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How will FinTech impact the commercial real estate market?

28 November 2018

Globally, technology is rapidly transforming the financial sector. One of the many financial services industries impacted by FinTech is commercial real estate (CRE). With an ever-growing population, commercial real estate is becoming increasingly important as every office property, shopping mall and skyscraper owes its existence to CRE lender capital. Much like tech companies have disrupted consumer lending, technology is slowly transforming the CRE market.

Real estate continues to attract capital, demonstrating its appeal over other asset classes in an otherwise uncertain investment world, where inflation and interest rates are rising. According to Real Capital Analytics (RCA), global volumes for completed sales of commercial properties totalled USD 873 billion in 2017, matching the total registered in 2016. A 6 percent rise in Asia Pacific and an 8 percent increase in Europe offset a decline in the US, the world’s largest commercial real estate investment market.

Also read: Dubai Q3 2018 Real Estate Research

 

global volume for completed sales of commercial properties

 

decline in the US real estate investment market

 

global capital flows 2017

 

There are numerous factors leading this change in commercial real estate including new business models and competition, changing expectations of tenants and investors, and extensive use of technology. According to Deloitte research, real estate fintech start ups across the world increased by 18 per cent between 2008 and 2017 from 246 to 1,372. VC firms and non-VC investors both have been heavily investing in such start ups. Between 2011 and 2016, non-VC source funding for real estate tech start ups increased at a CAGR of 72.4% to USD 2.4 billion. As of July 2017, funding reached an all-time record of USD 3.4 billion.

Globally, technology is rapidly transforming the financial sector Click To Tweet

 

increase in fintech start ups

 

increase in funding for real estate tech start ups

 

 

areas affected by technology

 

Savills research found that North America has some of the most valuable commercial real estate, estimated at USD 9.5 trillion – 29 per cent of all global commercial property. North America witnessed 31 per cent of all global big-ticket real estate transactions totalling USD 8.1 trillion in 2017, followed by China with USD 3.6 trillion, Japan with USD 2.8 trillion, Germany with USD 1.7 trillion and UK with USD 1.7 trillion.

 

north america valuable commercial real estate

 

north america real estate transactions 2017

 

annual value growth 2017

 

Commercial real estate investments are steadily on the rise, owing to steady economic and employment growth in key markets. Although there has been some concern about a flattening yield curve, several tax reform initiatives and the threat of trade tariffs. The full impact of Brexit in Europe is also not yet fully determined. In the first six months of 2018, CRE transaction volume globally increased 13 per cent year on year to USD 341 billion.

 

CRE transaction volume

 

most favored CRE markets

 

Technology now plays a role in every aspect of the CRE sector. Companies are beginning to adopt technologies. However, the pace of doing so is slower than that of other industries. According to a Deloitte survey in 2018, close to 53 per cent of respondents believed that technological advancements will have the greatest impact on legacy properties within the next three years, and 15 percent believe that the impact is already becoming visible. Investors also have certain expectations about technology usage from their CRE investments. Over 80 per cent of Deloitte’s survey respondents believe that CRE companies should focus on the use of predictive analytics and business intelligence. In fact, over the next 18 months, nearly two-fifths of respondents plan to increase the use of these technologies to make their investment decisions.

 

predictive analytics and business intelligence

 

Commercial Real Estate Market in the Middle East

UAE has a reputation of being a global real estate haven – with Dubai seen as a focal point for investment into the Middle East. Residential property has traditionally been the asset class of choice, but that is changing as buyers look for commercial real estate. Dubai’s prime office market has attracted much attention in recent times. According to experts, investors see well-located, high quality buildings as a first point of entry to the region. Although the property cycle in Dubai is witnessing a downturn, the overall transacted office prices saw an increase of 2.9% QoQ as per ValuStrat’s Q3 2018 real estate research.  Estimates suggest that premium commercial space accounts for 20 per cent of the total business space currently available in Dubai, with an occupancy rate of 92 per cent.

 

property cycle in dubai

 

 

premium commercial space

 

Declan King MRICS – Managing Director & Group Head Real Estate at diligent consulting group ValuStrat explains ‘…Increasing levels of institutional activity in Dubai’s CRE sector is reflective of the property market’s continued maturity, investment opportunities and improved product offering – whilst most participants are locally based institutions and corporations, we have seen more international participants in recent years.  Quality of suitable stock remains a challenge, particularly investment grade whole buildings with strong lease covenants. However, this appears to be gradually improving and is also being aided by way of ‘build to suit’ and sale & leaseback models. Alternative commercial real estate asset classes such as educational, healthcare, student housing and high spec logistical properties suited to e-commerce distribution have all seen heightened institutional interest over the last few years...’

