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Why Proptech’s Growing Appeal Isn’t Tied Solely to Interest Rates?
The jumbo-sized interest rate cut by the Federal Reserve in September is widely seen as the beginning of a steady easing of monetary policy. For investors in real assets and, by extension, property technology, or proptech, such development ought to be worth celebrating, right? The reality is that mortgage rates have been creeping up lately, tracking more closely long-term U.S. treasury yields, which are rising on signs of a sturdy U.S. economy. Against such market dynamics, does it mean that proptech as an investment segment will have to wait for longer for its moment to shine?
While proptech investment and adoption are undoubtedly sensitive to interest rates fluctuations, the sector’s broader value proposition in transforming the real estate industry – where a multitude of challenges needs to be addressed – ensures its appeal across various economic conditions. By integrating blockchain, the Internet of Things (IoT), AI, virtual reality, augmented reality, cloud computing and other cutting-edge technologies, proptech has grown to become a hugely diverse sector. Beyond reimagining how properties are developed, bought, sold and managed, it promises to create a more connected, efficient, and responsive ecosystem that is adaptable to evolving consumer and environmental needs.
Despite cautious investor sentiment, the U.S. proptech market recorded $2 billion in growth equity and debt financing across 95 transactions in the first half of 2024, according to Houlihan Lokey, a California-based investment bank. Compared to the most recent peak three years ago, the total funds raised in the first six months experienced a notable decrease. On the upside, the average deal size bounced back from its nadir, showing a 40% growth to $23.4 million.
A look at some of the largest transactions this year suggests solutions in the multi-family subsector, which target residential properties such as apartment complexes and townhouses, have remained highly attractive to investors. BiltRewards, a NewYork-based loyalty platform specializing in rent and neighborhood rewards, for instance, raised $200 million on a valuation of $3.1 billion earlier this year.Serving almost four million households as of January, its innovative programs allow renters to earn points on their rent payments, which can be redeemed for travel, fitness classes, shopping in local communities, or even used towards a down payment on a home. With another capital boost from the Ontario Teachers’ PensionPlan in August, the unicorn is expanding into single-family homes and condominiums and will allow members to earn points on mortgage payments over time.
On the merger and acquisition front, we saw strategic consolidation remain a key driver of deal activity. In April, Nasdaq-listed CoStar Group announced to acquire Matterport, best known for pioneering 3D-capture to generate photorealistic virtual tours and digital twins of built structures, for $1.6 billion. Their combined strength is expected create a sophisticated property data hub where quantitative data (i.e. pricing and historical performance) can be matched against qualitative data (i.e. layout and condition) to generate insights for more informed valuation appraisal, investment decisions, and risk assessments.
The examples above are just a few among many that support our belief that truly groundbreaking innovations could offer promising investment opportunities, even in the face temporary market setbacks. In the past few months, we have come across a spate of startups that are offering novel tools or financing models to help younger generations and middle-income families own their first properties in response to the worsening housing affordability crisis.
Toronto-based Perch, for instance, enables home buyers to obtain pre-approvals for mortgages in as little as 20 minutes (as opposed to the standard 3 to 5 days in Canada), thanks to its proprietary technology and one-of-a-kind credit-scoring system. More than just a digital mortgage brokerage, Perch offers a range of tools to help borrowers understand every aspect of their real estate finances including closing cost, the value of buying versus renting, the cost of switching mortgages as well as how much equity one can access to fund the next home project. Once they have a trusted relationship with their customers, it opens the doors to helping those customers in every aspect of the financial lives.
In the U.S., North Carolina-based Acre offers to acquire desirable properties for residents and grant them the right to benefit from the home’s appreciation over a 3-to-5-year period through a suite of innovative financial products that are more competitive than conventional mortgages. One of the most compelling aspects of its solution is its ability to reduce the upfront cost of a home (generally the down payment) to just 5% of the property’s value, while giving buyers the option to fully purchase the property at the end of the agreement.
Pashouses, our portfolio company, is streamlining Indonesia’s home transaction processes with an AI-enabled end-to-end solution that not only facilitates fair pricing, but also includes a broad array of services crucial to homeowners including mortgages and the full financial implications of renovations.
The next phase of of proptech is incredibly exciting. With its capacity to revolutionize how we interact with real estate, the many innovations unleashed in this space holds the potential to solve major challenges for millions of people around the world, making it a dynamic field where innovation can create the opportunity for venture-scale returns.
