Guest Speakers:
Transcript:
Marie-Anne Lampotang: (00:08)
Hi, everybody. I hope you can all see and hear me. My name is Marie-Anne Lampotang. I’m the general manager of Stone & Chalk in Sydney, and I’m really excited to welcome you all to attend this special Stone & Chalk and Proptech Association of Australia webinar. This is the first one that we’re doing since our launch in February, so welcome to everybody.
Marie-Anne Lampotang: (00:29)
Okay, so just for people who don’t know about Stone & Chalk, so we were founded in Fintech in 2015, which is five years ago, and our goal at the time was to help startups commercialise and grow in Fintech. Since then our goal is still the same, but we’ve expanded beyond Fintech, and we have hubs in Sydney, Adelaide and Melbourne, with about 200 startups. We’ve developed a particular focus on proptech, which is why we’re here today. And before I hand over to Kylie who is the CEO of the Proptech Association, who is going to moderate today, I just wanted to let you know about some housekeeping.
Marie-Anne Lampotang: (01:06)
So down the bottom of your screen there’s a Q and A function. We’ve received a lot of questions, which we’ve shared with the panellists while we went through the registration process, so hopefully they’ll answer most of the questions, but if there are some particular questions that you’d like towards the end, please pop them through and we’ll do our best to answer them. Thank you very much, and over to you, Kylie.
Kylie Davis: (01:26)
Thanks so much, Marie-Anne. How are you? Welcome everybody. So what will the property and proptech market look like in the second half of 2020? Welcome everyone to the Proptech Association of Australia’s first proptech panel, where we’re going to discuss the post-COVID recovery and what the property and proptech market will look like in the second half of 2020. So as Marie-Anne said, my name is Kylie Davis. I’m the founder of the Proptech Association, and it’s been fabulous to see so many people register for our first event. And I would especially like to thank Stone & Chalk who have made it possible.
Kylie Davis: (02:02)
Now, when we launched the association back in late February, we could never have imagined the next three months and what they would be like. We’ve all been through isolation, lockdown and a complete end to in-person inspections and auctions, which set the real estate world spinning. But as they say, necessity is the mother of invention, and in this case necessity has been the mother of adoption, as [inaudible 00:02:25] proptech and technology solutions to get through. And we saw unprecedented adoption of virtual tours, video, negotiation and digital marketing platforms and online auctions, just to name a few tech solutions, while CRM business has reported record attendances at webinars and training sessions. So what’s going to happen next, both in the market and in terms of adoption rates? Are digitally enabled agents the new normal, or has this been a big bungee stretch that is going to snap back soon?
Kylie Davis: (02:54)
So I wanted to introduce our expert panel. Thank you so much everybody for coming. Our first panellist discussing how the proptech market has performed during COVID-19 is Eliza Owen. Eliza is the head of Australian research at CoreLogic. She holds a first class honours degree in economics from the University of Sydney, and is a regular economic commentator on residential property. Our next panellist is a bit of a bench change from Macquarie. I’d like to welcome Dan Evans in the place of Dominic Thompson, who has happily welcomed a new baby into their family. Dan is national head of property services at Macquarie. Thanks so much, Dan. And lastly, we have Chris Rolls from PieLab. Chris is an entrepreneur, investor and adventurer, and the managing director and founder of PieLab Venture Partners, Australia’s first VC specialising in residential real estate technologies. So welcome everyone to our first proptech panel.
Chris Rolls: (03:51)
Thanks Kylie.
Eliza Owen: (03:51)
Thanks, Kylie.
Dan Evans: (03:52)
Thanks, Kylie.
Kylie Davis: (03:54)
So Eliza, let’s kick off with you. I know you’ve got some slides to show us as well. How has COVID-19 and the lockdown affected property market performance?
Eliza Owen: (04:04)
So overall, I think property markets were generally in an upswing in the lead up to COVID-19. Now, we’ve seen this kind of mild fall in prices, transaction activity has been impacted with lower sales and listings volumes, and there have been rental markets impacted as well, but the rental market impact is more localised. So, our data is showing that there is that mild decline in prices and transaction activity has been more affected.
Kylie Davis: (04:35)
So was it as bad as everyone feared?
Eliza Owen: (04:42)
Short answer, no, I think. Property prices, as I mentioned, had quite a mild downturn. Where we did expect a more severe downturn and where we did see that was in transaction volumes, so that’s why I wanted to show some visuals today. Are you able to see that, Kylie?
Kylie Davis: (05:01)
I can.
Eliza Owen: (05:01)
Can you guys see that? So I wanted to show how transaction volumes have been impacted by the pandemic. Basically, we saw about a 33% decline in sales volumes over April compared with March. What’s interesting is that we did see a bounce back around May. So typically what we’d see across Australia is about 38,000 sales a month. April this drops down to about 25,000 and then it sort of picks back up over May. And one of the most important indicators that’s been telling for us in the transaction space about why this has happened is looking at consumer confidence.
Eliza Owen: (05:47)
So this chart here shows a back series of the consumer confidence index produced by Westpac and the Melbourne Institute, alongside CoreLogic monthly sales volumes, and you can see that these two numbers are pretty strongly correlated. So what happened to consumer confidence is that it had this record 17% decline over April, and that bounced back 16.4% over May and had a further increase over June, and you can see that that’s sort of followed in sales volumes.
Eliza Owen: (06:25)
So that increase in consumer sentiment is really important, because the foundation of the questions around the consumer sentiment index are questions like, “How do you feel about your current income prospects? How do you feel about your future earnings potential?” And when that increases, when people feel better about that stuff, they feel more confident in making high cost, high commitment decisions like property. Consumer sentiments bounce back off the fact that over April and May we started to really get ahead of the virus curve in Australia. The government has started lifting restrictions around social distancing, gatherings and business operations, and so that’s led to more people being confident about making a property purchase decision. Kylie, sorry. Did you…
Kylie Davis: (07:11)
You go. You keep going.
