Data is everywhere, and its volume is constantly growing. According to a study by Bitkom, the German digital industry association, the amount of data worldwide is expected to total more than 100 zettabytes by 2020: expressed in bytes, this is an unimaginably large number with 21 zeroes. Like all other industries, the real estate sector is also trying to make the most of the benefits of the third digital revolution, as it is known. The study, “Digitalisierung in der Immobilienwirtschaft” (“Digitalisation in the Real Estate Sector”), produced by the Real Estate Management Institute (REMI) in Wiesbaden, calls this development a “megatrend”. The authors of the study are convinced that digitalisation helps to make sale and purchase transactions more efficient, because evaluating more data also means improving management decisions. In other words, big data enables individual knowledge to be matched up with, and supplemented by, global data. This makes networked, in-depth knowledge available at the push of a button. Until now, property markets, for example, have often been examined and described with reference to the prime segment, but there is much less transparency about the segments below that – a state of affairs that digitalisation will probably eliminate, according to the REMI study. This could also have an impact on prices. When decisions are taken on the basis of dry data, this can result in price increases or reductions of up to 10 percent, the IT consultancy Architrave calculates. Transactions are not the only area where increasing digitalisation is now established in the real estate sector.
In part, big data is already a reality at Union Investment. For example, thanks to digitalisation, previously unconnected figures can be expressed in relation to each other and thus provide new insights: for instance, energy consumption in hotel properties and their average occupancy rates. Analyses and evaluations then flow into the risk-management process. With ImmoRisk, Union Investment is using an internally developed, SAS-based software solution for risk measurement at property and portfolio level. It is used to perform a Monte Carlo simulation, as it is known, which replicates complex processes and plays through a range of risk scenarios with the help of statistical methods from probability theory. This makes it possible to quantify a variety of yield–risk structures – something that will be indispensable in the future, both for practical purposes and against the background of mounting legal requirements from the German Capital Investment Code (KAGB). In addition, different valuation approaches, such as the gross rental method and discounted cash flow, can be used in parallel. Performance comparisons between the whole special assets fund and subportfolios are also possible. Furthermore, a sensitivity analysis can provide information on the impact that risk drivers identified in advance will have on yield. In addition to projections of the expected return on capital, this process calculates the probability that the yield sought will not be achieved (known as shortfall probability). Finally, a stress test can be used to simulate various worst-case parameters and their impact on a fund’s value. Here, large volumes of data are examined in order to find out how key portfolio figures will develop under specific conditions. This cannot be done without considerable use of data and technology.
The real estate sector is developing from an investment-driven business into an information-driven business.
Efficient processes, data-driven decisions
Risk management is not the only area where Union Investment has implemented digital, integrated processes. A specially developed system is also being used for real estate fund planning. The main aim of ImmoPlan is to manage the performance of individual special assets funds comprehensively, with all the assets considered. The program also helps in identifying at an early stage any deviations from the planned capital growth of individual assets.“ Both digital instruments improve the basis on which decisions about investments are made, and they are also important drivers for optimising processes and making them more efficient. In short, they improve a company’s capacity to innovate and, thus, its ability to face the future,” says Heiko Beck, COO and Member of the Management Board at Union Investment Real Estate GmbH. The prerequisite for the further digitalisation of the real estate sector – and one of the major bottlenecks blocking progress towards it – is a supply of skilled workers. “We need more IT specialists,” Sandra Peterson, deputy head of the global healthcare group Johnson & Johnson, said recently.
Accordingly, talent needs to be encouraged and attracted – including from disciplines that until now have had no connection with the real estate sector. The University of Cambridge, for example, is already offering courses in “Smart Cities and Urban Analytics”, according to the latest study of the future from the Royal Institution of Chartered Surveyors, “Our Changing World”. In addition, legal problems must not be underestimated – above all, those relating to data protection. To take one example, electronic control units in cars have for a long time been supplying a large volume of data about the driving behaviour of the person behind the wheel. Motor insurers would like to use this to offer premiums adjusted according to the driving style of the individual customer. Defensive drivers would benefit financially. Something similar is also conceivable in the real estate sector: sensors that measure the energy-consumption habits of office tenants could certainly make them aware of possible weak areas and thus optimise additional costs. There is no problem about this technically – but legally? After all, as in the case of the car driver, this would mean more monitoring, which may not be to everybody’s liking, because data can always be misused, too.
