Home Sweet Home - transforming the European Real Estate sector
Updated: Apr 5, 2019
Buying a home will be the largest single purchase most consumers make in their life time, and also the greatest ongoing financial outlay for many.
Given this and the fact that the global real estate business is a trillion dollar industry, it is hardly surprising then, the European residential property market is receiving unprecedented levels of interest. The sheer scale of the opportunity and the traditional nature of the sector makes it a prime target for disruption. Corporates, entrepreneurial businesses and venture capitalists are increasingly investing their time and money to disrupt a traditional market. Illustrating this, Purplebricks has received $278m of funding, Nested £165m and YOPA £78m over the last handful of years.
Whilst these proptech groups have received increasingly aggressive funding rounds, the traditional agents have been hit by a toxic mix of large fixed cost base, decreasing volumes of sales and declining margins - reflected in the travails of real estate giants, Foxtons and Countrywide (where the share price has fallen from a high of 696pps five years ago to under 9pps at the time of writing) amongst others.
The UK residential property market leads the way in the European market in terms of digital disruption, but it is by no means unique. German traditional real estate groups, such as Engel&Völkers and Von Poll continue to make profits, yet new challengers like McMakler (€24.5m of VC funding received) are starting to emerge. A population of over 80M, rising house prices and very high agent commissions make it a market that is ripe for disruption. There is a lot of low-hanging fruit in the market.
With the likes of Purplebricks achieving unicorn valuations, Kobolt take a look at the European Proptech sector.
Why is this market so ripe for disruption? And why is now the right time?
Across all elements of consumer life, we are seeing changes in behaviour, whether that is banking, planning a holiday or shopping through a mobile app. Increased trust in digital products and an understanding of the efficiencies and cost-savings this offers, provide enormous opportunities for the emerging proptech businesses. Coupled with changing expectations from the millennial generation there are vast opportunities to challenge the status quo and to create value.
The incumbent operators are encumbered with large fixed cost bases, networks of bricks and mortar locations and employees whose skill sets are ill-suited to a digital world; as a result, they are unable to innovate as quickly as the more nimble proptech players. By stripping out cost and realising efficiencies through tech-enabled business models, these proptech businesses are stealing market share and a march on the sleepier incumbents.
How are companies looking to transform the market?
1. Wave One – Transparency of inventory
The first wave of disruption saw the development of new levels of transparency of inventory in the residential property market through the likes of Rightmove, Zoopla and Immobilienscout24.
These businesses provide consumers with ready access to the vast majority of properties available in a specific market, streamlining the process of identifying a pool of potential homes. The leading portals have developed very strong market positions over the last 20 years with Rightmove and Immobilienscout24 in particular being the first port of call for most consumers looking to find a home.
But consumers were looking for more than just access to inventory; this demand has underpinned the second wave.
2. Wave Two – Realising efficiencies
Much like in the fintech sector, businesses are identifying inefficiencies in the current home buying and renting process, and developing innovative tech-enabled capabilities to drive improved efficiency and cost saving for the consumer.
The focus of these companies ranges from the online estate agents, such as Purplebricks and Emoov selling your home, through to organisations such as Habito and Trussle, who have developed disruptive mortgage propositions.
3. Wave Three: Alternative models
Finally, there is an emerging group of business who are looking to develop new models of property habitation beyond simply buying a property that appeal to the millennials in particular. Many of that generation are either unable to buy a home due to its prohibitive costs or certainly less inclined to do so, enjoying the flexibility that is offered through alternative structures. Instead they are looking for the ability to live in a high quality home, at an affordable price point and with the flexibility on the length of their tenancy.
Businesses like RentMyHome or Rentify providing a comprehensive rental solution at a much lower cost than their high street competitors. Meanwhile the first wave movers, such as Rightmove are also moving with the market, releasing their own innovations, such as their RentLondon app, to streamline the rental process across London.
Alongside these businesses groups such as OWNR (leasing), Unmortgage (a combined mortgage and rental model) and StrideUp (acquiring percentages of the house over time) have developed new models of home ownership. These are intended to provide many of the advantages of home ownership without the lock-in and prohibitive equity requirements that are required to buy a home.