Eliza Owen: (07:15)
Keep going? The other component of transaction activity that’s really been affected in the current market is listings activity. So listings volumes are down a fair bit from where they were this time last year, and that’s sort of a good sign in a way, because it suggests that not a lot of people are selling right now, because not a lot of people have to sell, and I think that’s really been helped by things like banks offering a holiday on mortgage repayments. So we can see in listings volumes they’re about 24% down from where they were this time last year. They have come up about 30% off of a recent low.
Eliza Owen: (07:58)
So just to clarify, this graph is looking at the new listings that we count being advertised online in the property market for sale, and we can see that more vendors have started testing the market coming out of April, which appear to be this kind of trough in transaction activity. Over May, they’ve become a little more confident. And what’s so interesting is the total listings, so the total volume of stock not just the new stuff that’s coming online, has actually been falling. And the reason we’re seeing a rise in new listings and a fall in total listings, is because as more vendors have tested the market, buyers have met that higher level of volume. The number of sales we estimate has more than compensated for the new listings that have come onto the market over the past month, and so that means that the stock levels are remaining pretty tight and that’s keeping some stability in prices.
Eliza Owen: (08:56)
And then, as I mentioned, prices have had a relatively small decline. The way we’ve been tracking that as a kind of high frequency level, is to look at the rolling 28 day change in the daily hedonic index from CoreLogic. So our daily index is basically taking the entire value of the property market at different levels and looking at how that changes over time. And in the past month, we can see that the combined capital cities markets have seen price declines, but only by about half a percent in the past month. It’s been more severe across Melbourne, where we’ve seen about a one percentage point decline in property values over the past month and a 1.5% decline over the past two months.
Eliza Owen: (09:46)
But overall, the impact has been pretty mild, and I think that comes back to a lack of distressed sales and a lack of an influx of stock coming onto the market because of mortgage holiday policies. It comes back to consumer confidence, enjoying a recovery as we get ahead of the virus curve, and I think it also reflects some of the stimulus that’s been delivered in maintaining employment relationships. And it’s helping us to kind of come out of this recovery a bit better than we expected.
Kylie Davis: (10:20)
So that’s a great point, Eliza. I guess what you’re telling us is that the Combank’s predictions that property prices could fall as high as 30%, that doesn’t look like it’s on the cards. Winter is always traditionally a time when the number of properties on the market is traditionally lower anyway, but clearly there’s a lot of buyers out there. How do you think that’s going to play into what happens next?
Eliza Owen: (10:48)
Yeah, that’s a really good point. I think that you can kind of see in the listing starter that new listings are already following that seasonal kind of decline, so I think we will see a bit of a drop in listings over winter, and then that will follow a recovery for the spring period. Of course, the main headwind for spring time this year is that we might start to see an end to holidays on mortgage repayments, so that could see a bit of an uplift in stock and further downward pressure on property prices.
Kylie Davis: (11:19)
Yeah. And we are now officially in a recession. We’ve had two quarters of negative growth, so by definition. What are the economic predictors telling us about what’s going to happen next? What shape will the recovery be? And if there’s a second wave of COVID, how do you think that’s going to play out?
Eliza Owen: (11:39)
Well, I think one of the fascinating things about the [inaudible 00:11:43] downturn is that it is kind of self-engineered. [inaudible 00:11:49] that’s coming in, but I think one of the most important indicators is the government kind of stringency on lockdown. [inaudible 00:11:59] put together some really cool data from Oxford University and the OECD, which compares an index of stringency where 0 is no restrictions and 70 is much more strict, and they compared it to GDP.
Eliza Owen: (12:18)
Now, over the March quarter, we didn’t have much stringency until March 25th when our sort of lockdown began. Over the June quarter the average level of the Australian government lockdowns and the stringency index was closer to about 67 and based on this analysis that suggests we are going to see that really big contraction in GDP growth over June. But ultimately, if we look at that stringency index for Australia which is based on things like school closures, travel, business operations, gatherings, it’s easing, and so I think that’s going to help a gradual recovery in the economy. I think that it will be sort of a slow and steady recovery, given there is no second outbreak of the coronavirus, because that would obviously lead to the implementation of strict social distancing again.
Eliza Owen: (13:15)
And I think that some sectors will recover more quickly than others. We’re seeing industrial production in China has pretty much recovered at this point, which speaks well for markets which are tied to things like iron ore exports and that sort of thing. But until we get things like international travel, then your tourism markets, your shorter term accommodation markets, those are really going to see quite subdued performance in the next six months or so.
Kylie Davis: (13:44)
Okay. Fantastic. So, moving on. Thanks for giving us such an amazing overview on what’s happening. Dan, we can see from Eliza’s data that the mortgage holiday is a big player in the market, that there are buyers out there who want to buy but it’s really around confidence and jobs, and so the real estate industry in residential are going to be looking at, I guess, a protracted period of lower transactions. Before COVID hit, Macquarie did the pulse check report. What did that tell us about agents’ behaviour, and what can we learn from it?
Dan Evans: (14:27)
Thanks, Kylie. It was interesting timing to do the pulse check report, because there were signs of renewed enthusiasm in the market when we actually took the data in the survey, and then COVID hit not long after. So it was interesting to see even with that being the case that the survey was done really pre the COVID, a lot of the same themes were evident before, and have just been magnified by the COVID period.
Dan Evans: (14:54)
The Macquarie pulse check for those who haven’t seen it before, we’ve been benchmarking in the real estate industry since 2007, so we’ve now got 12, 13 years worth of data through the surveys to see these trends amplified across a long period of time. And there’s really three things that I think are evident in the real estate market, and they come down to the falling commission rates, which have been ever present in our surveys for at least the last four or five years. Both sales commission and property management fees as a percentage have been dropping, and that has been putting marginal pressure onto all the businesses.
