‘Difficult backdrop’ fails to slow proptech investment
Venture funding for real estate startups hit a record $4bn in Q1 2022 – up 31%, year-on-year – despite stocks in the sector underperforming significantly in recent months.
Deals in the private market have grown in both number and size, according to a report by investment bank Keefe, Bruyette & Woods.
The first quarter saw 116 deals complete (+47%, y-o-y) with a median size of $15m (+36%, y-o-y). Among the largest were Veev, a modular, tech-enabled housebuilder, which raised $400m in March and rent-to-own platform Pathway Homes, which raised $250m in February.
Referencing MetaProp’s recent investor sentiment survey, the report highlighted that industry confidence has reached an all-time high, with 70% of investors expecting invest more in proptech over the next 12 months.
In fact, venture activity has continued “unabated despite market volatility”, KBW said, highlighting poor performance among listed real estate tech companies.
A combination of company-specific and broader market factors have led to a downturn in publicly listed proptech stocks. Share prices in the sector were down 20%, compared to the S&P 500’s fall of 6% and Nasdaq’s -11% in the same period.
SPACs, in particular, have underperformed, declining 58% since Nasdaq’s all-time high in November 2021.
On average, shares in proptech SPACs, in which “blank cheque” companies merge with a target business to take it public, are down 51% on their initial $10 share price.
The report identified several possible drivers of underperformance, including a recent shift among investors from backing growth stocks – such as tech companies that expect considerable growth in the future – to value stocks – more established businesses that already deliver cash flows – amid interest rate rises.
Combined with financial performance “disappointments” in the sector, the move away from growth stocks has brought the sector’s IPO and SPAC activity to a near standstill.
While there were 18 SPAC transactions in the last two years – among them big names like WeWork and industry leaders like Matterport – there have been just two over the last six months.
The report said: “The rising interest rate outlook and end market headwinds in mortgage and housing paint a difficult backdrop for real estate technology stocks, which have underperformed significantly in recent months.”
Vote of confidence
Despite underperformance in the public markets, KBW said: “We continue to believe that real estate, the largest asset class in the world, remains anachronistic and ripe for disruption.”
The report described real estate as being in the “early innings” of innovation. Considering the size of the market, KBW added, proptech is capable of producing “very large companies”.
M&A activity has certainly reflected those expectations, totalling a record 228 deals in 2021 – up 73% on 2020.
Those deals have been led by a wide range of businesses, including private investors looking to grow their product lines, public real estate tech companies and traditional real estate firms looking for ways to innovate what they do.