According to reports from the World Bank, the global real estate market is worth USD 217 trillion, of which 75% is residential property. The global real estate market makes up more than half the value of all mainstream assets in the world, but it is extremely illiquid. This depresses prices and far fewer transactions occur than otherwise would. Annual real estate trading is USD 900 billion worldwide, and USD 340 billion in cross border deals, which are critical for such markets as Dubai.

 

annual real estate trading

 

 

During the quiet summer period office asking rents in Abu Dhabi’s primary commercial districts saw a 3.5% drop QoQ and 1.7% less compared to a year ago. Meanwhile, ValuStrat’s Qatar real estate research for the same quarter showed that median office asking rents fell 3% since the previous quarter and 16.8% annually.

 

Impact of FinTech on the Commercial Real Estate Market

 

  • Rise of Crowdfunding

FinTech firms are trying to radically transform traditional commercial real estate lending processes; however, they are still finding that they have plenty of work ahead. Online lending in the commercial real estate industry is still in its very early stages. Some credit crowdfunding served as the catalyst for launching commercial real estate fintech 1.0 several years ago. Crowdfunding pulled technology to the forefront in an industry that has typically relied on ‘old school’ methods for raising capital. Some crowdfunding firms have updated their models to offer both equity and debt financing for developers and sponsors. At the same time, there have been other FinTech firms that have entered the space as direct lenders and financial intermediaries.  Crowd Street launched with the goal of combining CRE investment expertise with technology, CrowdStreet provides direct access to a range of vetted, institutional-quality CRE opportunities and all the online tools needed to manage those investments. CrowdStreet provides investors the ability to diversify their portfolio with the 3rd-largest asset class, and one known for its stability. Similarly, an online marketplace for commercial real estate investing, RealtyMogul provides access to real estate investing for everyone. The platform allows investors to invest in opportunities vetted by experts starting at USD1,000.  Over a hundred thousand investors use this platform.

 

commercial real estate fintech

 

  • Simpler commercial real estate lending

Similar to how peer-to-peer lending has changed consumer loans, advancements in financial technology have led to a number of new alternatives for those seeking CRE loans. As a result, CRE financing has been optimized.

 

advancements in financial technology

 

FinTech has accelerated CRE lending and associated processes. Previously, the loan application process took several weeks. Now, however, it takes a few minutes of paperwork followed by one to two business days to get an answer from the lender. In addition, the due diligence now requires less time as well.

Speed is only one of the many factors of CRE lending that FinTech has improved. By utilising technologies like artificial intelligence (AI) and blockchain, FinTech has made CRE simpler and more transparent. AI algorithms go through large data pools faster than humans, reducing errors in the process. Similarly, blockchain enhances security which allows sellers and buyers to operate with more confidence.

 

artificial intelligence and bock chain technologies

 

  • Blockchain

Commercial real estate owners have an opportunity to alleviate some of the existing challenges in their leasing transactions using blockchain technology:

  • Inefficient property search process due to fragmented listings data
  • Time-consuming, paper-driven, predominantly offline due-diligence process
  • Complexity in managing ongoing lease agreements, property operations, and cash flows

Absence of real-time rich data affects management’s decision-making capability

blockchain technology in CRE

 

Current purchase and sale transaction processes are complicated and involve numerous steps. The latter makes property identification and transactions both costly and time-consuming for all parties, including CRE owners and institutional investors. Challenges include:

  • Fragmented data listings making the search process inefficient
  • Offline due-diligence processes which require longer time periods
  • Expensive, unclear financing methods and payments – especially when dealing with transactions internationally

CRE purchase and sale transaction

 

Smart contracts to execute real estate leases helps ease the problems related to property and cash flow management. This would also help increase transparency and allow automated payments. London-based startup, Midasium creates smart tenancy contracts that can lead to efficient property management and cash flows:

 

cash flow management

 

Commercial mortgage is typically closed in 3 months and finance approvals require a great deal of paperwork. Blockchain reduces the need for this paperwork and makes the process run smoother by simplifying financing processes. It also helps reduce due diligence and documentation times, along with data integrity concerns. The execution of smart contracts on blockchain platforms would provide all benefits of blockchain, including a series of complete, immutable, and traceable records, offering audit trails of transactions such as ownership history, property cash flows, and mortgage payments. The buyer could also track the mortgage in real time.

 

benefits of blockchain

Read next: Abu Dhabi Q3 2018 Real Estate Research