Pi Labs Oxford Said Investment Managers Research

Navigating into the future of investment management

Top takeaways from the latest comprehensive study into the digitalisation of real estate by Pi Labs and the University of Oxford. The 50-page report was written by Andrew Saull, research associate at Pi Labs, the proptech VC, and Andrew Baum, professor of practice at Oxford Saїd Business School.

This is an edited extract from the report.

Owners who embrace operational real estate will better align their product with occupiers, leading to enhanced returns

Traditional real estate investment is non-operational, meaning that investors receive a stable, net rent through a long lease which pushes a lot of costs and risk onto the tenant. As leases reduce in length, the operational costs cannot be pushed onto the tenant through an FRI lease, meaning that attention has to be paid to the cost line. Attention also has to be paid to the revenue the real estate can generate, because lease renewal or tenant rollover will become more important. If and when real estate investors embrace this they will be thrust into a different world of employees, health and safety, feedback platforms and big data. This offers opportunities for diversification and growth, but also requires an understanding of customer relationship technology.

Data integration is needed

There is a lot more that software could do if there was better integration of new solutions. The rise in bottom up vs top down data used in real estate modelling requires the need for standardisation. In its absence there is a lack of knowledge on how data can be used, there is little incentive for data sharing, there is a mismatch between the data being collected and that which LPs request, and there are high sunk capital costs on legacy software creating a reluctance to switch to emerging systems.

Distribution (investor management) processes will see technology application prior to manufacturing (investment management) processes

We can identify two key activities in fund and asset management. The first can be broadly termed distribution: capital raising, investor reporting, compliance. The second can be broadly termed manufacturing, meaning the investment process. Distribution is tailor-made for tech solutions, as this is a customer-supplier process already massively disrupted and/or streamlined everywhere else. Manufacturing (the investment process) is more complex, but technology will increasingly underpin every stage of this process, from buying, through asset management to selling, plus reviewing performance.

Real estate asset tokenisation is still many years away

Attempts to securitise single assets have so far proven unsuccessful, and the blockchain-based tokenisation and fractionalisation of real estate assets is unlikely to take off any time soon. If and when blockchain begins to be trusted, it will first be applied to the back office administrative tasks within investment management, such as replacing the settlement systems at central banks and clearing houses. It seems that the most likely avenue for the emergence of blockchain in real estate will be the debt markets.

Real estate fund fractionalisation should be digitalised

While the blockchain-based tokenisation and fractionalisation of real estate assets is unlikely to take off any time soon, the digital fractionalisation of real estate funds would reduce the cost (and carbon footprint) of capital raising while introducing the possibility of developing efficient secondary markets for fund units.

True disruption requires strong RegTech and LegalTech markets

Technologies which are lowering the legal costs of setting up an investment vehicle are emerging, while digital IDs offer near-instantaneous consumer-facing AML and KYC checks, enhancing the prospect for secondary market liquidity.

Negotiations will be the most resistant to technological disruption

Negotiating a transaction is a human process for which a technological replacement is elusive. While it is technically possible to digitalise and speed up conveyancing, risk remains with the buyer, who will continue to undertake lengthy due diligence. Until an economical and widely available insurance product is available, digital property passports and other process improvements will make small and incremental changes to current transaction timescales.

Operations, compliance, finance and fund structuring are underserved by technology

An independent review into the PropTech start-up market found that very few companies are targeting these investment management processes. We can therefore assume these will be the process that will see the least disruption in the short-term.

 Companies without a digital data strategy are already behind

Only 25% of real estate investment organisations currently boast an established data strategy. The most urgent need is for investment managers to structure, standardise and digitalise their existing data in order to accurately and efficiently position their portfolios, a task which can be tackled using today’s technology. Only once this is achieved will the insights offered by alternative big data sources be able to reveal new components of value.

There is a lack of holistic models and available financing options for green retrofits

Roundtable participants agreed that ESG metrics will only truly be adhered to once it hits a company’s profit line. At present there is a lack of knowledge and urgency about how to achieve this. Perhaps the biggest issue facing the industry is the need to upgrade the current building stock to meet 2050 net zero targets, with no clear model as to how this can be achieved in a profitable way.

Pi Labs Oxford Said

Americas unconvinced change is coming

Assets achieving emerging social accreditations will soon fetch a premium

As new, crowd-sourced social indicators of asset performance come to fruition through tenant experience apps or office booking platforms, and as industry benchmarks expand to include measures of a building’s smartness,  owners who adhere to ESG investing will be able to justify charging higher rents, subsequently increasing the value of the asset at disposition.

An end-to-end transaction and asset management platform is the biggest opportunity for technology

Some start-ups are able to aggregate data from disparate systems and software providers throughout the value chain, but we have yet to see the emergence of a dominant single platform which offers streamlined functionality connecting them all.

Content reproduced from Pi Labs. 2020. PropTech and the Future of Work. London, United Kingdom. License: Creative Commons Attribution CC BY 3.0 IGO

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