OWNR by way of example offers a medium-term leasing model, with a right to buy at the back-end of the lease period, potentially offering an alternative route to home ownership. Nils Kohle, the Founder-CEO of OWNR, explained:
“The major challenge for potential middle-class owners in the big cities is not finding a property, but financing the equity component. In Germany you need roughly 30-35% of the total purchase cost in the form of equity, and in the UK this is about 20% - most people do not have access to this. New models, like OWNR are looking to solve these problems in a completely new way. We buy the property for you today, lease it to you and then provide you with the opportunity to buy it up to four years later and with a much smaller equity outlay.”
Unmortgage, equally have gone about challenging the status quo, through their innovative partial ownership platform. Ray Rafiq Omar, the co-founder, recently explained to Crunchbase:
“Unmortgage enables everyone to live in the home they want to, that’s our mission. We do that by allowing people to buy as little as five percent of a home and rent the rest. So there’s no mortgage involved, hence the name Unmortgage”.
What are the challenges facing proptech businesses?
Whilst proptech businesses are well-positioned to transform the market without the legacy and high costs of the traditional real estate businesses, they still face their own challenges. December 2018 saw eMoov, which has received over $20m of funding, slip into administration and no doubt other challengers will fail over the coming months.
For many proptech businesses the biggest of these challenges is driving a change in consumer behaviour. It can be difficult to convince a buyer to use a more cost effective mortgage solution rather than a more expensive traditional bank or for a seller to utilise an online estate agent rather than their better known but more expensive brick and mortar competitors.
Alongside this all components of the sector are highly competitive, as a new idea occurs or a more cost effective solution is developed copy-cats quickly spring up. This means that proptech players require deep pockets to support aggressive marketing initiatives, differentiation of brand and to support initial (and potentially longer-term) cash-burn.
Conclusions:
There are head-winds for the broader economy and the residential property sector is not immune - reflected in declining sales volumes. Yet the heavy financial investment, technological innovation and highly competitive landscape that has developed in today’s proptech sector, means that today's immediate winners are both landlords and consumers. Through a combination of greater options, a streamlined customer experience and lower costs, the consumer is better positioned than ever before to find a home that suits their needs. The homeowner in turn is able to sell or rent their home with less stress, more speed and lower costs than before.
For the proptech companies, it is hard to predict who the next generation of Rightmoves, Immobilienscout24 and Purplebricks will be at this stage, but in a highly competitive landscape it is clear that there will be winners and losers. Many of the traditional players appear to be struggling to adapt to changing markets. At the same time many of the emerging start-ups may not gain the required traction, attract the required user base or the requisite funding to survive in the medium-term. The fighting is already bitter, but the future winners are yet to be confirmed.
Interesting proptech players:
Purplebricks - well publicised as the UK's leading online estate agent. The business dramatically undercut the market offering fixed fees of £899 for selling your home. Purplebricks achieved unicorn status in 2017 and has received $278m of funding.
Nested - leverages data to accelerate the sale of your property and also provides a cash advance on the sale of your home to ensure you are efectively chain free - accelerating the process to acquire your new home. Nested has received £165m of funding to date.
McMakler - Germany's leading online real estate agent, taking the fixed price model to the German market. McMakler combines a web based model with traditional services, providing an 80% cost saving for consumers.
OWNR - Another business focusing on disrupting the German residential property market, leveraging a web platform and leasing model. OWNR enables consumers who are looking to rent to access the larger pool of properties that are available for sale by acquiring the property and leasing it back to consumers, whilst also providing them with a right to buy at the end of the lease period.
UnMortgage - A UK headquartered business that combines home ownership and rental to part-own and part-rent the property. The consumer buys a minimum of 5% of the property, UnMortgage the remainder, and then rents the remaining proportion of the property back to the consumer at market rate. The consumer can buy more of the property over time.
Dashly - a privately owned technology platform that offers real-time mortgage comparison and proactively advises home-owners on when to switch their mortgage and save money.
Habito - with over $30m of funding, Habito is looking to streamline the mortgage application process for consumers, saving them both time and money.
Trussle - is also looking to disrupt the mortgage market through a transparent and cost effective technology solution.