How data is changing decision-making in real estate investment

Floorspace, length of lease, cost per square foot, occupants' covenant strength – these are the traditional data on which real estate is built and decisions are made. But is it enough in a fast-moving digital world?

Change won't wait for real estate

Footfall, credit card payments, internet connection speeds and even the presence of augmented reality (AR) advertising laid over a site now feed into the way we understand buildings. This information is just waiting to be joined up, escaping traditional silos associated with the long-term building life-cycle. 'We haven't got to grips with the sheer volume of data', claims LIQUID Real Estate and Alpha Property Insight founder Dan Hughes. Patrick Rafferty, VP of product at commercial real estate platform Reonomy agrees that real estate is 'not very far along in its journey' into data.

Earlier this year, Remit Consulting produced the information paper 'The use and value of commercial property data' for RICS. A survey of 150 property professionals conducted for the paper revealed that they see valuation, planning, rating and asset management as the top areas where better data is required. Better valuation data would, of course, prove vital to investment

The information paper highlights how real estate is presented with a particular challenge in an open, digital market – much of its data is held privately for commercial advantage, unlike other types of investment where there may be a legal requirement for data to be transparent. One of the greatest challenges is to open up proprietary data in an area where information is often an organisation's biggest asset, a task that Neil Webster of Remit Consulting describes as 'the big elephant we're going to have to cut up'. It's certainly an intimidating prospect when many are saying that building data could become more valuable than buildings themselves

These were the topics discussed at the recent RICS webinar 'How data is changing decision-making in real estate investment', where 88% of webinar attendees 'agreed' or 'strongly agreed' that data technology will change decision-making in real estate.

Game changers

Given the amount of funding poured into technology in the last few years, with investment just short of $20bn in 2018 according to Venture Scanner (although figures may vary depending on what is defined as 'proptech'), it is clear the market mood is behind it and the changes it could bring. Yet a minority seems to be in denial, perhaps intimidated by the changing landscape.

Technology in real estate also faces the problem of illiquidity. While fintech may have been able to quickly slot into place for hedge funds and share traders, it can be harder to see the benefit in real estate of the speed that tech can bring when there is a protracted buying and selling process.

No single technology looks set to change the game of decision making in real estate by itself, but data platforms, 'as a service' offerings, machine learning and other analytic software all have a part to play in making data accessible and easy to compare and analyse, says Rafferty. From lease-reading software such as Leverton, which can extract the relevant data from a document far faster than any human, to Honest Buildings, which gathers together huge volumes of project data to help keep those projects financially on track, there is a lot happening to change how real estate operates.

Insights

While we have not yet arrived at true artificial intelligence, machine learning is making gains fast and allowing for new insights. Brokers are already using Reonomy's data to explore patterns with the aim of predicting who is likely move, sell or buy in their market. Major consultancies such as McKinsey are now taking an interest in CRE data and developing teams to work on it.

Data is also being used for businesses to predict the best locations for their workplaces. WeWork has a strong data team that has been partnering with Reonomy to crunch the figures that could help them choose the best areas to expand into, building a 'score' for a potential asset. This shows the value of knowing what you want – something WeWork is renowned for – and thus what data you want to delve into.

Asset owners and occupiers are looking beyond 'prestige' buildings and straightforward matters of size and cost; now the emphasis is on how a place will help to attract and retain talent, which means examining transport connections, air quality and access to greenery and open space, all of which contribute to wellbeing.

Better data gives value not just for real estate, but also areas in search of inward investment – allowing them to 'tell a better story' about what they had to offer, suggests Neil Webster. Fine-grain detail about potential for regeneration, the number of degree-educated locals and the number of start-ups can pique the interest of investors looking for pastures new. Look at any stand from a city or local authority at a property event where developers are in attendance and you will see this data being promoted, quite literally, for all it is worth.

Decisions, decisions

To start making better decisions, businesses have to rethink how they use data, and rethink it soon, according to Hughes. Understanding building performance is essential in attracting investors or making an investment decision, so the wellbeing factors mentioned above and energy efficiency, for example, may be more valuable information than previously believed. Looking at the data also allows both parties to see where value might be added, or where there are risks in the assets' future. Climate change and legislative restrictions on letting buildings with poor energy performance, such as the Minimum Energy Efficiency Standards (MEES) in England, can make a building obsolete if not carefully managed. Investors are increasingly aware that sustainability is not just nice to have – it could be the difference between a thriving asset and financial black hole.

Both tech suppliers and real estate need to seriously consider the data standards at the base of all of this. Compounding the problem of data stored in a variety of formats – from ancient paper deeds, to Excel spreadsheets, to apps – is the many ways the same data type might be measured and recorded. RICS continues to work on data standards across the built environment and to disseminate how these can be implemented.

Despite, or maybe because of this, human judgement will continue to be vital in assessing the patterns that data shows, looking into and querying the 'black box' of automated analysis, and in the management of relationships. Webster refers to Hannah Fry's book 'Hello World', an exploration of the importance of human interpretation in a technological world – as he put it 'You can't use the calculator unless you can do maths'.

It is hard to predict how much work will be done by humans and how much by machines, but this very much depends on the question. An automated valuation model may be sufficient to tell us the value of a portfolio, but the decision whether to buy or sell an asset requires human judgement. It's not necessary for real estate professionals to become data scientists amid all this change; more to understand how it will impact on their field and to make sure they are not standing still waiting for someone else to implement the relevant technology. Hiring a chief information officer can be the first step in ensuring that your organisation is equipped to ask the right questions of new tools and implement a future-proof business strategy, says Rafferty and a big part of their role is to ensure that everyone 'speaks the same data language'.

These 'right questions' are at the heart of the real estate data revolution. Businesses need the skills to identify them, ask them and draw actionable insights that will enable them to comfortably ride successive waves of change.