Dan Evans: (15:27)
What we’re also seeing has been increased volatility in those revenue streaks. So we talk a lot about the listing volumes and where they’re dropped from last year, but last year was already a seasonal low in transaction volumes in the industry. So we’re just seeing this volatility, the seasonal inter year volatility as well as year on year, and really impacting businesses and confidence within businesses. And then a third trend is really around consolidation.
Dan Evans: (15:53)
So to combat those two things, to combat the decline in commission and the increased volatility, people are seeking more scale. They’re trying to seek more scale in property management and more scale in their businesses more generally. And there are more willing sellers to help people consolidate the industry too.
Kylie Davis: (16:12)
So last year was a strange year, wasn’t it, because we had the election and so transactions were down in the buildup to the election. And so year on year for us to say that the transactions are not so bad against last year, last year was pretty bad compared to the year before, so we’re seeing this constant sort of ratcheting down of transaction levels. Would that be correct?
Dan Evans: (16:34)
Yeah. Absolutely.
Kylie Davis: (16:35)
So to summarise the findings of pulse check, the broad trend is that agents are earning less commission on fewer sales, but as a result they’re going to need to service more clients to remain profitable and they need to have a better understanding of their businesses holistically, I guess, because it’s not just about sales commissions and it’s not just about property management commissions. All of those things are under fire.
Dan Evans: (17:02)
Yeah, and to a degree all of those things were evident in the pulse check pre-COVID, but COVID really just magnified and amplified all of those things. And I always think the market is falling into a number of different segments. It’s not true to say that businesses are responding in a unified way to the challenges of COVID, just as they weren’t responding in a unified way pre-COVID, and so there’s a segment now of the industry we think that is finding the current environment incredibly difficult.
Dan Evans: (17:32)
It was becoming more challenging before. There was increased competition, increased margin pressure and increased reliance on staff and management and leadership that was causing more headaches in running the business, and that segment has just found the current time then even harder to deal with. Sort of managing all the tenancy rent reviews and the leasing changes and the falling in transaction volumes. And that portion of the market, I think, are the ones who are sort of wanting to be consolidated for want of a better description. The industry is becoming quite challenging for them.
Dan Evans: (18:07)
And then there’s a group of agencies who have always been very progressive. They’ve been at the cutting edge of the implementation of new technology, the vision for where the business is heading, and I think a lot of them have almost seized this opportunity to really take their business to another level again. And then there’s this big group of people in the middle, and they’ve often known that they needed to make a change, they’ve known that they needed to implement changes, and COVID has given a lot of them the catalyst to start making those changes. And I think it will be interesting to see from here on whether they keep their foot on the accelerator of change, whether they pursue all those initiatives as the lockdown starts to ease and maybe some of the pressure requiring change starts to ease, how many of them will continue with that and join that progressive group of agencies that’s at the cutting edge of the industry.
Kylie Davis: (18:56)
Yeah. We are really at that inflexion point aren’t we, where we’re seeing that innovator set kind of really start to separate from the pack and lead the way, but at the bottom end the people who are least likely to adopt new technology or the changing market conditions to start to really start to drop away. And the inflexion point is really how this middle group behave, whether they try and move forward to keep up with the innovators or whether they just keep wishing that the market would go back to normal and we’ll all be okay. What did you find in the pulse check that those top performers are doing, and their relationship with technology?
Dan Evans: (19:46)
So interestingly, when you look at the data that the pulse check provided, the top-performing agencies weren’t necessarily using more technology than other agencies, but they were using it much more consistently and they were executing on changing their systems to adapt that technology much better. So there was a real productivity benefit from the systems they had in place. They weren’t necessarily just relying on the addition of technology.
Dan Evans: (20:11)
So a lot of it, for me, just comes down to that mindset, and I’ve sort of described those three segments and that progressive group of innovators. I think for that middle core of the market, most of it is that commitment to change, the commitment to using technology efficiently, the commitment to trying to drive higher profit margin and try and really sort of combat some of these trends we’re seeing with increased volatility through more technology.
Dan Evans: (20:37)
So if they can make that commitment to drive the change, if they can have those difficult conversations with the staff who will feel threatened by the new technology, if they can see the end vision of where they want their business to get to, I think that’s really the most significant different between an agency that successfully implements technology and successfully changes the business model and those that get stuck spinning their wheels.
Kylie Davis: (21:02)
If you’re a startup, a scale up, or an established supplier of technology to real estate, join Proptech Association Australia. The Proptech Association Australia is a new national not for profit member association to grow the emerging proptech industry. We champion real estate and property technology and work to grow the marketplace by helping the property and building industry feel more confident about adopting and investing in innovation. We’re building a community of bold thinking innovators who share their knowledge and share best practise quality solutions and consistent approaches. So, come and join us. Membership is free till the end of 2020. Go to proptechassociation.com.au, or follow us on LinkedIn.
Kylie Davis: (21:48)
Yeah, so we’re really seeing this change where technology is not necessarily about the next shiny button, it’s a leadership question inside businesses and looking at what kind of business do I want to have as an agent and what kind of service do I want to offer and then what technology is going to really help me achieve that goal and get costs out of my business and make my business more efficient.
Dan Evans: (22:14)
Yeah, absolutely. And I think it’s that commitment to continuous improvement and making a decision that they will implement the changes and regularly review to make sure that it’s as efficient as possible, rather than thinking that technology by itself will solve a fundamental issue within the business.
Kylie Davis: (22:32)
So it’s an execution issue now more than an innovation issue.
Dan Evans: (22:36)
Yeah, absolutely.
Kylie Davis: (22:38)
He who executes best wins.
Dan Evans: (22:42)
Well, there is a lot of innovation in the market already. I mean, there are lots of different pieces of technology and different platforms that companies can use to improve their business. And I think you’re right. Without a clear vision of where the business needs to get to it’s impossible to select which of those technologies you employ, and then it becomes impossible to execute on any particular plan. So that getting the mindset right to begin with and then driving through with the execution of the technology. There are lots of excellent proptech companies developing lots of solutions, so there’s no shortage of the innovation. It’s the execution that most agencies struggle with.
