Venture capital raising for proptech firms is set to reach record levels this year and there are signs of the sector beginning to mature, with more funding of late-stage companies and increasing consolidation.
JLL data shows that capital raising fell in 2019 and 2020, from a peak of $18.2 billion in 2018, before rebounding to hit $9.7 billion in the first half of this year, a record performance for the first six months. This suggests 2021 could be the biggest year yet for the growing proptech market, with funding on target to exceed $20 billion.
The rise in proptech funding is not surprising, as specialist proptech investment managers have raised substantial capital for their funds in recent years. The PERE Proptech 20 ranking shows the largest managers in the space have raised a total of $494.5 billion over the past five years. Investment also comes from the venture capital sector and from real estate companies themselves.
There has also been substantial public market activity, as proptech firms and their backers seek initial public offerings. Investment bank Keefe, Bruyette & Woods said 20 new proptech companies floated in the US in the past year, while the past 18 months has seen the launch of 16 proptech “de-SPACs,” where a listed special purpose acquisition company, which has raised blind-pool capital, acquires a private company and thus creates a new public entity. KBW also estimates there are 21 SPACs in the market looking for proptech acquisitions. A vibrant public market for proptech will encourage further private capital funding.
Proptech around the world
The US remains the world’s biggest market for proptech companies and is home to more than half the proptech firms that received funding over the past decade, with a concentration of start-ups in New York, San Francisco, Los Angeles, Silicon Valley and Chicago. However, London, the focus for activity in the UK, is the world’s leading proptech city, home to 458 firms, according to JLL. In Europe, the UK and Germany are the leading countries for proptech start-up fundraising, followed by France, Spain and Sweden.
The second largest country for proptech funding is China. Other top countries in APAC include India, Singapore and Australia. Among the top cities are Bengaluru, Delhi, Singapore, Beijing and Sydney, primarily due to a large number of listings sites and shared service providers.
Jonathan Hannam, co-founder and managing partner of Sydney-based Taronga Ventures, says: “There are interesting proptech firms popping up all over Asia. What is helpful in this region is that we have so many markets where there is rapid urbanization and therefore lots of construction and development. It is often much easier to bring new technology into new projects.
“Real estate companies themselves are also getting more involved in technology. A lot of family-controlled Asian companies are seeing a new generation involved in their business and it is often this next generation of leaders that are bringing on board new ways of thinking.”
The range of proptech company activities is huge. However, a number of trends are emerging with regard to the types of companies favored by investors, says Raj Singh, managing partner at JLL Spark, the broker’s proptech venture capital arm. “Construction tech is a big area for investment, especially when that technology can help reduce the environmental footprint of buildings.
“The impact of the pandemic on workplace safety and culture has driven an uptick in solutions that improve tenant experience in a hybrid environment. We also expect the business of real estate financing to undergo a major tech shift, and investor interest is following suit.”
Bigger and bigger
M&A activity has already hit record levels this year, according to KBW. Up through August, there have been 155 proptech M&A deals, more than in any other full year. The previous annual record was 132 in 2020. In dollar terms, JLL data shows $18 billion of M&A in the first half of 2021, close to the annual record of $21.9 billion set in 2020.
“Over the last decade, billions of dollars of capital have flowed into the sector, fueling the emergence of disruptive proptech start-ups and other trends that are digitally infusing every aspect of the real estate value chain,” says Ryan Tomasello, director at KBW. “Private investment in the sector has surged in recent years, while M&A activity has increased significantly. Despite this, we believe the sector remains in its infancy.”
“Construction tech is a big area for investment, especially when that technology can help reduce the environmental footprint of buildings”
While proptech may well be in its infancy, the increasing M&A activity is a sign the market is beginning to mature, says Singh. “As the market matures, big proptech players are starting to emerge – and with that status comes capital to invest in M&A.
“By taking this approach, proptech companies can expand their offerings to continue their growth and decrease the impact of – or even join forces with – the competition. It is also clear that not every proptech start-up will be successful, and consolidation offers a route to a stronger competitive positioning.”
A further indication that the proptech sector is beginning to mature is funding shifting to later-stage companies. JLL data shows a rise in Series B and Series C+ funding in the past year or two.
“We’re seeing strong indications that the migration of funding to later-stage companies is associated with a maturing market,” says Singh. “That said, there are certainly other factors at play as well. Since we’re seeing the majority of capital being invested in later-stage rounds, it is possible that some investors view more established proptech start-ups as a safer bet.”
Sustainability comes to the fore
The covid-19 pandemic accelerated a number of global trends, and none more so than ESG. Proptech is no exception to this, with an increasing focus on sustainability from both venture capital investors and real estate companies.
Jonathan Hannam, co-founder and managing partner of Sydney-based Taronga Ventures, says: “We noticed that, about 12 months ago, ESG became the key priority for many of our investors. Furthermore, I think at the moment for most corporate real estate groups, there’s an absolute focus on sustainability.”
Real estate companies are under pressure from institutional investors and regulation to reduce their environmental impact, with building operations and construction contributing 49 percent of global carbon emissions, according to the UN and International Energy Authority. Proptech can contribute in a host of ways, from building management systems to onsite energy generation and smart construction materials.
Proptech companies are finding that a sustainability angle opens up new avenues for them, says Hannam. “In our experience, if we can implement a new technology or ESG solution that is measurable and then report on it and demonstrate it to the executive teams and boards of the real estate groups, then we get a lot more traction.”