Skills, segmentation and cost: why the proptech revolution has failed to materialise

Thomas Proctor, founder and CEO of NCG, looks at the past, present and future of proptech, and why the long-awaited proptech revolution has never really transpired.

Related topics:  Business,  Property,  Proptech,  AI
Thomas Proctor | NCG
20th February 2024
Question 901
"Despite the significant and ongoing growth of the proptech industry, the truth is that we are only just scratching the surface of how advancements in data, artificial intelligence (AI), digital connectivity and the Internet of Things (IoT) can transform a world of bricks and mortar"
- Thomas Proctor - NCG

The integration of technology into the way real estate is developed, bought, sold, leased and managed dates back more than half a century. But the term proptech itself is more recent – it really only entered our everyday lexicon around 15 years ago as part of the somewhat clumsy trend of creating a portmanteau for every industry’s use of new tech.

Today, tech is increasingly interwoven into the operations of all manner of real estate companies, and this trend is still gathering pace. For context, the global proptech market was valued at $31 billion in 2022, with this figure expected to more than quadruple by 2032, rising to $133 billion.

Despite the significant and ongoing growth of the proptech industry, the truth is that we are only just scratching the surface of how advancements in data, artificial intelligence (AI), digital connectivity and the Internet of Things (IoT) can transform a world of bricks and mortar.

A trough of disillusionment

The journey of the proptech industry – that is to say, the current generation of proptech solutions – can perhaps be best understood through the Gartner Hype Cycle.

The analyst firm states that emerging technologies typically go through a period of wildly fluctuating levels of satisfaction. Here is the pattern we usually see:

1. Trigger – a new technology emerges, often still in an infantile state, and the creators of the tech strive to achieve proof of concept and product market fit.

2. Expectations build – the buzz is created around this new tech as people (and businesses) boldly speculate about what it could enable.

3. Disillusionment follows – the reality of an immature technology fails to live up to the hype, and the backlash comes amid claims of it merely being a case of the emperor’s new clothes.

4. Market matures – the tech develops, use cases emerge, and a better understanding of how the tech works and what it can achieve.

I would argue that proptech – through a rapidly growing market with widely adopted solutions – finds itself struggling to climb out of the so-called Trough of Disillusionment. Of course, there are

exceptions; there are real estate companies, landlords, asset managers and developers that are leveraging tech to gain competitive advantage, create new commercial opportunities or achieve far greater operational efficiency. Yet the property industry is yet to realise these sorts of benefits.

A recent Deloitte report, which included a survey of US real estate companies, found that most (61%) firms’ core technology infrastructures still rely on legacy systems, but more than half decreased their investment into new tech in 2023.

Economic pressures, not least rising interest rates and the cost of servicing debt, will naturally impact businesses’ investment in new tech. What’s more, with swathes of the commercial real estate sector experiencing falling revenues and valuations on assets, building a business case for investing in new tech has become more difficult – this could threaten to halt predictions of rapid growth for the proptech sector over the coming years.

Nevertheless, while accounting for the testing economic climate, Deloitte’s data is worrying in that it suggests real estate companies believe they can afford to pause on their efforts to integrate tech into their operations, which would again suggest a disillusionment with what proptech can deliver.

Why is proptech failing to deliver?

There are several reasons why the proptech market has failed to reach maturity over the past decade. Having worked with some of the biggest names in the commercial real estate sector, such as British Land and Aviva Investors, before founding NCG, I have witnessed some of the obstacles first-hand. These are the three that stand out:

Too disparate

Tech solutions in the real estate industry have predominantly been created in isolation – single pieces of hardware or software that are launched to solve specific problems. This is not uncommon; similar trends could be observed in the fintech industry, where startups create products with a narrow focus, aiming to do one thing well.

For real estate businesses, however, this segmented approach to using tech to solve individual pain points is problematic. Companies do not want to have to invest in, integrate and manage different tech solutions from different vendors to help improve the way they manage and secure an asset, market, and lease it, communicate with tenants, monitor energy efficiency, and so forth.

The value of technology comes through compatibility, allowing it to be harnessed cohesively and strategically. But too often businesses have to adopt a broad portfolio of proptech as part of their digital transformation strategies – subsequently, the costs and complexity ramp up, meaning they fail to see commercial or operational advantages from doing so.

Skills gap

In almost every industry, the proliferation of technology has outpaced the advancement of people’s tech and data skills. In turn, this has created a digital skills gap, impacting businesses’ ability to effectively leverage new tech.

The real estate industry is certainly no exception in this regard, with advancements in areas like AI and IoT only exacerbating the issue. Without people in the business who are proficient in using tech and analysing data, it will be hard to achieve value from the disparate proptech solutions that are available.

Cost and achieving ROI

Technology can be expensive. Where connectivity is concerned, for instance, the capital expenditure required to integrate the necessary digital infrastructure can be hard to come by – as noted, this issue becomes more acute as debt becomes more expensive to service. Similarly, software solutions will all add to a company’s operational expenditure.

As with any industry, then, companies in the real estate sector have to build a compelling business case to invest in proptech, and they must then assess how they can achieve a return on investment (ROI).

Again, this is where the first two points become pertinent; siloed tech and a shortage of digital skills will prevent businesses from realising the true value of tech, which makes it harder to build that business case for investing in it in the first place.

This is where a strategic, joined-up perspective becomes so important. Not only does this allow businesses to set a clear budget for their tech investments, but by integrating technology as part of a broader, cohesive strategy, they are better able to then achieve commercial goals to get that ROI –lowering operational costs thanks to energy efficiency improvements; attracting and retaining tenants through better tech-enabled services; and so forth.

Consolidation and compatibility are key

Technology undoubtedly has the potential to transform the real estate sector, and there are many clear examples of that. But there is still a great deal of progress to be made.

If we are to move up the ‘slope of enlightenment’ and towards the ‘plateau of productivity’, we must move away from seeing proptech as a market full of standalone solutions to solve different pain points for businesses.

Instead, the maturation of the proptech sector must be built around a consolidation of technologies and providers – it is the businesses which embrace joined-up strategies and compatible, complementary suites of proptech that will realise the greatest benefits, and this will enable the entire sector to break new ground.

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