Kylie Davis: (23:18)
Fantastic. So Chris, we’ve heard about how the market has performed from Eliza and we’ve heard about the imperative for agents to adopt and execute on tech from Dan. How did COVID affect the proptech innovators, and what are you seeing in the space around adoption? How are the technology businesses going to come through this?
Chris Rolls: (23:42)
So look, in terms, Kylie, of the proptech industry, I think it’s sort of hard to say that COVID has affected everyone in the proptech industry in the same way. Different businesses have been affected in different ways. There are some businesses, some in our own portfolio, that have had record months of sales. One of those businesses are a company called Aire that provides digital assistance to the real estate industry. Small Brisbane-based startup, and they’ve done very well in sort of April, May. Particularly in May, I saw a record level of sales. I think that’s probably a little bit around business owners trying to drive efficiency in their business because they were sort of worried about some of the implications of coronavirus and have reduced their headcount, which has resulted in [inaudible 00:24:36] efficiencies.
Chris Rolls: (24:37)
And then there are other businesses that haven’t done as well. I think one of the initial, I guess, almost the initial panic stations that everyone took sort of halfway through March there was, “I need to cut some staff and I need to cut some costs.” And I know many people in the real estate industry literally went through and went through a process of what’s absolutely necessary and what’s not. And as part of that, one of the things that tends to happen in all businesses, not just in the real estate industry, is that subscriptions to software products that seemed like a good idea at the time start to mount, and then there’s an exercise of cost cutting and all of a sudden they start to get switched off. And that’s something that we’ve seen in the industry across lots and lots of different businesses, where subscription levels have all of a sudden dropped down, or a lot of calls around, “I want to turn this off. I want to stop subscribing.”
Chris Rolls: (25:35)
And those in the proptech industry that responded positively and did things like reductions in fees in order to get people through this with a view of if you can keep people on as a subscriber, albeit at a reduced rate for a couple of months, then it saves you having to re-sign them up when good times return. And those businesses I think made the right decision, and that’s starting to show with after we’re starting to come out when they switch those fees back on, resulting in very little loss or attrition of subscribers.
Kylie Davis: (26:14)
So what was the technology that was most in demand? What were people turning off and what were people scrabbling to turn on?
Chris Rolls: (26:22)
Well, look I think it’s fair to say, I know this sounds ridiculous, but clearly the big winner out of this is Zoom.
Kylie Davis: (26:30)
We all [crosstalk 00:26:31].
Chris Rolls: (26:31)
That’s not proptech, it’s just technology. And it’s funny actually, at the start of this panic one of the guys in the office said, “Wonder what’s going to happen to Zoom shares. I might buy some.” And we looked up Zoom share price, and kind of one of the only stocks that had risen, and had only risen marginally, and now it’s sort of trading at triple what it was back then, so I didn’t do anything about it. But funnily enough, if you were to say to me, “What technology has been adopted by more people in the real estate industry than any other?” It’s Zoom. And it’s not a proptech thing, but that’s the case all over the place.
Chris Rolls: (27:05)
I think specifically relating to proptech, certainly things around remote inspections. Inspect Real Estate released very quickly a remote inspection tool. HappyCo, which is a company we’re invested in, although they’re more in the US market, they have a software platform for inspections in the real estate industry with about 2.4 million properties on it. They released a similar product.
Chris Rolls: (27:31)
The online auction space. Now over the years we’ve looked at multiple online auction proptech businesses. It’s a space that we took a view as one that was going to not be successful, and to date we haven’t had any of those businesses get significant scale, although there is no question they did have an uptake over coronavirus. Now the big question on everyone’s lips is, “What is going to happen once everything goes back to normal?” This whole idea of people not having to turn up to an auction almost flies in the face of exactly what a real estate agent wants, and so therefore rolling out the technology in that space has been different. But it’s certainly a space that has done well over coronavirus couple of months.
Kylie Davis: (28:23)
That was always the real estate belief, that, “Oh, we can’t do it virtually because no one would show up.” COVID actually proved that wrong as a hypothesis. You actually can get more people to an auction if you make it easier for them to attend, and sometimes physically attending is quite a tricky thing to do.
Chris Rolls: (28:42)
Yeah. Look I think we’ve spent a lot of time looking at that particular space over the last few years. The issue is in order to adopt wide scale in the industry that issue is you need to have agents on board. They’re the ones that really are the group that control the auction environment. And if they have a view, and we took the view that they did, if they have a view that I would rather have people turn up to a property than bid online.
Chris Rolls: (29:17)
Now, the reality is auctions have worked incredibly well for many years, decades, because if someone really wants to buy a house and their only option is to turn up, guess what, they turn up. I think sometimes in sort of technology circles, people come up with a problem that maybe isn’t a genuine problem, or maybe not a genuine problem at scale. There are unquestionably certain unusual circumstances. I mean, Don’s just had a baby. If he really wanted to buy a house on the day that baby was born, it’s going to be difficult for him and his wife to turn up. He’s not on this call. But how many people does that actually occur for? And that’s just a view that we took. Of course, when you’re an investor as we are, a venture capital investor, we’re backing businesses that we think can get enormous scale, and we just took the view that the online auction space was not one of those spaces.
Chris Rolls: (30:18)
Now, as it turns out, it’s done well in coronavirus. Is that going to continue? We don’t know. And is the market big enough to sustain a very large business there? Once again, we don’t know the answer to that, but it’s an interesting one.
Kylie Davis: (30:31)
Do you think the adoption of it by, it’s now available through both realestate.com and Domain. They’ve both sort of got their own online auction platforms going. Do you think that’s going to change how we behave in this space?
Chris Rolls: (30:48)
I think it’s fair to say that the whole concept of remote engagement, be it work, auctions, performances, whatever they happen to be, entertainment, I think the uptake of that is going to be significantly increased in the future. And I think we’re all going to be 12, 18 months down the track, even if we do get a vaccine for COVID-19, and we’re going to be heavier users of technologies that allow you to do things remotely. So, I think that’s inevitable.
