AFK Holding, says the firm made its first real estate technology investment via 2150 for sustainability reasons: “Our vision is to be among the most sustainable real estate developers here in Denmark. Therefore, it’s interesting for us to invest in green tech because we all need the efficient solutions and the technology that can get us there. We need input on how to do this.”

Showcasing greater efforts toward carbon footprint reduction is one of the reasons why a proliferating number of proptech managers are carving out a new private capital markets frontier. The acceleration of trends affecting the various real estate asset classes brought on by the pandemic is another. But the main reason is the widening realization that investing in property technologies is not only useful for making an institutional-grade real estate portfolio efficient, but can be profitable and scalable too.

The managers on PERE’s inaugural Proptech 20 ranking are responsible for raising more than $5.5 billion, a little less than one-fifth of the total investment in the sector last year alone. Given that investment volume was almost three times the amount invested just five years ago, it would be fair to contend that the ranking, alongside the wider proptech capital markets universe, has plenty of growth ahead of it.