German Real Estate Tech Market in 2015 – A (R)evolution?

Germany is the largest country in the European Union by population and hence, its real estate market has a significant volume: in 2014 EUR 195 billion have been invested in the real estate market overall and in 2015 a total investment volume of EUR 230 billion is expected in the building sector. Despite of 245 thousand newly constructed buildings, the number of properties is still under the required level. According to the German real estate index vdp-Immobilienpreisindex the real estate prices increased up to 6% in Q3 2015 compared to the second quarter.

WirtschaftsWoche Online estimates that one out of three Germans plans to move his or her domicile in the next two years. The situation in Germany´s major cities has intensified – for example: in the last ten years, the annual growth rate for the population in Bavaria’s major city Munich has been about 14%. Therefore, it is getting more and more challenging to rent an apartment in Germany´s high-density areas like Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart. Also, it is getting more complicated for landlords to cope with the number of applicants entering the market.

Recent changes in legislation trigger a tectonic shift in the conventional real estate market for rental properties. As of June 1, 2015 the “causer principle” has become effective. It states that real estate agents have to be paid by their mandating clients and not – as it has been the case before, no matter who initiated the mandate – by the tenants.  Typically, this means shifting the obligation to pay the agents to the landlords, who have often enjoyed a free service in the past.

While landlords face the new challenge of how to finance the agents’ fees (increasing the rent is probably not an immediate solution, since this market is to some extend regulated), an increasing number of startups is taking on the opportunity to offer renting services on a low-cost basis. For real estate agents this potentially results in a disruptive shift in their industry, although – according to industrial estimates – their income comes to 80% from selling and only to 20% from renting properties. Unsurprisingly, some startups go after the selling part of the business, too.

Real Estate Tech Ecosystem Germany 2015

More than 24 startups have launched respective selling and renting services in the last 12 months in Germany. Our Real Estate Tech Ecosystem for Germany illustrates the startups´ business models (non-exhaustive):

German Real Estate Tech Ecosystem 2015

We count seven different business models. By definition, the incumbent players in the real estate agent market such as Sparkassen Finanzgruppe, Engel & Völkers, LBS Immobilien NordWest, and Postbank Immobilien, which accounted for a total of EUR 1 billion in commissions in 2014, are not included.

Selling and renting services are the startup business models that intend to replace the real estate agents as described above. These startups typically build their services on top of existing market places or classified models, i.e. they use existing online channels to gain access to prospects. We see similar concepts in other industries, e.g. for pre-owned cars (Beepi.com).

Therefore, the marketplaces are the backbone of the ecosystem, e.g. ImmobilienScout24. They have brought real estate classifieds online and bring demand and supply together. Meta listing services help property owners to create a listing on multiple marketplaces in one user interface. Meta search services provide a similar service to property seekers and, hence, provide search results from different marketplaces in one user interface.

Agent matching services are lead generation models that help the property owner or seeker to find a relevant real estate agent in their region. Crowdfunding / investment players are the fintech elements of the ecosystem and enable real estate investments in a more accessible way.

In total, we can identify 47 startups in this ecosystem. In the last two years we have observed 4 funding rounds (mainly seed) with a total funding volume of more than EUR 12 million. Clearly, once the new selling and renting services startups show traction, we expect more early stage funding to be available. The critical question for us is whether their business model is really scalable through technology?

Case study selling/renting services

renting/selling process

Note: prices for renting assume that landlord mandates the agent.

Based on three selected examples each for selling and renting services we have analyzed their proposition along the typical selling/renting process. Since there are process steps involved that simply cannot be automated through technology (for instance, on-site gathering) or – at best – can be supported by technology (for instance, organization of on-site appointments for prospects), it is not surprising that the main share of the process has to happen offline, just as typical incumbents would do it. Overall, we are unable to identify significant efficiency gains in the process through the use of technology.

Where the disruption kicks in is the pricing – clearly, the respective startups are much cheaper as compared to their incumbent counterparts. Example calculation: a regular agent used to collect up to EUR 2,380 in fees for an apartment with EUR 1,000 monthly rent from the tenant (2.38  times an one-month-rent, including VAT); the cheapest player in our case study charges EUR 199 from the landlord.

Outlook

We believe startups are currently too focused on pricing and consequently on deflating the market, while it remains unclear how they actually can win market share on a sustainable profitability level. The startup that can manage the selling/renting process most efficiently has a competitive advantage over its peers and the incumbents. Further, due to the necessary on-site elements in the process, the startups will have to build a business model that can cope with its local nature. Typical in such cases, execution speed and a smart roll-out strategy are keys to success. A team that provides convincing solutions for these issues is well positioned to attract funding from venture capital firms interested in this industry.

Incumbents are exposed to the risk of declining profits in case these startups succeed. The aggressive pricing of the startups shows their appetite to win this market. Small real estate agents with a high dependency on rental transactions will feel the impact first.

 

About the authors: Alexander Mahr is Co-Founder & Partner at Stryber, Helena Auer is a Business Analyst at Stryber.

Comments 1

  1. Sie haben im Bereich Crowdinvestment/Crowdfunding einige deutsche Plattformen nicht berücksichtigt. http://www.mezzany, . http://www.companisto usw.. Gleichzeitig haben sie jene Plattformen vergessen die europaweit ausgerichtet sind: http://www.brickvest z.b. (gegründet von Deutschen und finanziert von Rocket Internet). Nur solche international ausgerichtete Crowdinvesting Plattformen haben jenen Skalierungseffekt, der notwendig ist um erfolgreich zu sein. In wieweit das auch auf die sonstigen digitalisierten Real Estate Dienstleistungen gilt, weiß ich nicht, gehe aber davon aus, das dieses Argument auch dafür gilt. Aber trotzdem ein sehr guter und informativer Artikel.

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