Proptech: 5 innovative trends that are reshaping real estate investment
By Early Metrics Team - 07 February 2023
Could buying a property be as easy as shopping on your smartphone? This is what proptech startups are promising as they endeavor to transform the real estate sector.
The pandemic has shaken up the customs of a sector in which humans play a key role. Indeed, the disruption of physical interactions coupled with falling interest rates and a surge in savings have created a favourable climate for the growth of real estate investments and the digitalisation of the sector. In 2021, proptech attracted $32 billion in venture capital investment, a 30% boom compared to 2020.
In a recent study conducted by Meilleurs Agents, 46% of investors stated that they were increasingly using digital technology for their real estate projects. Moreover, in the United States, 95% of buyers say they have used the internet to search for a property. In light of these new buying behaviours, the real estate industry has no choice but to go digital. In fact, 41% of real estate professionals claim that they have already accelerated the digitalisation of their services and the adoption of new technologies to redefine their processes.
Here are 5 innovative trends that are significantly transforming the experience of individual real estate investors.
1) Innovative financing solutions
Despite the rise in borrowing rates, inflation is having an impact on mortgage rates, which have now passed the 2% mark, while property prices are rising in urban areas. These factors restrict the approval of credit applications, particularly for the most at-risk profiles (first-time buyers, elderly people, freelancers, etc.). A number of solutions have emerged to facilitate access to property:
Real estate leasing
“Why waste money on rent each month when you can be a homeowner?” Well, what if paying rent actually made it easier for you to become a property owner?
This is the challenge undertaken by Hestia, a proptech startup founded by former Swile employees, which promises investors to acquire a property in three years. First, the startup scores the current borrowing power as well as its potential evolution over time. It then offers to acquire the property for you by renting it out with a guaranteed fixed price purchase option. Each month, approximately 10% of the rent paid is transferred to an escrow account. Over time, these sums become your down payment to obtain a loan. After 3 years, you are free to withdraw the purchase option or to remain a tenant. DeedPath, which is based on the same model, buys your dream property for an upfront payment of 5% of the property price. The startup earns a commission on the rent paid, as well as an annual 3% increase in the purchase price.
Down payment is often the main obstacle to home ownership. In order to help the young working class become homeowners, the startup Virgil offers its services to become a co-owner by providing a deposit of up to €100,000, within 20% of the property’s price. Virgil also provides support from the structuring of the loan application to the handover of the keys. A net sales commission is paid by the owners if the property is resold within 10 years. Beyond that, the owner undertakes to buy back the share held by Virgil at market price.
Proportunity is another startup that offers participation loans of up to £150k or 25% of the property price on top of the mortgage obtained from traditional lenders. The company is also developing a machine learning algorithm to help identify properties with the highest growth potential. With this technology, Proportunity aims to maximise the capital gain while minimising the amount of initial capital required.
Tembo helps first-time homebuyers by increasing their down payment with the help of their family. Indeed, its “Depot Boost” feature allows relatives to mortgage a non-cash asset, such as their home, and convert it into cash. The family member’s money – which Tembo calls “homebooster” – is then transferred to the young homebuyer’s mortgage deposit, enabling them to buy their first property.
Pretto offers individuals and home loan distributors the Finspot platform to simplify searching and selecting a loan. The platform provides an online simulation of the investment project in less than 3 minutes. In addition, it provides an assessment, help filing the application, as well as personalised support until the loan is obtained. Meanwhile, Kiilt offers a real-time scoring tool for investors’ borrowing power based on open banking and AI. To do so, it connects to the borrower’s bank account and analyses their history. Then, the software is able to determine a maximum loan amount and a probability of success in 5 minutes.
2) Rental investment platforms
According to a French study, the share of investment properties (namely for rental) doubled between 2014 and 2021, rising to more than 30% of total sales in old residential property. Similarly, more and more first-time buyers are opting for this investment option in response to rising property prices. Indeed, investing in property with the prospect of renting it out allows them to take advantage of the attractive return prospects in other provincial cities.
To simplify access to a larger market for often young and inexperienced investors, proptech startups offer turnkey solutions. These solutions help them organise virtual visits, acquire funding, optimise rental management but also search and estimate the value of a property as well as any construction or refurnishing needs.
