At a recent conference, the COO of a large real estate investor was lamenting that he couldn’t actually say with accuracy the number of individual assets his firm’s various funds owned around the world, let alone speak to trends or forecasts from one asset class to the next without a massive data-pulling exercise from various teams. His plight is not unique and speaks to the challenges of real estate as a growing asset class and the ongoing struggle to harness data.
There is approximately $277 trillion in the real estate universe — an extensive amount of complex and illiquid wealth that is hard to measure, manage and track. Of that $277 trillion, about $42 trillion is investable, with the balance non-investable (owner-occupied housing, land, public assets and owner-occupied commercial real estate). That compares to $70 trillion of equities and $1.1 trillion of bonds.
Harnessing that complex and illiquid wealth via technological improvements in data, transparency and access has become big business. Since 2012, more than $43 billion has been invested in property technology (proptech), coming from around 8,000 different proptech investors, into about the same number of proptech companies, with no slowdown in sight. These efforts have certainly helped real estate investors start to grasp the amount of data and various opportunities to harness that data, but there is still a long way to go when it comes to the maturity of real estate as an investable asset class, particularly when considering equities and bonds as a “data and accessibility” benchmark.
HOW DATA INFORMS INVESTMENT
Access to data for real estate investors, no matter their size, is important for many reasons, including that it:
- Helps investors better understand potential investments and make better investment decisions
- Gives more transparency into the portfolio and ongoing performance
- Increases the ability to make timely decisions about the portfolio
- Allows for better reporting to investors about performance, ESG considerations and any other ad-hoc requirements
- Moves the industry toward democratization via broader access to investment opportunities
While the proliferation of proptech companies has offered a range of solutions for real estate investors to harness data and achieve these goals, it has also created a new challenge given the large number of proptech companies and velocity of change within proptech, which investors must continually monitor and understand to ensure they are not falling behind. This evolution will continue to create a new set of challenges. For one, investors will need to determine the right technology in an ever-changing technology landscape. While most will likely select one technology and stick with it, the rate of change may make this a harder decision. In addition, LP demands for more transparency will continue to increase as solutions increase, and smaller investors will need to keep up with larger investors that have more capital to invest in the ever-increasing range of solutions.
Contributing to demand for data and heightened expectations is a new breed of individuals entering the space due to some companies offering partial share investment opportunities to a wider investor pool. Most of these new individuals that have historically not invested in real estate have high expectations for data availability, accuracy and timeliness. Between this and increasing demands from existing LPs, the expectation for real estate investors to provide more data in a quicker manner is increasing exponentially.
Note that larger investors don’t always have it easier; they need to ensure they make the right decision on technology when a “better” option might come out tomorrow, or they may just decide to build it themselves. There is virtually no barrier to entry to start a proptech company, and capital everywhere is searching for the next big idea. Even after a decision is made on a solution, a real estate investor needs to ensure the data is accurate and consistent, including monitoring the various providers and data sources period over period.
Let’s assume for a minute that real estate suddenly aligns to the equity and bond asset classes with respect to data accessibility, broadly defined. Data is readily available to every investor, regardless of size or sophistication and almost any asset can be purchased and sold with relative ease. Transaction times will have decreased dramatically as organizations can access, consume and analyze vast sets of data in a more automated way. Consider if individual shares are available for any office building on the planet, for anyone to buy (not just REIT shares). In this microcosm scenario, what does that do to the current infrastructure? For example, valuations may be significantly driven by investor sentiment versus actual cashflows.
With all this transparency and speed, and significantly democratized access to data, the opportunity to make significant returns across the industry following historical methodologies may decrease. Does this mean less certain profit using known value creation methodologies at the same time as more requirements are being introduced? Organizations will need to evolve their infrastructure and staffing to respond to this. We will likely see a whole new set of services and operational requirements to support this environment.
Beyond this broadened access to data, the real estate investing industry continues to mature in other ways with increasing pressure on fees, magnitude of dry powder, LP demands, regulatory scrutiny and reporting demands. Add to the mix changing accounting requirements and data/proptech providers increasing in complexity and number, and many real estate investors will feel pulled in too many directions, causing them to pull in and focus on their core competencies. Most investors will need to assess what exactly those core competencies comprise and would likely say that managing LP relationships and making good investment decisions (hopefully using the best data) are the most important. Everything else could be considered a support task that may not be a good use of the investors’ time. Examples of these tasks include: managing the process around data and reporting, assessing and managing new proptech and other asset-level providers, and performing accounting and various other back-office functions.
The real estate investing industry will certainly continue to evolve and mature, making its way toward what will be considered available to anyone. However, there is a lot to be determined and many different views on the end-state. The technology — both supporting data management and reporting that is supposed to enable the end-state is itself — is a moving target, thus confusing the path and the ultimate end-state on more standard, transparent and real-time access to data.
Josh Herrenkohl (email@example.com) is a senior managing director and real estate business transformation services leader at FTI Consulting, and Josh Wilcox (firstname.lastname@example.org) is a managing director within the investment administration and reporting service offering at FTI.