Chris Rolls: (31:28)
If the question is do I think online options are the future of auctions, my answer to that is no. And even if it was, I would argue that I don’t think the market is big enough to sustain a large technology business. So as an investor, that’s something that any institutional or venture capital investor looks at and says, “How big a business can you grow in this sector?” And in my view, even if we had 50% market share with one provider of online options across the whole of Australia, it’s still not going to be a 500 billion dollar business. It would struggle to be a 150 million dollar business, which is one of the issues with Australia as a market place. Typically, you need technology that can scale multiple geographies, because the Australian market is small and real estate options are something that are not common all over the world.
Kylie Davis: (32:20)
So how did investors respond to COVID? I mean, I was reading stuff when it first happened that, “Oh, all the investors are going to pull out of all of these new innovators and out of the funds.” What does the investment landscape look like at the moment, for everyone except for auctions?
Chris Rolls: (32:39)
Talked a lot about auctions. Look, I think the investment landscape, there’s no question that investors have a greater choice of investment opportunity now than they did six months ago. Having said that, we’ve still got public markets, equity markets, the stock exchange, not just here in Australia but around the world, trading at strangely high levels, and professional institutional investors across the board can’t understand why. And there’s lots of theories as to why that is the case, but there’s no question there’s more opportunity now.
Chris Rolls: (33:20)
So what we’ve seen is a number of things. We’ve seen valuations drop, particularly for growth businesses in the technology space and particularly for earlier stage growth businesses. We’re looking at one opportunity that we said no to prior to coronavirus that came back to us at a valuation that was half the price. And they literally had that round filled prior to coronavirus and we chose not to participate, and we chose not to participate during coronavirus at half the price. So we’re definitely seeing that is an element of supply and demand and investors being cautious. So we are seeing reduction in price, a reduction in capital, but then by the same token, good opportunities are still raising capital.
Chris Rolls: (34:10)
We took part in a foreign investment for one of our portfolio companies, a company called [inaudible 00:34:15]. They literally were raising capital at the absolute height of the panic, and their round was oversubscribed. So I think it was seven and a half million round in an Australian proptech business that’s relatively early staged. Why? Because it’s good business. So you look at as is always the case, those that have got good investment opportunities will succeed, but I think it is definitely harder for young growth tech organisations, including proptech in the proptech space, it’s definitely harder to raise capital now than it was six months ago.
Kylie Davis: (34:51)
So what’s your advice to those young growth companies at the moment? What do they need to be doing to be attractive to VCs?
Chris Rolls: (35:02)
I think as an early stage tech business, be it proptech or otherwise, your currency is growth, and that’s one of the key things to understand. So really what you’ve got to do when you’re looking at your process of raising capital to fund that growth over a period of time, obviously you’ve got to not run out of money. And this is one of the really interesting things we’re going to see in the tech space. There are a whole bunch of businesses that are raising money at these 12, 18 month intervals in the growth tech space.
Chris Rolls: (35:39)
Now the problem is, in order to raise a subsequent round you need to show growth over and above your previous round, and there are going to be a lot of businesses that are going to struggle to show that growth over the first six to eight months of this year. So with them going in with capital raised in sort of June, July this year, we’re in June now, say August, September this year, and they haven’t gotten that growth, the question is what’s going to happen to those? And I think those businesses are going to struggle to raise capital, and we’re going to see the death of a lot of early stage tech businesses, be it proptech or otherwise.
Chris Rolls: (36:10)
So there’s a few things, and this is one of the things that we’ve spent a lot of time on the phone with all our portfolio companies around, “Okay, we really need to cut costs, and this is not because you’re losing customers, but if you are inhibited from growth, what we want to do is we want to stretch the runway of capital that you have to get well and truly out the other side of this scrum, this pandemic, so that you can once again demonstrate growth prior to going into your next round of capital raising.” So my first piece of feedback or advice would be make sure you stretch that runway out as long as you can. If you’re not growing right now, you need to cut costs in order to stretch that runway out.
Chris Rolls: (36:50)
That’s a difficult thing to do. Most people in the tech space have read the book that Marc Andreessen wrote called The Thing About Hard Things. And the reality is, one of the hard things about running any business, particularly a cash burning early stage growth startup is you’ve got to make tough decisions. So we saw some businesses make tough decisions, but right decisions that will result in them being in a good position 12, 18 months from now. So that’s one of the things that I think is very important.
Kylie Davis: (37:23)
So to summarise, early stage proptechs at the moment need to be growing faster than they were last year or over previous quarters, despite the fact that the pandemic might have slowed them down a little bit, and they need to be-
Chris Rolls: (37:38)
To clarify, so no. I’m not saying they need to be growing faster, but in order to raise capital you need to show growth, and if you’ve got a product that isn’t thriving during COVID, which frankly is probably most products, and your growth has stagnated, then you really need to stretch your runway out so that once you get back out the other side you can demonstrate you’ve got growth prior to going into your next round of capital raising.
Kylie Davis: (38:05)
Got it. Okay. Chris, we did see though that a lot of proptechs sort of enjoyed this extraordinary demand on their services while lockdown and isolation was in place. Do you think we’re going to see some of that other adoption remain in the market, or are we going to see a bungee stretch back?
Chris Rolls: (38:31)
I think it’s probably going to be a combination of the two. That would be my view. Like I said earlier, I think we’re going to see a maintenance of this uptake of new technology. I think what we are also going to see is a lot of customers of the proptech industry, so the real estate agencies that use a lot of tech and property developers and what have you, understand that all of a sudden they can run their business at a lower cost level than they originally thought they could.
Chris Rolls: (39:01)
That was one of the overwhelming things we’ve had in feedback not just from our portfolio companies but from businesses across the whole real estate space, is that once they made some cuts at the height of the panic and all of a sudden their revenue didn’t necessarily drop, they were suddenly a whole lot more profitable and wondering why they hadn’t done that previously. So that’s definitely a trend that I think we’ll see, but I think there are definitely certain businesses that are going to be successful out of this.