One might wonder, what are these startups’ business model? Masteos is paid based on success (5% including tax on the net selling price) and through a management fee of 4.99% of the rental amount. Meanwhile, Beanstock charges a 7% commission of a property’s price , with a minimum amount of €10,000, and a management fee of 4%, with the first year being free. Bevouac and Victor Investissement, on the other hand, offer a flat fee. Indeed, if the startup succeeds in negotiating a lower sale price with the seller of the property, it charges 20% of this price reduction. In addition, the startup takes a commission of €10,000 on average for each sale.
You already own a primary residence and would like to escape the city during the weekend? The startup Mansio has you covered: the proptech’s digital solution provides assistance in finding and financing your property, for 3% of the price. Another example, Prello, allows you to invest in a property with several other people such as your friends, thanks to its platform dedicated to the joint purchase of secondary homes. In exchange for an 8% commission of the property’s price, the startup allows users to split ownership in up to 8 shares, based on the size of the investment made. Once a shared secondary home is acquired, other startups like Prello take care of maintenance, managing and planning the stays between co-owners. The startup can also help handle the rental of the property and the distribution of the rent to each co-owner.
3) Short and long term rental management platforms
Owners do not always live in their homes year round and may therefore be interested in renting them out. A large number of proptech startups offer solutions for these individuals.
For example, Kaliz simplifies landlords’ search for tenants. The startup manages 2,700 lots on behalf of 800 owners in France. It offers owners of multiple properties a single point of contact for property rental, tenant selection, accounting and administrative management.
Meanwhile, American startup Rentberry is riding the wave of remote work. Operating in more than 30 international cities, it offers a long-term rental service (3 months to 1 year) to millennials. The latter can apply, visit the property and sign their rental contract online. The owner has access to a real-time bidding algorithm to determine the fairest price. Finally, Koliving takes care of finding and securing tenants for your property in exchange for 4% of the rental price, or 7% to include management of the inventory of fixtures and a guarantee to cover unpaid rent.
Unpaid rent is a source of stress for landlords and directly impacts a real estate project’s profitability. As such, GarantMe acts as a guarantor for tenants excluded by the traditional application selection criteria, in exchange for 3.5% of the annual rent. The owner does not have to pay anything, and has a guarantee for unpaid rent. Finally, the startup Unkle provides landlords with a 30-day refund on all unpaid rent.
4) Digital solutions to facilitate the sale of real estate
Solutions also exist for people who are ready to achieve a capital gain or to sell their property quickly. Proptech companies such as Homeloop, Dili and Zefir are developing an “iBuying” concept, also known as instant property purchase. The company estimates the price and purchases the property within 48 hours, without any financing conditions or withdrawal period. Then, it resells it, charging a 6-8% fee. This leads to a slightly lower value but these companies are a serious alternative to bridging loans for homeowners in a hurry.
On a global scale, Italian proptech Casavo recently raised €400m to deploy its online property sales offer in Europe. The company offers a digitised process and promises to find a buyer within 3 months at a guaranteed price. If no buyer is found, or if the sale price is lower than Casavo’s estimate, the startup agrees to buy back the property at the determined net seller price.
5) Real estate crowdfunding
The rise of crowdfunding since 2014 has driven a new form of investment for individuals wishing to diversify their sources of income without the constraints associated with property ownership. As a result, several platforms offer project financing opportunities to these investor communities.
- Homunity offers projects with investment tickets starting at €1,000, with a period of 12 to 24 months, and promises 8-10% returns. Other proptechs are also operating in this field, notably Lymo and Raizers, which receive 5 to 10% commissions on the amount of financing obtained by the promoters.
- Bricks.co offers a hybrid model combining royalties and shares. It allows investors to invest in real estate by owning fractions of the property (“bricks”) and benefit from recurring rental returns. The minimum investment ticket is €10.
Despite the many advantages of real estate crowdfunding, funds remain frozen for the duration of the project. To provide more liquidity to investors, Grapen Invest offers project owners a real estate tokenisation process. In other words, the funding is fragmented into a number of digital assets that are transparent, secure and can be traded by investors on a secondary market embedded in the blockchain.
The years to come will bring many uncertainties to the real estate investment market. This is notably due to the contraction of borrowing conditions, the volatility of real estate prices, the tightness of the market in large cities, and the evolution of tax constraints. Certain economists even predict a crisis linked to a significant drop in transaction volumes in 2023. In Chinese, the word “crisis” is two characters: Wei (danger) and Ji (opportunity). Similarly to 2019, proptech will certainly have a role to play in responding to the turmoil of the real estate market through innovation.