2. Blockchain - Real World Assets and Proptech 3.0 Evolvement
As per my personal experience, after networking with hundreds of investors, the sentiment is the following: Proptech VCs deem crypto too intricate and Crypto VCs find real estate boring. In Q1 2023, we are seeing a shift in the conversations. Are they finally discovering common ground in their pursuit of the world’s largest asset class future?
"The market for property is probably the oldest market in the world, and only now is it beginning to change rapidly," noted Peter Thiel, founder of PayPal. The reason for such a rapid change of real estate is the rapid digitalization of real estate ownership during the pandemic and the growing demand for RWAs - Real World Assets protocols with an adjusted risk/reward balance after the Terra and FTX collapses. Real estate ownership is a digital asset, because the real estate is immovable and all the transfer functions like recording, signing and electronic notarization are pushed online by legislation before and during lock-downs.
As a result of RWA movement in crypto, we’ll see Proptech 3.0 evolving as the next wave of innovation, offering a peer-to-peer ecosystem that is more secure, transparent, and efficient. Proptech 3.0 will become the new DeFi backed by real estate ($300+ trillion globally), and it will be multiple times larger than the traditional DeFi by value locked. As I am writing the article the DeFi market is $58.47 billion, and crypto locked in stable coins is worth $135 billion. With just a couple of institutional real estate players brought to RWA protocols the market size could be surpassed within days. Meanwhile, four RWA lending protocols such as Maple and Centrifuge are already ranked among top 10 DeFi protocols.
With potential home insurance and title insurance RWA pools, the value in this capital-intense and profitable industry will be shared with the community. The process of obtaining a mortgage will become smoother and more accessible. Collateral becomes easier to manage, and smart contract settlements eliminate the possibility of human error, hacks or corruption.
Important to mention that Proptech 3.0 is not about decentralization per sei. It shouldn’t be the ultimate goal for founders and the community. Decentralization is critical for the protocols behind title records, smart contracts execution for transactions, for community votes, but not for the entire industry as many off-chain oracles have to communicate to the protocols. The ultimate aim is to eradicate fraud and create an industry where all participants have an equal opportunity to succeed. By preventing a select few companies from monopolizing the market, Proptech 3.0 allows for a more honest and equitable system that prioritizes the interests of all parties involved.
Price discovery remains the lacking piece of the puzzle for Proptech 3.0 with the residential sector advancing faster than commercial due to more complexity in the latter. Many teams are showing traction already. You may consider liquidity to be the second largest obstacle for real estate performing well on-chain, but it’s the web3 solutions like NFT technology that will bring liquidity to the market by reducing fees and making the mobility demand closely correlate with homeownership velocity.
Coinbase, the No. 1 U.S. crypto exchange, not only predicts that institutional players will seek to use DeFi platforms for tokenized RWAs but also that NFTs are increasingly being used for RWAs on-ch
ain authentication, including real estate, and financial instruments. RWAs are an opportunity for the NFT sector to expand beyond largely speculative use cases.
The EthereumETH -0.4% co-founder Buterin in an interview with Forkast also talked about his vision for NFTs and real estate. According to Buterin, “Applying fractional ownership to NFTs could be extended to NFTs representing the real estate.” Buterin acknowledged that NFTs or DAOs will be useful for managing real estate portfolios.
In my next article I’ll try to point out startups utilizing Web3 for construction, mortgage, home insurance, fractional ownership, their traction and how they all would work together between each other and with solutions my team is developing, forming a full eco-system of the future financial world backed by immovable physical assets with an omnichain life cycle.
3. Decarbonization and Sustainability
When I moved to Silicon Valley after studying Sustainable Urban Development and having sustainability-related features in mind for my company, I was shocked to find few people in Silicon Valley cared about sustainability in real estate back in 2016 (in comparison to Abu Dhabi and Dubai where I moved from). However, as we see the first evidence of the financial success of carbon-focused ventures such as Tesla and the new evolving carbon market (the value of the global carbon market soared 164% in 2021 to a record high of $851 billion), the real estate industry is starting to take notice.
Decarbonization of real estate is important for several reasons. First, the real estate sector is responsible for significant carbon emissions, mainly from heating and cooling buildings, and powering ele
ctricity and appliances. Second, it can lead to cost savings in energy bills and maintenance costs, and improve indoor air quality, which benefits building occupants. Finally, decarbonization can increase the market value and competitiveness of buildings, as consumers and tenants are increasingly demanding energy-efficient and sustainable properties.
According to Brendan Wallace, co-founder and managing partner of Fifth Wall, the largest proptech venture capital firm with $3.2 billion in assets under management, “The real estate industry is the single largest CO2 emitter on earth and explosion in real estate-related climate technology has also begun, covering not only software but also hardware and material technologies that can decarbonize the industry. The interconnectedness of automation and smart-building technology with decarbonization will become increasingly obvious as smarter assets can be more sustainable assets." It’s not a surprise that one notable example is the VC firm Fifth Wall, which has made sustainability a key focus of its investments and has backed companies like Assembly OSM and Brimstone. These companies aim to reduce the carbon footprint of buildings and make real estate more energy efficient.
The decarbonization of real estate has the potential to make a huge impact on the environment, and as more people become aware of the issue, the real estate industry will continue to take steps towards sustainability. Moreover, Wallace is also suggesting that, “real estate will become the keystone in the global imperative to remove C02 from the atmosphere to prevent climate change. And not just in the obvious ways like those that Fifth Wall actively invests in, like decarbonizing buildings, but in the use of land to protect and/or regrow forests and jungles to generate nature-based carbon offsets. The value of land that is capable of dense, high-volume photosynthesis is posed for enormous growth over the course of the next decade."
