Is Investing in PropTech Companies a Smart Move?
With 2023 quickly approaching, investors are looking out for the best opportunities that promise the highest return and lowest risk. Sitting at the intersection of two high-potential industries (real estate and technology), proptech seems like a logical choice for different types of investors.
But is investing in PropTech companies really a smart move at the moment?
Let’s take a look at the current state of proptech and where we can expect it to take us in the coming year. I will also look at the main advantages of investing in startups within this industry, as well as the risks investors should be aware of. Finally, I will go through a few real estate areas that need to be disrupted in order to offer the most beneficial investment opportunities.
The State of PropTech at the End of 2022 and the Beginning of 2023
Proptech is a relatively new industry, first emerging in the early 2000s. Since then, it’s been a steep upward journey as real estate investors, agents, brokers, property managers, and others quickly realized its benefits.
The size of the global proptech market is currently estimated at $18.2 billion and is projected to reach $86.5 billion by 2032. This accounts for an impressive CAGR of 16.8% in the next ten years. Growth in the US is expected to be around the average rate of 16%. Other countries like China and Japan are forecasted to grow at annual rates as high as 23.7% and 26.5%, respectively.
Between 2010 and 2021, proptech investments in the US market amounted to $61.1 billion. This has been the combined effect of a surge in SPACs and other investment models. In 2021 alone, global investments in PropTech companies were $24.3 billion.
Overall, I expect proptech trends in 2023 to remain just as dynamic as previous years. Property prices and mortgage rates will likely remain high, which means investors and others within the real estate market will need all the help that proptech startups can provide.
Three Benefits of Investing in a PropTech Startup
Here are the three main benefits of investing in proptech, compared to investing in other industries.
High Return Opportunities
The main factor that drives investors’ decisions of where to put their money next is the expected return and the associated risk. And proptech offers exactly what investors are looking for—high return potential.
While the proptech industry has undergone impressive growth in its 20-or-so-year history, the expectations are that its progress will accelerate in the next decade. This means that for every dollar you invest in a proptech startup today, you can expect a multi-fold return in a few years.
The US real estate market is forecasted to experience some relative calmness and normalcy in 2023, after two years of absolute turmoil. However, investors and others will continue facing substantial challenges like high home values, high interest rates, increased competition from homebuyers, geographical shifts, and overall inflation. To be able to make efficient decisions and close profitable deals, they will need to resort to the power of AI, big data, machine learning, and other real estate technology trends.
In other words, the demand for proptech solutions to solve ongoing challenges in real estate will be as strong as ever. This translates into excellent opportunities for proptech company founders and investors.
Huge Market Potential
Another factor that investors consider when deciding whether to invest in a certain industry is the potential market size. In this regard, it’s hard to beat proptech as it combines two of the largest and most stable industries—real estate and technology.
In 2021, the size of the global real estate market was evaluated at $3.69 trillion with about $1.2 trillion in commercial real estate. The big data technology market, which is at the core of proptech companies, is projected to expand from $41.33 billion in 2019 to $116.07 billion in 2027.
Due to its size, the real estate market is difficult to saturate with tools and solutions. There will always be a need for more capabilities as the industry is constantly growing and presenting new challenges for homeowners, investors, agents, and others.
This creates opportunities for proptech leaders and entrepreneurs to continue releasing innovative solutions to old and new problems. It also offers chances for investors to back up these revolutionary products and services while generating a solid return on their investments.
Being at the Forefront of Real Estate Tech Disruption
Last but not least, one of the best parts about investing in proptech companies is the opportunity to contribute to the digitization and democratization of one of the largest yet most traditional industries worldwide.
As a proptech entrepreneur and investor myself, there is something so satisfying about disrupting the ways that business has been conducted for decades while enhancing efficiency, transparency, and profitability for many players.
The recent boom in proptech has allowed for the entry of small players that could not previously gain access, while simultaneously shrinking the control of large stakeholders. Continuing to accelerate this trend by investing in proptech startups is extremely exciting, to say the least.
Three Things to Consider When Investing in PropTech Companies
There are numerous examples of successful proptech projects where investor money has allowed them to grow exponentially, improve existing products, develop new products, and conquer new markets. However, there have also been cases where receiving a large influx of money did not end up well. The most notorious example is Better.com (after undergoing a SPAC, the company lost over $300 million in a single year and laid off 5,000 employees).
Therefore, it is crucial for investors to establish solid criteria when deciding whether a certain proptech company is a good investment. I like to focus on the following main factors:
The Product and Potential Market
First and foremost, before investing in proptech companies, you have to make sure that the product is offering a real solution to a real problem in the real estate industry. In other words, ask yourself if the startup is adding value in the real estate space. Products that propose efficient solutions to inherent challenges are likely to meet strong demand and continue growing.
In addition, evaluate the size of the potential customer base. Investing in a product that is too niche-oriented might turn into a dead-end street.
Second, consider the team that stands behind the proptech startup. When you invest in a company, you are also investing in its management and employees.
It’s important to make sure that the individual team members are driven and excited about new opportunities. Motivation and soft skills are as important as hard skills when it comes to disrupting the real estate industry. Moreover, it’s a good idea to spend some time with the team and make sure that they get along well. You don’t want any hiccups down the road because of interpersonal conflicts.
The Exit Strategy
Finally, you should invest in a company and a team with a vision. They need to know where they see the company in five or ten years and what goal they are working toward. Specifically, you should understand how exactly your investment will contribute to reaching this end goal.
Two Areas in Further Need of Disruption
While many areas of real estate could use further tech advancements, there are two niches that I believe are due for serious changes in the coming year. From an investor’s point of view, I would say it makes sense to look for investment opportunities in these areas as I expect the demand from consumers to be high.
With mortgage interest rates reaching their highest level since 2002, both homebuyers and real estate investors will be on the lookout for alternative financing options. This forms a void that savvy proptech leaders should be quick to fill. Meanwhile, angel investors and venture capitalists might gain additional profit from investing in proptech companies in these fields.
Another area where I am seeing increasing interest from property investors is fractional investments. A few different platforms have facilitated fractional ownership of investment properties through tokenization, but there are more improvements and enhancements to be made within the processes. Therefore, potential returns in this area might exceed the average.
Investing in proptech companies can be a very smart move in 2023 due to the size of the real estate market, its untapped potential, and further opportunities for disruption. However, this doesn’t mean that every investment will be a success. You need to undertake each investment decision with care and do your due diligence in order to ensure that the product, team, and end goal are worth your money.