Why the real estate industry has been 'sluggish' to embrace new technologies

Despite a ‘plethora of prop-tech’, take-up of digital innovations has been slow, according to a new report.

By Conor McMahon Deputy editor, Fora

THE REAL ESTATE industry has been “sluggish” about adopting new technologies, despite growing demand from occupants and investors for digital innovations to be used to “deliver better workplaces”.

That’s one of the highlights of a new report published by Irish commercial property fund IPUT and engineering and design group Arup.

The study, entitled Shaping Our Cities, examined how technology has changed the expectations and demands of property industry stakeholders.

“Real estate remains one of the most heavily under-digitised and conservative sectors,” the authors wrote.

“Meanwhile, the technology vendor community is developing a plethora of prop-tech solutions across the real estate value chain, including smart building solutions,” they stated, referring to the $20 billion invested globally in property-related technologies in 2018, according to figures from research company Venture Scanner.

The authors of the IPUT-Arup report said there is a “mismatch between the solutions being developed by the technology vendors and what is being deployed in commercial buildings”.

There are four main reasons for this, according to the study, including poor alignment between traditional landlord business models and the use of digital technology to deliver data and services in buildings.

“Typically, many landlords maintain a small portfolio made up of large, long-term leases, with terms of up to 10-15 years,” the report stated.

“At the end of each long lease, it is often in the developer’s interest to find new tenants, given that rent has likely significantly increased over those 10-15 years, and the developer will be able to negotiate more favourable terms in the new lease compared with the existing one.”

Unless a landlord has a particular need to differentiate their offering with “data driven operations … digital buildings have not been mainstream”.

The report’s authors noted that the most significant cost to a company occupying a building is not utilities or rents, but payroll costs.

“Considering that improving human productivity far outweighs the cost-benefit of optimising energy consumption, it is easy to understand why landlords and operators have been lacking the incentives to avail of prop-tech solutions, given that, until recently, the available technologies primarily focused on energy savings and optimisation.”

Legacy systems

Another issue that has led to poor take-up of new digital technologies within the real estate industry has been the fact that “most industry stakeholders rely on legacy systems with data sets”.

“As many real estate companies have their business logic deeply rooted in proprietary legacy systems, it is hard to migrate and modernise these systems without major losses to normal business operations.”

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Other factors that have contributed to poor take-up have been a lack of a strategic overview within the industry of how digital technologies can enhance services within real estate, as well as other risks such as cybersecurity and the fact that digitising a property is simply “too much of a risk to developers and landlords” given the requirement to make decisions early for properties that many take years to deliver.

“There is often uncertainty about cost and return on investment, as the success of digital interventions can depend on detailed functionality and the nature of the organisation using them. This makes it hard to run a rigorous return on investment on these initiatives.”

Despite the challenges, the report stressed that adopting technology is “now an imperative for the future of real estate”.

It said the climate crisis has prompted investors to look for more sustainable assets, which means they want greater levels of data to assess the environmental performance of their investments.

“Commercial property developers themselves are starting to wake up to the new opportunities unlocked by digital technologies, to manage complex portfolios, make better-informed development decisions, decrease project management costs, and even extract more value from the operations of complex properties,” the report said.

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