Investor confidence in PropTech startups declined to 7.7, after reaching 8.7–its highest level in a two year growth period, due to volatility and market uncertainty, as investors scaled back funding resulting is slower portfolio growth compared a year ago, according to new report released by MetaProp, a New York-based tech accelerator and venture capital fund focused on real estate and the Royal Institution of Chartered Surveyors and the Real Estate Board of New York.
Despite the 12% decline in investor confidence, 60% of PropTech investors indicated that they plan on making more investments in 2019, an uptick of 14% from last year and 32% of PropTech CEOs forecasting 5X growth in 2019.
“From our vantage point, the PropTech market remains extremely healthy and the best innovators continue to create intriguing investment opportunities. This sentiment seems in line with our professional investor peers, “ stated Aaron Block co-founder and managing director of MetaProp NYC.
Among the report’s significant findings was an increasingly optimistic outlook from startups for exits and acquisitions with 46% of PropTech CEOs stating it is either likely or very likely that their company will be acquired, go public or have a major liquidity event compared with 28% in mid-2018.
Additionally, the average number of investments in PropTech startups have nearly doubled from 5 from 2.7 from a year ago.
The startup confidence index which decreased scantly to 7.0 from 7.2 in mid-year 2018 was a reflection of lower capital raising sentiment and increasing competition as more nearly startups are aiming to create innovative solutions in the sector. Nearly 90% of investors stated that they expect to see either the same amount or more pitches from startups in 2019, compared with 2018.
Survey results underscored that the biggest challenge for PropTech startups is trying to convince investors and customers of the role technology can play in enhancing the industry instead the task at hand will be finding a way to stand out in an increasingly crowded landscape.
The report found that investor focus is also shifting from residential and B2C applications to smart city verticals, smart buildings, fractional ownership in the commercial real estate sector and broader insuretech and fintech are also poised to for growth. In construction tech, AI and predictive analytics based solutions are expected to gain significant traction.
Nearly 35% of investors indicated that they are most interested in smart building applications, followed by a tie at 21% between space management and usage and finance and investments. Only 9% of investors indicated an interest in consumer and broker focused tech solutions.
A broader set of market opportunities will be addressed and more real estate companies start operating like tech firms, according to Paul Levine, partner at Sapphire Ventures and former president of Trulia.
“Many companies that are built and financed as hybrid real estate and tech companies. Historically, real estate investors and technology investors operated quite independently, with little crossover. Today, given all the innovation and company formation, we’re seeing tech-enabled real estate companies that are operated and funded by VCs as classic tech companies, while also financing significant balance sheets for real estate investing,” stated Levine.
While last year saw both wins and losses from a maturing market, 2019 will be a year with regional winners competing on a global scale according to Julia Arlt global digital real estate leader at PwC.
“There will be less room for small startups that are poorly funded or have sub-optimal teams. The next step will be for big regional winners to start competing on a global scale. I would like to see successful examples of companies taking their business model to other markets outside of Europe, to show others what a successful global roll-out looks like operationally,” stated Arlt.
PropTech Firms will also need to balance between scaling to broader markets with the CAPEX costs of expansion.
“For PropTech startups broadly, the balance of capital and scale will continue to be an important challenge to keep an eye on. As more companies look at model’s that require significant CapEx investments (think WeWork), look for companies that are thoughtfully building more capital efficient models,” stated Jason Fudin, CEO, and co-founder of WhyHotel.