Chris Rolls: (39:32)
You talked about the rise in usage of CRM systems. One of our portfolio companies, ActivePipe, who have a marketing platform for the real estate industry, record user time on their platform over this period of time as well. So definitely an uptake there that hasn’t as yet started to decline in terms of usage from their customers. So I think there will definitely be businesses that are better off longterm as a result of what’s happened.
Kylie Davis: (40:05)
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Kylie Davis: (40:28)
So where do you think we are in the curve of innovation at the moment? Do you think where COVID has affected the industry, are we going to see more innovators in the next wave start to run out of cash and close down or disappear, or do you think if we’ve got through it so far you’ll be okay?
Chris Rolls: (40:53)
Are you talking in terms of actual proptech businesses?
Kylie Davis: (40:57)
Yes.
Chris Rolls: (40:58)
Yeah. So in terms of proptech businesses, I think we’re going to see a retraction in the number of proptech businesses that are around over the next six to nine months. But I don’t think that’s limited to proptech. I think that’s going to be the whole startup ecosystem. The reality is there’s less capital around, it’s harder to raise, we’re going to see a decline in spend from both business and consumers.
Chris Rolls: (41:21)
I mean, one of the strange things about this, there’s a lot of optimism which is great, but we’re heading to sort of record levels of unemployment. As soon as we get out of the artificially heightened sense of everything is okay because of massive stimulus, JobKeeper stimulus, PAYG stimulus. And also just from a consumer perspective, all those people that are on mortgage repayment holidays and things like that, that’s all got to end and it’s all got to be paid back. And I take the view that most institutional investors do, and that is we’re going to see more pain and suffering down the track in terms of the economy, and I think that’s going to spread across to markets, the equities markets.
Chris Rolls: (42:07)
And if you’re a venture capital investor, we get our capital from a range of other investors, high net worth individuals, family offices, other institutions, and when they’ve got more choice on where to invest it they’re going to invest less with us, which means we, in turn, invest less in the proptech space. And that’s just, I think, a reality that most people probably don’t realise just yet, and we haven’t seen it really play out just yet but I do think that is coming.
Kylie Davis: (42:35)
A bit more pain coming through. How many Ozzie proptechs are there in the market that you guys have counted?
Chris Rolls: (42:43)
Well, that’s always a tough question. So we’ve looked at to date 542 proptech businesses to invest in our portfolio. Now, I would argue we’ve probably looked at more. Have we looked at every single one? No. I think that would be presumptuous to assume we have, but I think we’ve looked at a lot of them. There’d be a lot of small ones that we haven’t looked at simply because they’re sort of not on that radar from a size perspective. I think in Australia there’s probably circa 1,000, so talking all the way down into sort of really micro sizes.
Chris Rolls: (43:19)
I should point out as well, we’re very focused on the residential space, and the biggest problem when someone says, “How many proptech businesses are there?” The question is, “Well, what is proptech?” And there’s lots of different definitions floating around, and I think it’s fair to say that proptech is definitely more than the residential space, which is predominantly where we look, but it’s certainly commercial real estate. But is it construction, or is that something different? So it’s a really hard question to answer, but there’s certainly a lot, and it’s a space that has historically grown very well over the last few years.
Kylie Davis: (43:56)
Yeah. So I guess to summarise what you’ve been telling us, around about 1,000 proptechs. We’re probably going to see that number come down over the next 12 months as the virus sort of plays through and as its impact on the economy plays through. The advice to proptechs is to survive at all costs, look after your customers, get rid of all your costs, try and make sure the money is going to last you through what the next couple of months are going to hold. But where do you think the focus should be in innovation at the moment?
Chris Rolls: (44:35)
Well, that’s a tough question. It’s sort of how long is a piece of string? I think with innovation, and I don’t think it’s changed now to where it was anywhere else, you need to focus innovation on problems that are genuine problems in a market that is sizeable, and that’s if you’re in proptech or any sort of technology start up business. Are you solving a genuine problem, and is that problem big enough so that you can sell to a big enough customer base in order to create a large business? Because if you’re not, it’s very hard to attract capital in order to fuel the growth of your business. That’s one of the things I would say one of the most common errors that startups make, is that they’ve got a product, they’ve identified a problem, but it may not be a genuine problem or a problem for enough people in order to create a sizeable business, particularly in the Australian market, of course.
Chris Rolls: (45:38)
That’s one of the issues that we have in Australia is that if the market in Australia is not big enough you think you’ve got to go overseas, and there are definite risk points in scaling a business geographically, which is why it’s a great idea to start internationally. Something there’s an assumption, “I’ll build market share in Australia and then I’ll go overseas.” If you can easily sell your product overseas, start doing it from day one, because you’ll learn a whole lot more.
Chris Rolls: (46:04)
A classic example of that is one of our portfolio companies, HappyCo, who started with an inspections piece of software for the Australian real estate market and soon realised that every time they signed up a customer in Australia they signed up two or three hundred properties to their system. Every time they signed up a customer in the United States they signed up just under 5,000 at a time. So the average size of their customer manages 5,000 properties, and that’s well above. I think the average size for [inaudible 00:46:35] in Australia is, and Dan, correct me if I’m wrong, somewhere around the 700 mark at the moment, which is significantly higher than it was several years ago. But you can see a business like that has 2.4 million properties being inspected on that platform in the US. That’s the equivalent size of the entire residential property market in Australia.
Chris Rolls: (46:53)
That’s a really interesting point in case around if they hadn’t have been selling to the US market the same time they were Australia, they may have got some great market share in Australia, but what’s the likelihood of them getting 100% market share? Pretty small. And they’ve got the equivalent of that in the US, and that’s a really interesting sort of case study around think big and fish where the fish are when it comes to building a technology business.
