Contributing c.40% of the world’s greenhouse gas emissions and consuming c.30% of the world’s energy, the property sector is a prime target in the increasingly sustainability-aware environment, driven by climate change, public opinion and rising energy costs.
Regulators and occupiers alike are demanding a transition to a more sustainable property portfolio over time. Investors are having to take note and consider strategies to achieve and prove this, or face a declining asset value to be accounted for when they sell or rent in the future.
As a result, and in common with most other sectors, the property sector is looking to improve efficiency, using data to enhance the accessible knowledge base and, increasingly, automated distribution to reach more customers, more effectively. Proptech, covering areas such as prop-fintech, construction, consumer browsing, sustainability outreach and data collection, has been the happy beneficiary.
Between 2012 and 2020 the proptech sector raised $78bn.
Value of Investments in billions of US. Dollars
| Year / period | Value of Investments in billions of US. Dollars |
|---|---|
| 2010 | 0.6 |
| 2011 | 0.7 |
| 2012 | 1 |
| 2013 | 1.4 |
| 2014 | 2.9 |
| 2015 | 5.8 |
| 2016 | 7 |
| 2017 | 9.9 |
| 2018 | 15.4 |
| 2019 | 20.4 |
| 2020 | 14.1 |
| 2021 | 24.3 |
| Q1 2022 | 4.3 |
Chart axis labels: 0, 5, 10, 15, 20, 25, 30.
Market activity is bubbling with deal flow expected to increase by 38% over the next year. Due to more challenging macroeconomic conditions, there is reduced confidence in startup backing although, more positively, this is expected to result in a higher level of M&A activity, as feature-rich start-ups are targeted for consolidation into more established platforms with confirmed customer bases.
Proptech opportunities abound, with increasing interaction with other sectors as market leaders look for opportunities to deliver wider programming through their platforms. Examples include:
Diversified Distribution: Airbnb has acquired 27 companies, spending over $700m. Although Airbnb falls under the prop-tech umbrella, its acquisition profile has extended more widely, with investments in 11 online travel companies, three social platforms and two food tech companies demonstrating the interaction with opportunities beyond the proptech space to develop and grow its own service offering and distribution model.
Fintech: Deal activity within the prop-fintech sector has been rising over the past three years. Porch acquired Floify Inc for $86.5m in late 2021, demonstrating the value of fintech within the property sector. This was followed by Altus Group’s acquisition of Rethink Solutions for $28.8m. Real estate fintech deals increased by 167% between 2021 and 2022.
| Acquiror | Relationship | Target |
|---|---|---|
| Porch | Acquired | Floify |
| Altus Group | Acquired | Rethink Solutions |
Property Investment platforms: In 2021 Property Partner, (now rebranded as London House Exchange) a UK housing investment company, was bought by US digital home ownership company Better.com. It now offers a platform for direct investment through a property exchange, with the goal to bring liquidity to the housing market. This new form of investing demonstrates the power technology can have over outdated structures. The transaction valued Better at $7.7bn post acquisition. However, Better.com has since disclosed a $90m net loss in Q1 of 2023, reflecting recent volatility in the underlying property market in both the UK and US.
Better — Acquired — London House Exchange (formerly Property Partner)
In a similar vein, this year saw reAlpha acquire Rhove Finance LLP to speed up its development in shared-ownership housing in the US. A new movement towards property being a shared investment opportunity has begun to shape this decade with investors feeling empowered in partial homeownership schemes.
New Entrants: Companies such as Prologis, although specialising in logistics real estate and not directly considered a proptech company, have also been active in proptech M&A. Since the company’s creation, Prologis has made five acquisitions and 24 investments, spending over $57bn on acquisitions in the past 10 years. Concurrently, the Group has been developing its ESG credentials, helping it to deliver a net worth of $113bn as of August 25th. As companies such as Prologis continue to grow, environmental and sustainable awareness is increasingly at the core of both consumers’ and investors’ purchasing decisions. This has led to a steady increase in ESG-backed acquisitions within the property space, whilst legislation has supplemented the transformation and necessity for new property monitoring tools.
