One of the most serious unsolved problems facing the millennial generation is that a large part of the younger population simply cannot afford to own property in the metropolitan regions of this world. Although we likely will see a short-term contraction in real estate prices, we believe the trend of rising rents will continue in the long run. While the ratio of median housing prices to median gross annual earnings was 6.9x in London in 2002, it increased to 12.8x in 2019, indicating that in this period house prices have grown twice as fast as salaries. On this front, innovative business models have been attempting different approaches for years. Here are four solutions we believe will gain a further foothold.
When acquiring property, often 10–20% of the value is covered by a downpayment and the remaining amount through a mortgage. However, the majority of millennials already struggle to provide the initial down payment. So-called rent-to-buy solutions offer relief to this problem. In such models, the landlord grants the option to the tenant to purchase the property at a later date. In this event, part of the rental payments made can be converted into a monthly down payment. A leading company in this field is Divvy. In addition, there are hybrid solutions that are receiving increased popularity. One concept allows tenants to buy only the share of the apartment that they can really afford. The remaining ownership share, which can be paid off via a rental payment, is then held by Strideup.
Due to the aforementioned problem of rising property prices in European cities, debt financing plays an increasingly important role for most real estate buyers. However, existing mortgage providers are only slowly digitizing and adapting to changing external factors (flexible labor such as freelance work, 0-hour-contracts, changing jobs etc.), leading to many potential homebuyers not being able to participate in the market due to antiquated underwriting models. Providing solutions to this problem will not only enable people to purchase their dream home, but higher ownership rates also have wide-ranging benefits for the economy. Loanlink, for instance, is an online mortgage lender that provides home buyers with pre-approvals in under 10 minutes. Other examples include Better, Habito, Loandolphin, GenerationHome and Proportunity. With these solutions, demographics that would otherwise not pass initial credit checks can gain access to financing alternatives through a richer data set and a more nuanced underwriting model of the lender.
The amount of capital tied up in homeownership is likely immense — unlocking this capital will be a major opportunity for economic growth in the future. Once a mortgage is paid off, innovative concepts can help release liquidity for homeowners. There are several companies attempting to tackle this market; one example is Unison, which converts up to 17.5% of a home’s value to liquidity. In return, Unison shares a portion of the home’s value when the person decides to sell. Figure, a similar company tackling this problem, allows you to borrow against the equity of your home by offering a fixed-rate line of credit, provided in 5 days.
We believe that releasing parts of equity from real estate will be vital in the future in order to unlock additional equity and increase liquidity of an otherwise illiquid asset class, especially compared to traditional turnover rates of several months.
iBuying Home Sale
Finally, iBuyers represent a dramatic shift in the way people are buying and selling homes, offering in many cases a simpler and more convenient alternative to a traditional home sale. How iBuyers operate varies, but the underlying idea is that a company estimates the value of a home and makes an offer. If the seller accepts, iBuyers take on the burden of owning, marketing, and reselling the home. Depending on the service, the benefit is the certainty of an all-cash offer and more control over when a person moves.
Tiko, our portfolio company, is the leading iBuyer in Spain. The business uses technology to make an offer on a home within hours, offering a faster and more convenient alternative to a traditional home sale. Tiko owns the homes and is thus acting as a middleman in residential real estate transactions. Other companies in this space include Casavo and OpenDoor.
Today, most valuations in the DACH market are provided by traditional incumbents, claiming a large portion of the market share. Customers include appraisers and banks, that require an expert valuation to determine value before financing a real estate transaction.
However, the landscape is rapidly changing in light of two key dynamics: The first being increased availability of data. Today’s property data is not just a record of historical transaction values — there is a wide range of data available affecting a property’s value, such as infrastructure, light, noise-pollution and demographics. The second factor driving change is the growing range of customers. Increasingly, companies such as developers and realtors are using data-driven valuation tools in their analysis, and provide these features to their clients. Customers are demanding dynamic tools, an easy-to-use UI and a great UX. Incumbent legacy players have only slowly adapted to these new demands, giving rise to more innovative companies.
Pricehubble, one of the portfolio companies of the Helvetia Venture Fund, is the European market leader for AI-driven property analysis. The SaaS model gives clients access to structured data from over 150 sources. Customers include companies from all sectors of the industry, including banks, brokers, developers, etc. Pricehubble is facilitating the analysis and valuation of residential properties, which can be used to understand the market better and faster, evaluate potentially interesting assets, maximize rents and yields, and optimize disposal strategies. Other companies offering data-driven real estate analysis are RealXData in Germany and Housecanary in the UK.
Overall, despite the recent COVID-related challenges of the property market, we continue to believe in the immense potential of new innovation in the PropTech space. While we tried to identify areas that are interesting, the ideas in this blogpost barely scratch the surface of some of the solutions in the PropTech space. Also, I am sure that our view only is incomplete, so I am always happy to start a conversation, receive feedback and learn from experts in this space! Reach out here on Medium or email me at firstname.lastname@example.org.
This blogpost was originally published on Medium on August 13th, 2020.