Kylie Davis: (47:17)
Cool. Dan or Eliza, have either of you got any comments on what Chris has said or want to add anything from what we’ve talked about so far?
Eliza Owen: (47:28)
I would just add to the point about the online auction space. I think it’s something that may be a bit overblown just because of the period that onsite auctions were banned. I mean, that was probably about a month. In that time we saw auction volumes reduced to about 300, 400 a week, and even from those properties that were selling under auction conditions, only about 12% were selling on the auction date. So that’s just to say that a very small percentage were actually selling online, whereas what we actually saw in the auction space was a much larger portion being sold prior to the auction event and being managed through one-on-one inspections and a pivot to private treaty.
Eliza Owen: (48:16)
So I think that issue of not having the onsite auction, first of all, it mostly only affected Sydney and Melbourne. Secondly, it probably wasn’t taken out of play long enough for the online auction space to become more widely adopted. And so I guess we’re thinking about what other kind of pivoting can you make in that virtual inspection or videography to pivot away from the online auction.
Kylie Davis: (48:47)
So Eliza, what Chris alluded to which is that it’s the next six, nine, twelve months that are really going to determine what COVID has really been like, what are you seeing in the data to help us shape what that might be?
Eliza Owen: (49:07)
In terms of the shape of the recovery kind of thing? Yeah, so I always find that a funny question, because I mean in terms of a v-shaped recovery, depends on whether you’re looking at percentages or sizes of GDP or whatever. I am a fan of I think the kind of Nike tick where you get that kind of short, sharp downturn and then a gradual recovery. I think a v-shape recovery is just, I think it’s kind of impossible to imagine, just because there are still headwinds in the sense that as Chris said, companies that have found that they can adopt more technology and pivot to less labour intensive operation, means that that might limit the uptake of employment as the economy recovers. And I think that there are just sorts of headwinds there where Australia’s private sector was already pretty weak, a lot of our firms are small business, they don’t have a lot of capital, and that’s why we probably see the drop out of more business.
Eliza Owen: (50:14)
So in other words, I think our recovery won’t necessarily see people who have lost their jobs welcomed back into their jobs with open arms in every case. Things like the JobKeeper have helped, but there are certainly headwinds that will slow down the economic recovery.
Kylie Davis: (50:34)
And Dan, how has it affected how Macquarie looks at funding and finance? I mean, you have a lot of proptechs come to you for funding, but also the real estate industry. How has it affected how you’re looking at real estate businesses?
Dan Evans: (50:49)
I think some of the commentary Chris made about planning the cash flow out for the next six, nine, twelve months was key for us really. So we recently launched for our clients an online cash flow sensitivity analysis they could do where they could look at their current cash balance and look at what the likely movement was, and see how much liquidity they were likely to have for the next six, nine, twelve months.
Dan Evans: (51:12)
That lack of certainty around where the future of the economy is heading, I mean we’ve just never been in this situation before with such a dramatic stop in economic activity, so none of us really know what the outlook is. None of us know how the impact on part-time workers will be impacted by the end of the jobkeeper allowances. All these factors all roll in together over the next three to six months, so we’re really looking at those companies that are being prudent, and yes, hoping for the best but planning for the worst. How can we build a sustainable business that come 2021 we’ll be in good shape to start taking advantage of the opportunities that are there?
Dan Evans: (51:52)
And we do think there’ll be a lot of opportunities for real estate business. And one of the things we mentioned was this consolidation of the market, and I think that’s a theme that will get a lot of momentum over the next six to nine months. It’s all about timing and it’s all about getting the right opportunity at the right time with the right backing. So we’re definitely in a mindset of opportunity. We’re looking at how we can support our clients through growth at this time. That’s the lens.
Dan Evans: (52:19)
I think three months ago probably wasn’t as much about growth, it was more about how do we help our clients to hunker down and sort of get through, because no one knew what was going to happen. But I think at this stage we’re definitely looking at growth and opportunity, but it’s just got to be well-managed and prudent and careful. I think that applies across all aspects of the capital structure, whether it’s VC or debt finance.
Kylie Davis: (52:44)
Cool. So let’s open it up to some questions from the audience. Marie-Anne, I’ve got a few here that I can ask off the question sheet, or just let us know if there’s some other ones that you want us to answer. I’m not sure who wants to take this, but do you feel that the predicted economic downturn as a result of COVID will accelerate or decelerate the tech disruption of traditional real estate and of the traditional model? Because we’ve got headwinds coming that are sort of making people hunker down. We’ve got also the impetus to need to change and get better at innovation. How do you think it’s going to play out? Chris, do you want to take that?
Chris Rolls: (53:31)
I was thinking long and hard there.
Kylie Davis: (53:34)
I can see.
Chris Rolls: (53:36)
I’m not sure I have a view on that. It’s actually a really good question. Is it going to accelerate or decelerate sort of tech disruption of the property space. I think once again, the answer to so many questions around innovation and proptech is it depends. It depends on the types of areas.
Chris Rolls: (54:02)
You take one area that I’m obviously very familiar with. Many people won’t know I used to run quite a large property management business in a former life. If you look at the property management industry, I think what Dan is definitely saying is the property management industry is unquestionably consolidating. So what we’re seeing is we’re seeing a lot of businesses buy other businesses, and there’s an enormous amount of technology being developed for the property management industry, and there’s also technology disruptors coming in to the property management industry as well.
Chris Rolls: (54:33)
So I look at that and think, “Okay, yes I think that is going to continue to be disrupted,” although it’s a very difficult industry to disrupt, but with a massive prize pull of revenue sort of circa 3 plus billion dollars in management fees paid around Australia to succeed with. So I think what we’ll see is we’ll see the technology disruptors take a part of that market. We’ll see encumbered industry adapt and change their business model and consolidate and become more profitable, and we’re already seeing that.