4. Contech - Innovation in Construction
As an immigrant to the United States and a former real estate developer, I have always held the belief that homeownership is a fundamental part of the wealth creation and preservation and of course the American Dream. Unfortunately, the current state of the real estate industry has made this dream out of reach for many. The affordable housing crisis continues to persist, with a recent report from the National Low Income Housing Coalition finding that there is a shortage of 7.2 million affordable and available rental homes for extremely low income renters. This problem has been exacerbated by the COVID-19 pandemic, which has put financial strains on renters and led to increased evictions.
However, there have been some positive developments in recent years due to contech or construction tech rapidly evolving. When it comes to pure tech, online solutions, 3D printing and robotics can help increase housing affordability in several ways. Alexey Dubov CIO and co-founder at Mighty Buildings shares: “I observe that the overall dynamic in the building industry is mainly focused on cost-efficient solutions, including materials, building systems, and project management. Not surprisingly, materials and solutions that are cost-competitive and sustainable are getting the major spotlights. Tangible Materials and Plantd are good examples of early-stage companies getting traction.“
The use of advanced construction techniques like energy innovation, 3D printing and modular building can help reduce the cost of housing by streamlining the building process and reducing the need for labor. It can also allow for more customization and flexibility in the design of housing units, which can be particularly beneficial for affordable housing projects. However, it's important to consider the potential impacts on the construction industry and to ensure that these technologies are used in a way that is fair and equitable for all stakeholders.
When it comes to robotics in construction, it can help reduce the cost of building homes by automating certain tasks and reducing the need for labor. This can help lower the price of new homes, making them more accessible to a wider range of buyers.
“An interesting observation from the International Builders Show 2023 is that traction for new products and materials was measured in decades and now we're seeing it brought down to years. Emphasis on these new market opportunities from private and public capital, as well as organizations like NAHB indicate this is more than tailwind, but perhaps a tipping point.” - Dennis Steigerwalt, President at Housing Innovation Alliance, shared. Great examples of new construction products and materials are Simple Homes, Diamond Age 3D, rheia, Mighty buildings, plantd, BotBuilt.
Innovation in regtech (regulatory technology) can also help increase the supply of housing and make it easier to build new homes faster. Regtech solutions can help streamline the permitting and approval process for new construction projects, reducing the time and cost involved in obtaining the necessary approvals. For example, companies like Permitify and PlanGrid are using technology to automate the permit process and to provide an online platform for managing construction projects.
Finally, buildings have all the prerequisites to become power plants. Solutions like energy storage such as Our Next Energy are the necessary puzzle pieces to get there.
5. Capital Flowing in Proptech
Global venture capital funding for proptech companies saw a decline from $32 billion in 2021 to $19.8 billion in 2022, representing a 38% drop. Despite this decline, the trend for the past 5 years has been upward, with the total amount of funding for proptech companies increasing from $10 billion in 2017 to $32 billion in 2021. This is a testament to the growing importance of technology in the industry and the potential for innovation to transform the way we buy, sell, and manage property. According to a prediction by Grand View Research, the real estate technology market is expected to reach $94.2 billion by 2030. This represents a major shift in the industry and highlights the potential for technological solutions to tackle some of the most pressing issues facing the real estate sector today.
One of the key drivers of this growth is the increasing focus of venture capital firms on the real estate technology space. Generalist investment funds like a16z (Andreessen Horowitz) have been at the forefront of this trend, investing in proptech companies with partners Alex Rampell and Sumeet Singh understanding real estate. Their recent loud proptech deal is Adam Neumman’s FlowFLOW2 -3.8%, which I personally believe will eventually tap into crypto tokenization for tenants. There are other great examples of proptech only focused venture firms such as Camber Creek, RET Ventures, MetaProp and others with fund sizes between $150 million and $300 million.
The impact proptech investments cannot be overstated. By making it easier and more affordable for people to buy homes, we are helping to address one of the most pressing social and economic issues of our time: the affordability of housing. This is particularly important in cities like Miami, San Francisco, New York, and London, where the cost of living is skyrocketing and the affordability of housing is becoming a major concern.
Moreover, the investment in real estate technology has the potential to create new jobs and boost economic growth. By making the process of buying and selling real estate more efficient, we are reducing the time and effort required for transactions, freeing up resources for other economic activities. This can help to stimulate economic growth and create new opportunities for people to achieve their financial goals.
These 5 trends have the potential to not only change the direction of the real estate industry, but make significant changes to consumers’ lifestyle experience and financial stability. As I said earlier, this is one of the most significant assets in one’s life and it also contributes heavily to the carbon issue, and thus these trends must have the space to take effect and help society. Which is through the decisions of everyone involved in real estate from the reporters that cover real estate news, to the agents that sell homes to the tech founders, VCs and corporate organizations, who all play vital roles in the real estate community. Generative AI reduces the workload of the real estate market participants, so they can focus on other important items. RWAs and Proptech 3.0 spearhead the rapid on-chain digitization of home ownership, diving into the next wave of innovation in the real estate industry to be more secure, transparent, and efficient. As contech rapidly evolves it can increase high quality supply and help bring to the public affordable housing. In 2023 and beyond, these trends can guide the industry into a new era of real estate.
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