Times of Crisis: An Opportunity For Disruption and Digitization
If you were to look at the German real estate industry last year by reading the news clippings, you would probably think that there wasn’t much to worry about. The biggest concerns were mostly tied to new property developments and government legislation.
Then COVID-19 hit, putting a temporary freeze on business. Consultancies changed static forecasts on Germany’s GDP into bi-weekly updates, trying to keep up with the pace of the pandemic. By now it is clear that the pandemic has left a dent on the real estate industry – retail and commercial sectors struggle and market prices decay, only to mention a few problems.
In the meantime, PropTech startups are eating at the incumbents’ revenues and slowly taking over market shares to disrupt the age-old industry. This fact stands hidden in the shadow of COVID-19, but will probably hit just as hard.
In financial terms, PropTech seems still a rather young phenomenon: according to Dealroom, in 2019 German FinTech startups attracted $1.5bn in funding while PropTech startups raised only roughly $460m – not a big deal, is it?
Interestingly enough, PropTech investment mirrors the spread of the pandemic – a few cases in the beginning, rapidly evolving into a national lockdown. With increasing speed PropTechs are dismembering incumbents. Only $2.2m was invested in 2014. Since then VC funding increased by 300% annually on average, more than any other industry (FinTech: 170%, Transportation: 210%).
So do you really see what is coming for you?
We looked into the German PropTech sphere to better understand which segments are targeted, what problems are solved, and which models promise the highest power of disruption. We compiled a series of articles that will give you a good understanding of the German PropTech market. This first article gives you an overview, while subsequent articles will look into the categories in more detail.
2. Segment Breakdown: Real Estate Innovation in Germany
In order to structure the data with the customer view in mind, we have applied the segmentation logic of Proptechhouse into the 5 categories mentioned below. These categories are both technology (AI, VR…) and business model (marketplace, SaaS…) agnostic. When two or more categories are applicable to a startup, we have classified it according to its core value proposition.
- Design & Build
Groups startups that are involved in the design, construction or demolition of buildings and adjacent processes up to the handover of the finished building. This includes companies like Schüttflix (transportation of construction bulk materials), Capmo (digital construction plans and administration) or Alasco (construction project finance management). The majority of companies focus on B2B customers, as end-consumers are rarely involved.
- Finance & Invest
Includes startups whose value proposition revolves around the financing of real estate objects & projects and the investment therein. Many models are retail real estate investment platforms such as Exporo, besides it also includes services to find the best mortgage, such as Hypofriend or property evaluation services like Immolyze.
- Market & Transact
Segments startups providing services for the marketing & transaction of property or rental agreements. This includes digital realtors such as McMakler, booking furnished apartments for business travel with Homelike, but also services that enable property marketing & transactions such as Alpaca, a chatbot to find rentals.
- Manage & Operate
Probably the broadest category, it clusters companies that maintain buildings, manage or operate space or provide services around these processes. This includes coworking & coliving operators such as Habyt, online property management services like Habitalix, property management software like Vermietet.de, and storage space providers like Boxie24.
- Live & Work
This category represents startups providing services targeting the end-consumer experience, ranging from low-tech services to high-tech products. Exemplary companies are Helpling (book cleaning services), tink (e-Commerce for smart home products), or Allthings (tenant experience/communication platform). Interior e-commerce models such as Westwing were excluded.
3. PropTech Trends Disrupting the Real Estate Market in Germany
By sifting the databases, we have identified a total of 248 active PropTech startups headquartered in Germany. In comparison: Crunchbase lists 560 FinTech, 390 transportation and a total of 6,000 startups for Germany, founded 2013 or later.
Based on the number of startups in each category, we can see a clear focus of founders on the areas Design & Build (76) and Manage & Operate (73). Very few PropTechs seem to focus on the financing of and investing into real estate (24).
Roughly 45% of startups have obtained funding (both undisclosed and disclosed), while the funding ratios range between 40% – 60% among categories.
A first glance: there are a significant number of startups surviving without funding. While it may be possible to sustain a small company for a year with fff-funding (family, friends and fools), the business becomes hard to sustain without VC money if you aim at expanding dramatically.
Let’s find the real threats by analyzing the amount of funding received across the 5 categories. While funding amounts are no promise for a successful model, they are a strong indication.
Looking at the distribution, we were astonished by the sharp investment focus of VC funds. The category Market & Transact has received a staggering 61% of all collected funding of $950m, despite containing only 19% of all startups.
Putting into relationships the number of startups and disclosed funding amounts per category, you can observe that startups in the categories Design & Build and Manage & Operate do not only attract less investment in absolute terms but also in relative ones. The average disclosed funding for a startup in those categories lies at $5m and $8m respectively, while Market & Transact startups attract $48m funding, on average. Nonetheless, most founders seem to focus on the former two areas.
Explanations for low fundings of startups in the Design & Build segment could be the immaturity of the market or generally more complex models that inhibit scalability and therefore diminish potential returns and market reach. We cannot make a final conclusion here, as for many startups the funding amount was not disclosed.
Going further, the Market & Transact category may give us an indication of what is happening and yet to come in PropTech and in the other categories thereof.
We saw that 6 out of the 10 biggest players are from the segment Market & Transact. Here we can find two digital real estate agents, McMakler ($180m funding) & Homeday ($68m) and two vacation rental search engines hometogo ($177m) & Holidu ($51m). This provides us with two main insights: first, the most successful startups (so far) have been digital-first solutions holding little assets, matching demand and supply (classical marketplaces like search engines) or operating in high-margin industries (digital real estate agents).
Second, the most successful models are already competing with each other by piling up cash – the respective incumbents are not even considered to be threats. It is no coincidence to find duplicate models twice within the top 10 – an indication that innovation in this segment has already progressed. Looking at the more progressive US market, we find PropTechs already moving up the value chain. Exemplary digital realtor Zillow is now also offering home trade-ins (segment Finance & Invest).
These companies are hungry and strive for market domination. They hire hard-working, agile and digitally native teams. They don’t stop.
And guess who is taking home the profits apart from the founders? Unsurprisingly it is not the respective market players. Prominent shareholders bear names such as Frog Capital, Balderton Capital, Insight Partners or Prime Ventures – mostly venture capitalists. Large classical realtors such as Patrizia or TAG Immobilien seem to have missed the opportunity and are now being confronted with a serious disruption threat.
Patrizia drew first conclusions from this and started taking action, recently investing in the PropTech fund of Pi Labs. Corporate venture capital (CVC) is often one of the first defensive moves of corporates but it poses its own challenges. To better understand possible corporate innovation measures, have a look at our Navigating Corporate Innovation framework.
4. Closing Remarks
To neglect the impact, some might say disruptive startups will die due to the COVID-19 aftermath, so why bother?
On the contrary, Corona, just like other major crises we’ve witnessed in the past, serves as a catalyst. Startups of minor importance may die off, but the truly disruptive ones are being fed through by their VCs.
The real estate industry is currently under pressure to adapt to remote services, digital infrastructure and new sustainability requirements. Startups can adapt a lot faster to these circumstances and outpace corporates, who struggle with layoffs and location closures.
In the following articles, we will look into the categories and those troubles in more depth. Stay tuned, with the segment Design & Build following in the next article. Wanting to get an overview of the startups mentioned in this article? Click the image below and get our free analysis.
Note: in the beginning, we spoke about annual VC investments into PropTech, not the totals for startups founded 2013 and later