Chris Rolls: (55:04)
I’ve talked to two businesses this week in the property management space that are running property management businesses with even margins on their property management business of over 35%, and that’s actually very high. And they are both good users of technology that’s been developed in that space, so they’re really driving efficiencies in their business. So it’s such a tough question to answer, because really the answer is it depends on what space you’re talking about, because proptech encompasses so many different things. So there’s a really bad answer for you, Kylie.
Kylie Davis: (55:39)
Dan, do you want to have a go at that question?
Dan Evans: (55:44)
Yeah, I’d probably just add to that answer really that the biggest impact I’m seeing through this is people’s mindset. So I think this experience has affected confidence and the way people feel about the world in a way that I’ve not seen an event like this happen or have that impact, and it’s making people want to ensure they are taking a bit less risk and building more buffer and building more protection against the volatility. And I mention that the volatility had been present beforehand, but this really just showed people how vulnerable their businesses were to a shock, and this was a few months of revenue impact. And that’s not uncommon in the real estate space when you look at the seasonality of the market. And I think it highlighted to people that change needs to be made.
Dan Evans: (56:33)
Does it necessarily follow that that always mean technology change? Not necessarily, but I think the flow of events will be that more people will make that commitment to become a high performing business, more people will make that commitment to change their traditional model for a more efficient model, and as a result of that they will be looking for all of the possible solutions to improve the efficiency of their business, to lower their cost and to find adjacent revenue streams, and more than anything, to build an experience that the customer actually wants to use.
Dan Evans: (57:04)
I think this whole experience has just reminded people of their vulnerability and the need to make decisions. The problem will be a lot of people don’t quite know what the first step is in making that change journey, and I think as people’s desire to change grows, as their dissatisfaction with their business as it stands grows, then I think we’ll see a wave of change. And hopefully it will come through. I mean, I genuinely hope we start to see people really take that continuous improvement in their business management, not more seriously because I think they take it seriously now, but just with more intensity and more urgency.
Kylie Davis: (57:41)
And when we talk about how it’s changed for customer demand, one of those customer sets is actually your stakeholders are staff too, and this ability to work from home has had a big impact on the industry as well. Who wants to take that? Do we think that real estate office is going to get smaller? Are they going to disappear from the high street? Are property management teams going to be working from home? What’s your thoughts on that?
Chris Rolls: (58:10)
I’ll answer that one. I think the answer is yes. And not just in the real estate space, but everywhere. We have a lot of property investors who are investors in our fund, and one of the overwhelming feedback we’re getting is that the demand for commercial property and the return on commercial property is really under a big question mark moving forwards. The reason behind that is if you’re running a business and you all of a sudden have to have 10 square metres of space per person when you used to be able to get away with six, I’m just throwing random numbers out there, then what happens? Well, you need more space, but that doesn’t automatically make you more profitable which means you can’t afford more rent. So something has got to give somewhere, and I think what’s going to give is the return on commercial property.
Chris Rolls: (59:06)
One thing that is well and truly shown, although working from home is not for a lot of people, it certainly is for some people. I take our business. We operated perfectly well in an environment where we were working from home. I’m back in the office now, but it really made no difference to us. Do we need office space? Absolutely not. There’s no question about that in our business. Some businesses you do. I think in the real estate industry we’re going to see an increase of people working from home, particularly in property management, so that’s my view on that.
Kylie Davis: (59:37)
Yeah. So we’re coming up for time guys. Thank you so much for an amazing discussion. Eliza, I’m going to get you to finish off if that’s okay. What do you think is going to happen to property prices in the second half of 2020, and what’s the spring market going to be like, do you reckon?
Eliza Owen: (59:58)
Yeah. So short answer, I don’t have a crystal ball. I can’t really say. My guess is that because the cash rate is at its effective low ward bound, we’re as low as we can go with monetary stimulus, which reduction in cash rate typically sees an increase in property prices. Hasn’t quite had that effect this time but has kept price declines I think less severe. So what I think is probably going to happen is we’ll continue to see a decline in prices throughout 2020, and I would expect values to start picking up again once employment figures start to rebound. And the reason for that, I think personally, is because we can’t rely on the cash rate reductions any further and the governor of the RPA has made it pretty clear that we’re not going any lower with our target, it’s going to come back to income for purchasing capacity. So I would expect to see perhaps after Q1 of 2020 maybe starting to see a bit of recovery in property prices as we see more jobs being taken up and income recovery.
Kylie Davis: (01:01:08)
So Q1 2020… Sorry, which Q1?
Eliza Owen: (01:01:13)
2021. I would expect to start seeing a bit of an uplift. I was going to say don’t hold me to that, but I know we’re being recorded. We’ve got journalists on the line, so there it is. But I started in this job thinking that I had a pretty good handle on where the economy and the property market was going, and then a global pandemic induced downturn, created one of the biggest economic downturns we’ve seen in about 100 years, so who knows?
Kylie Davis: (01:01:45)
We’ve all had our belief in what is reality completely questioned over the last couple of months. So hunker down folks, I think there’s still a bit more pain out there, but if we all know what to expect I guess forewarned is forearmed. Look, we could certainly discuss this all day, but I’m afraid we are going to have to wrap it up there. I wanted to thank our panellists, Eliza Owen from CoreLogic, Chris Rolls from PieLab, and Dan Evans, thank you so much for stepping in from Macquarie Bank. I would also really like to thank the Proptech Association Committee, Simon Hayes, Jennifer Harrison, Marie-Anne Lampotang, AJ Chand and Kylie Dilon for all their help organising this event. We’re going to be holding more events like this over the next few months so please stay tuned for details. They’ll be in your inbox, or follow us on LinkedIn or Facebook.
Kylie Davis: (01:02:35)
And a very big thank you to Stone & Chalk for getting behind this event and their support for Australian proptech. So if you are a proptech looking for a great workspace with other businesses kicking goals across fintech and proptech, really encourage you to check out Stone & Chalk and their spaces in Sydney, Melbourne and Adelaide, because you can’t work from home forever. You need to get out of the house. So thank you everyone so much for your time. Thank you again to our panellists. This is Kylie Davis signing off.
