Real estate and innovation: shifting to a customer-centered industry
Innovation is not a dirty word in real estate. Historically, the sector even underwent a technological revolution in the 19th century, when modern cities were built. The sector saw great gains of productivity then. In 1818, Louis Vicat, a young French engineer, made Portland cement. Joseph Aspdin took out a patent in 1824 for this product. In 1845, Pierre-Joseph Fontaine invented the modern lift, which became popular when American Elisha Otis took it across the Atlantic.
During the late 19th century, the use of steel-reinforced concrete was being developed simultaneously by a German, Gustav A. Wayss, a Frenchman, Francois Hennebique, and an American, Ernest L. Ransome. In the interwar period, French Eugène Freyssinet patented the much more resistant pre-stressed concrete, indispensable to the building of skyscrapers.
Another huge transformation is about to happen, driven by three factors. Firstly, software and hardware technologies together are turning real estate value upside down. A few of those are known and operational already, ranging from Building Information Modeling to blockchain, from drones to IoT. A myriad of young companies are now combining these technologies to reach new economic models, likely to generate real productivity gains.
Also, public and personal data are collected in increasingly large amounts, and made available. Thus, today it is possible to know the prices and characteristics of properties, as well as urban regulations, for free.
The third factor, which is probably the most important, is cultural changes. The sector is still very conservative, due to social or cultural representations associated with real estate. A parallel with the automobile can be made. As owning an individual car used to symbolise social status, conservatism in this sector did seem very important. Before the great recession, car manufacturers’ CEOs still stated a car was a special, non-temporal good. Yet, this all changed very quickly. Firstly with a more standardised car production, coupled with a more fluid market, offering various options benefited the consumer. Then, the focus shifted, from goods to service consumption.
Millennials is perhaps the most overrated word used in real estate. People born after 1981 are said to change everything. Renters for life. But numbers show they are not that different from their parents. In the U.S., millennials are even the most numerous real estate buyers today. 80% of U.S. and 75% of UK millennials who do not own a home intend to buy in the next five years, according to recent HSBC Group research. In Asia, up to 70% of Chinese millennials have their own house. Up to 91% of them plan to buy property within the next five years. However, if the same desire to own still exists among younger generations, it is seen more as a well thought-out decision to consume or invest than a symbolic rite of passage to adulthood. It is because ownership still has more benefits than rental in many countries. Real estate is LBO for Main street. Especially when you can deduct mortgage interests. In contrast, it is very hard to borrow money to invest in the stock market.
If homeownership is still attractive, real estate is becoming a commodity. In other words, it becomes a good, stripped from its cultural heritage, freely exchangeable in a transparent market.
If homeownership is still attractive, real estate is becoming a commodity. In other words, it becomes a good, stripped from its historical and cultural heritage, and freely exchangeable in a transparent and competitive market. Owners, and even occupants, are ready to rent, exchange, share, let travelers stay, or store goods for others. In addition, the rotation of the housing stock is accelerating. Americans already move about 11 times in their lifetime but Europeans and Canadians move only 5 times. These figures will probably increase in the coming years. If a low quality client experience could be tolerated every ten or fifteen years, it is unacceptable every five or seven years. The ongoing revolution will start with paying more attention to customers. They’re thirsty for personalisation, and more likely to switch, a habit acquired from financial and telecommunication services.
The evolution of technology is turning it from the unusual to ubiquitous, so much so that there’s hardly an industry that does not feel the disruption. Some sectors are embracing these changes quickly, BioTech for the health sector, FinTech for finance, AdTech for advertising, InsurTech for Insurance, and also EdTech for education. These represent sector mutations worth hundreds of billions dollars. Now, Real Estech (real estate + tech) is having its day. The objective is simple: moving away from real estate driven by constraints forcing people to adjust their behaviors to fit a limited offer towards a real estate responding to people’s real needs.
The entire value chain is concerned: real estate, financing, construction, management and occupancy. The cost of capital brought by investors, the cost of construction work, intermediary and building management fees, as well as occupancy fees paid by users, will drop and finally allow the sector to move upmarket. Productivity gains will allow cheaper and better quality construction, benefiting the consumer, the investors, and the sector’s employees – whose work conditions are often still tough. Customer-centricity and zero-defects quality have spread across many sectors. Yet today, the imbalance between supply and demand in housing is such that consumers tolerate a service quality which would be unacceptable in other industries.