PROLOGIS — Ahead of what’s next
Over the past decade, the world has witnessed a dynamic relationship between proptech and legislation, driven by a growing emphasis on Environmental, Social, and Governance (ESG) concerns. As proptech solutions revolutionised the real estate industry, legislation stepped up to support the adoption of best practice, promoting environmental sustainability, social impact, and governance issues.
In the early 2010s, pressure to address energy consumption and carbon emissions started to be felt by the real estate sector. This encouraged the development of smart building technologies, energy-efficient systems, and renewable energy integration. New platforms were introduced to assist in tracking the new Energy Performance Certificate (EPC) requirements. These developments were taken up by consumer-focused companies such as Zoopla and Rightmove, establishing the reliance of a one-size-fits-all platform for potential buyers. Zoopla sold in 2019 for £2.2bn to the US PE firm Salt Lake, whilst Rightmove is on the London Stock Exchange and currently valued at £4.75bn.
Feed-in Tariffs (FiTs) were introduced in 2010, incentivising small-scale renewable energy generation by providing participants with payment for the electricity they produced. The implementation of this scheme required effective monitoring and operational support, facilitated by the proptech sector’s diverse developments during that time. One notable company, Green Energy Options (GEO), offered optimised technology solutions, enabling people to monitor the power they generated from renewable sources. Over the past decade, GEO has focused on advancing sustainable energy solutions, experiencing substantial growth, reinforced by its acquisition of Onzo Ltd in 2021.
ESG considerations have expanded to encompass social impact and affordable housing concerns. Proptech companies leveraged technology to address issues in affordable housing, facilitating community engagement and improving living conditions. In tandem, UK legislation focused on encouraging affordable housing development, safeguarding tenant rights, and combating housing discrimination. Proptech’s collaboration with social initiatives has paved the way for a more inclusive and socially responsible real estate sector, in line with the UK’s commitment to housing affordability and accessibility.
Property purchasing conduct came into focus as a direct result of the financial crash. The FCA introduced the Mortgage Market Review (MMR) to reduce high-risk lending. This made home ownership harder for low-income households and first-time buyers, a direct result of which was the emergence of saving apps such as Moneybox, which harnessed government schemes such as the help to buy scheme, whilst offering users professional online support and advice. Moneybox started in 2016 and is today valued at c.£107m.
To supplement the saving support of Moneybox, Habito was founded as a digital mortgage broker platform in 2016 and had gone on to raise over $88mn in 11 rounds of funding. Although the foundations of the company were laid in mortgage comparisons, it has since been an ESG advocate in the proptech community, developing a blog that focuses on sustainable living and ethical purchasing practices. The support from companies such as Habito to first-time buyers and homeowners has helped develop a more ethical and sustainable face for the property sector.
Ensuring governance and transactional transparency has become paramount for building trust among stakeholders in all sectors. Proptech platforms have allowed greater transparency in property data, financial transactions, and regulatory compliance. The UK government has recognised the significance of transparent property transactions and has now adopted measures to streamline property registration processes, reducing the risk of fraud and enhancing governance practices. The integration of blockchain technology also offered secure property records, aligning with the UK’s commitment to robust governance in the real estate market.
The Grenfell fire sparked new concern over housing legislation within the UK, resulting in new fire and building regulations for existing and new housing. Metrikus is an example of a proptech company that has developed since the Grenfell incident. The company monitors the safety, security and environmental conditions of a building. This not only improves the efficiency of a building, but ensures the relevant rules and regulation are being followed to protect the residence. In 2020 Metrikus had raised $6.7m over two rounds of funding.
The Minimum Energy Efficiency Standards prompted the growth of established proptech companies such as InventoryBase, a property inspection and sorting software that allows for the streamlining of operations and legal compliance for landlords and property managers. These tools have allowed for new legislation in the UK to be implanted quickly without impacting the workload of the user. Government-led proptech projects, such as the EPC Register, have allowed the government to enforce and monitor the following of new legislation through building online platforms to gather and sort data private data securely.