Start-ups as a model
Ultimately, companies also have to be both able and willing to keep pace technically. Of the companies questioned for a Commerzbank survey entitled, “Management in change. More digital, more efficient, more flexible!” 52 percent admitted that they found the high speed of development a challenge – including in the financial sense. It is no wonder, then, that 63 percent indicated that small and medium-sized businesses were currently still tending to neglect the subject of digitalisation. However, Carsten Lausberg, Professor at Nürtingen-Geislingen University (Hochschule für Wirtschaft und Umwelt Nürtingen-Geislingen, HfWU), who has produced a new study dealing with the digitalisation of business models, warns against overloading this megatrend: “Digitalisation does not automatically go hand-in-hand with innovation.” He believes it is indisputable, though, that “the real estate sector is developing from an investment-driven business into an information-driven business”. Stefan Gross-Selbeck, former CEO of the online business network Xing and co-author of the Commerzbank survey, encourages old economy firms to follow the example set by start-ups: “They do not use new technologies only in order to achieve improvements in productivity. They also try out options for exploring new customer groups and distribution channels and creating new offerings.” The internet giant Google demonstrates how such a start-up mindset can also work in a major group. It recently acquired a maker of heating thermostats. Stephan Rohloff, marketing director at the software developer Aareon, believes that one thing is clear: “Silicon Valley is already extending its feelers into the housing sector.”
“It is time for a change of mindset”
Martin Brühl on working with new technologies
Mr Brühl, how enthusiastic is the real estate industry about technology?
The real estate profession in industrialised Western countries tends to be rather conservative and sceptical about technology. However, the growing digitalisation of our economic structures requires our industry to be aware of the impact that this is having. It is, therefore, time for a fundamental change of mindset – a new perspective on the whole subject of technology. We have to create a culture that does not fear technology but perceives and accepts it as an opportunity.
You are the new President of the Royal Institution of Chartered Surveyors (RICS). How, in practical terms, do you intend to approach this change – in the use of big data, for example?
We are already at the practical stage here: disciplines regulated by the RICS, such as geomatics, urban planning and urban land-use planning, and infrastructure development, are using big data in their everyday work. Very specifically, the RICS is currently drawing up a range of international standards on the harmonisation and classification of important data – for space measurement, for example. Common, binding standards such as these are one of the key requirements for the success of big data.
Are such initiatives from within the industry enough?
Certainly not. This is why the RICS is encouraging collaboration between the real estate and technology sectors. We are working across industry boundaries and building up new networks and new co-operation arrangements. For instance, we set up an online technology forum some time ago and are now in dialogue with new partners outside the group of “usual suspects” in the real estate industry, especially technology companies and their industry associations.
What is the industry’s view on Building Information Modelling (BIM)?
BIM, the digital, 3D-model-based process for the planning, design, construction and management of buildings, is a small but very important cog in the machinery of digitalisation. In any event, use of BIM is projected to grow significantly in the land and real estate sector in the coming years: research institutions are forecasting annual growth rates of almost 17 percent up to 2020. Market players are expecting that the market share of US$2.6 billion in 2013 could rise to $8.6 billion in 2020. The RICS itself has already done a lot to make progress in this area. For example, BIM Manager Certification has been created, BIM conferences have been held, and we are working with architects, civil engineers and regulators to establish new standards, which are necessary in this field.
If you think beyond big data, you end up at open source: will the RICS back this form of transparency?
The concept of open source stands, more broadly, for freely available knowledge and information. This brings us back to the point that also concerns the real estate industry: in the future, what you know will matter less than what you actually do with that knowledge. The way to add value is to derive appropriate recommendations for action from what you know! And yes, I am certain that the future will belong to open source initiatives and open data standards. The public expect open, free, easily accessible and transparent data. A professional association that is committed to the common good, like the RICS, has to integrate these social expectations into the work of our regulated, quality-assured members. However, some substantial questions remain open, especially in relation to property rights, data protection and cybersecurity.
Interview conducted by Arne Gottschalck.