Why Proptech is Relevant for UHNW and Family Offices?

Written by Stuart Daun, our Chief Operating Officer (AUS)

Having spent a large part of my career in investment management working with HNW/UHNW clients and Family Offices, I am often asked by ex-colleagues, clients, or advisors on the merits and appeal of Proptech as a sector for consideration.

Whilst we, at The Proptech Connection, only work with institutional investors, including leading (Proptech) VCs and CVCs focusing on this space, we can see some compelling reasons why proptech is interesting and worth exploring for a professional investor cohort. Without giving any general or specific advice we have summarised an overview of the sector and factors driving interest for professional investors.

Proptech as a sector

Our team recently described Proptech in a recent Property Chronicle article, What does Proptech mean?, as “a catch-all term that describes technology that impacts space” and highlighted some of the key tech types in this space including Contech, Fintech, Mobility, Climate tech, SMART buildings, Generative AI and others.

Property Assets - Interest and Experience

Partly due to the wide and changing nature of Proptech, the investment opportunity resonates with HNW/UHNW investors and Family Offices.

Most investors within this space will own multiple properties across different sectors ranging from their main homes, investment properties, holiday homes and commercial buildings (small or large) as part of a wider portfolio. This will be on top of exposure with REITs, shares in commercial landlords and other indirect exposure to the sector with estimates that roughly 30% of a UNHW portfolio is property-related. Clearly, property is a familiar asset class.

By owning property, investors have started to realise the huge potential technology can bring to this traditionally conservative sector and are keen to embrace the digital transformation revolution.

Relevant Trends

Transaction Platforms - Whilst technology has revolutionised retail and financial transactions (when was the last time any of us received a cheque or a physical share certificate?), the process of buying, selling, or leasing property has largely been unchanged in the last 40 years and there are a number of interesting companies close to automating and streamlining large parts of these manual processes speeding up transactions, reducing delays, risk and costs.

Energy Tracking and Efficiency - With the combination of increased energy prices and a desire from investors and tenants for energy-efficient buildings that enhance ESG credentials, landlords have struggled to accurately capture, analyse, and address energy usage in a systematic and consistent manner. Firms active in this space can add immediate value to a landlord and make the building more valuable, driving ROI.

Building Management Systems - Increasingly, landlords and tenants want greater visibility of how their building is being used; and early visibility of issues and data to help ensure the space is being used productively. Middleware and data tools working with hardware can highlight this to owners and can help increase tenant satisfaction, predict outages, flag defects, and help transition space to different uses to increase community engagement or boost yields.

Investment Trends As traditional investment portfolios have had to increasingly adapt to regulation, cost, and performance challenges the trend has been shifting towards passive investments including ETFs. Portfolio management theory would support this but to this writer, there is still an element of narrative and tangibility that investors need to feel energised about their investments.

They have been seeking this in tangible/ real assets such as property holdings but also in direct investment in companies they can feel a connection with. This could be defined as a core and satellite structure, but I am also aware other investment professionals have different terms for the approach.

Many UHNW investors are entrepreneurs at heart and like to support new businesses and their owners if they can see a solution to an existing business need and buy into the vision of management. Whilst some in the popular media decry the early-stage space, we work with an amazing array of founders who have given up major corporate roles, the security of steady income and taken on personal costs in time, energy, stress, and funding challenges to achieve their goals. Often, they are looking for a sounding board, networks, and connections rather than just funding as they evolve which can dovetail neatly with an investor’s background.

Other factors

You will note I have not discussed possible investment returns. That is deliberate. We believe this is a compelling space with one conservative forecast valuation of Proptechs expected to grow from $ 19.6 billion in 2023 to $ 47.6 billion in 2033 on a pretty narrow definition of proptech. Whilst this gives a large CAGR of 9.3%, it is still an emerging industry with the risks inherent in investing in small companies on their growth journeys. This is part of the reason that most governments encourage investment in the start-up space with tax advantageous structures be that EIS/ VCT programmes in the UK, ESIC rules in Australia and equivalents in other countries including the US.

Conclusion

At The Proptech Connection, we are very positive about the future of Proptech. We see the real estate industry evolving with macro trends supporting change (higher interest rates, vacancy rates remaining high and energy challenges). Property owners are seeking to embrace technology as property use changes and adapts and new solutions become demanded from space users, tenants, and buyers. For a professional investor, this means it offers a unique opportunity to get close to the technology transforming the real estate industry. They could access this via some of the leading funds in this space or may consider joining an earlier angel or seed round for a direct investment in a new firm in the space. Whilst we cannot give advice, and the risks of early-stage investing are apparent, we believe there are compelling reasons to consider Proptech as a small part of a wider and more diversified portfolio.