With rapid urbanisation, proptech has emerged as a key player in shaping sustainable urban development in the UK. Employing data analytics and artificial intelligence, proptech platforms provide valuable insights for urban planners, facilitating evidence-based decisions on infrastructure, transportation, and zoning. The UK’s legislation has actively embraced proptech data to inform urban planning processes, promoting environmentally sustainable city design and resilience to climate change.
The UK Future Homes Standard has ensured properties are being built using sustainable materials and methods along with renewable energy sources. Companies, such as Buildots, have benefitted from the new UK legal framework, with its platform now having an estimated value of $60m. Buildots offers AI technology that monitors construction quality and progress, whilst also tracking energy efficiency. Beyond the construction phase, companies such as Grid Edge focus on operational energy efficiency enhancements, looking to optimise energy usage within a property whilst also monitoring consumption to ensure the property owner is being given up-to-date energy data to promote energy-saving solutions.
With large financial institutions and individual company and consumer demand alike pushing for a more sustainable approach, there is widespread recognition among global asset managers in the commercial real estate industry, that their investors and funders need to ensure that their underlying property portfolios are more sustainable going forward. Failure to plan for this will depress valuations as occupiers’ preferences for sustainable property drives down rental values on non-sustainable facilities, ultimately leading to capital losses where property is sold on.
Data resources and consultancy in this area have hence risen rapidly over the last few years.
Leading ESG consultancy and software business, EVORA Global attracted widespread global interest when Polestar brought it to the market in 2022. Its combination of ESG strategic advice, its SIERA software to facilitate action and its world-class client base enabled its shareholders to secure a partial exit at a strong valuation, whilst the business benefited from substantial investment from Bridges Private Equity and MSCI, the US-listed data business to drive continued expansion.
Other competitors in a similar space include Measurabl in the USA, Deepki in France and (though it is more of a benchmarking tool) GRESB, in the Netherlands. Valuations reflect the pent-up demand as funders increasingly stipulate ESG strategies and evidence as a condition of financing.
As an example, Measurabl, founded in 2013, has secured $93m over eight rounds of funding, the latest at a valuation of a value of $200m, against revenues of under $10m. Its ESG-focused data collection software creates investment-grade sustainability reports and alerts users to improvement opportunities.
With the huge US market remaining relatively untapped, alongside demand still to be satisfied in Europe and elsewhere, Polestar is seeing strong appetite for assets that can help the move to net zero and enhance sustainability.
As we move past the end of Q2 this year, the macroeconomics against the property market appear to be being treated as a short term anomaly, with market activity ready to burst in the M&A and financing space. Investors are looking to drive value into existing companies through acquiring software assets that bring value and new direction to acquirers. Legislation is both supporting and driving change within the space, encouraging high-level sector development and driving market activity, as businesses change and adapt to new consumer expectations.
With strong appetite and plenty of the market yet to fully embrace the heightened efficiency available from the most cutting edge solutions, this could be the perfect time to explore your options for raising funding or securing a valuable exit. If you are in the proptech and advisory space and looking for financial advice or simply exploring your options, Polestar is very happy to share additional perpspective from its recent experience and international connections.
PropTech refers to technology used within the property sector. It includes property finance, construction technology, consumer property platforms, sustainability reporting, building monitoring and property data collection.
Buildings account for a significant proportion of global energy use and greenhouse gas emissions. Regulation, rising energy costs and demand from occupiers and investors have increased the need to measure and improve property performance.
PropTech can monitor energy consumption, collect environmental data, support regulatory compliance and identify opportunities to improve building performance.
Less sustainable properties may experience lower occupier demand and reduced rental values. This can affect the value of the asset when it is sold.
Established businesses were using acquisitions to add software, enter new markets, broaden their services and gain access to new customer groups. More difficult funding conditions for start-ups were also expected to create consolidation opportunities.
Areas highlighted included property FinTech, digital investment platforms, smart buildings, construction technology, energy management, ESG reporting and sustainability data.
PropTech platforms can collect and organise property information, document compliance and help governments, landlords and property managers monitor requirements such as energy-efficiency and building-safety standards.
ESG software helps investors and asset managers understand the sustainability of property portfolios, produce reports and identify opportunities for improvement. This information can also support compliance with funding requirements and net-zero strategies.
