Roelof Opperman on technology in real estate and Fifth Wall's new Real Estate Technology European Fund
Roelof Opperman of US-based venture capital firm Fifth Wall, spoke with Blackstock Consulting’s Andrew Teacher about the real estate asset classes being unlocked by new technology, and outlined the investment strategy behind its newly launched Real Estate Technology European Fund.
The use of technology in real estate has come a long way in the past few years – so far, in fact, that the line between technology and real estate is beginning to blur, according to Roelof Opperman, managing director of real estate at Fifth Wall.
“The biggest REITs in the US right now are data centres,” he said. “All those data centre companies were considered tech companies five years ago, and now they’re considered real estate companies.”
For Opperman, the impact of new technology of course extends much further than high-tech warehouses that house the world wide web.
“I think what is truly key is, ‘how is tech creating these new operating models that are going to be the future real estate players of the world?'”
Low interest rates are certainly helping the investment in technology from real estate companies, Opperman explained.
“It’s also down to the incredible solutions that people are [investing] into, and this incredible entrepreneurial time we are in. And I think that we should all view that as very positive for the future.”
As in many areas of life, the COVID pandemic has accelerated pre-existing trends towards greater use of technology, Opperman said, highlighting the experience of its residential-focussed company Notarize.
“It helps with virtual notarizations for things like mortgage documents,” he explained. “So, instead of having the notarization agent there physically, you just do it via a video phone call. That has taken off with COVID because suddenly, everyone is social distancing, everyone’s stuck at home.
“You have those types of areas, particularly within residential, such as virtual viewing software, and COVID has actually been a massive boost and catalyst for them.”
Full article on Property Week.
Andrew Teacher: Roelof, given where we are now in the market and the cycle, everything that’s happening post-COVID retail offices and lots of doom and gloom, let’s be honest. How are companies still able to throw money into what many people would simply describe as a bunch of moonshot?
Roelof Opperman: I think that’s a great question. So what we’ve found, in general, in proptech and in our portfolio widely, is that you want to put things in almost kind of three buckets. So the first is in some senses proptech that had a massive tailwind due to COVID. You know, we can come up with some anecdotal examples, but let me take one in our US portfolio. So we have a company called Notarize. And basically, what it does is it helps with virtual notarizations for things like mortgage documents. So instead of having the notarization agent there physically, you just do it via a video phone call. That has taken off with COVID because suddenly, everyone is social distancing, everyone’s stuck at home. You have those types of areas, particularly within residential, where you know, virtual viewing, etc. COVID has actually been a massive boost and catalyst for them. So you have that group of buckets. And it’s not just in residential but that’s just one example. You then have the groups where it will be a bit of a pause right now in terms of actual contract sign because of a bit of the turmoil in real estate. But there is no doubt in everyone’s mind, that traction has picked up and that coming out of this, there will be an increased demand for what they’re doing. The examples there may be things like what we call tenant engagement apps, right? Or apps for buildings, or things like co-working or flexible space. Now, obviously, you know, a lot of co-working companies are having a tough time but I don’t think anyone who is serious about the business and looks at the stats, doesn’t think that people are going to want more flexible space coming out of this crisis than they are going into it. In fact, we probably think that that market is bigger than everyone initially thought. So you have that kind of middle category. And then I would say you have the end category. And I think we’ve been fortunate that – honestly, through through more luck than anything – we haven’t had a lot of exposure there. But things like in the hospitality area, where the lack of understanding of duration of how long this thing is going to last has led to a lot of challenges in that area. And I think as the vaccine gets rolled out, and as these other alternative platforms come up, I think that’s where real opportunities are going to be. But obviously, if you had done work or are doing software for hotels right now, obviously that’s a challenging area. So I think that to us it’s in these three buckets, if anything at a high level, it’s kind of been a real catalyst for tech in general in real estate. And I think there’s a few reasons for that. I think I think the first is certainly that the changes that were happening gradually just got accelerated. And all of a sudden, tech is kind of front and centre to every real estate executive; it’s how they’re doing their meetings every day, it’s how they’re actually enabled to work from home. And I think it’s just front and centre to everything they’re doing. And therefore I think it’s more top of mind in terms of what’s important, right? And so you regularly see these surveys now, where people are saying from executives, ‘What is your plan for spending on tech?’ and almost all of them have increased their plan for technology spend in general.
Andrew Teacher: But are they the right people to spend that money? And that’s kind of my point here because I guess you guys have been hugely successful raising money and investing over the last four, nearly five years. And you’ve got some some fantastic top tier partners from places like British Land, Segro, BNP Paribas Real Estate. But obviously, there’s a huge amount of pressure in the listed sector, particularly at the minute, cash calls from many large firms we’ve seen over the last few weeks but my question is, should these companies not be focusing on themselves rather than investing in third parties?
Roelof Opperman: Yeah, so putting aside specific examples, I think that the thing about technology and the kind of commitments to technology in general, I think the truth is you’re getting, remember, it’s an investment in efficiency and operational efficiency, right? So when you’re sitting there as a large company, and you’re thinking about the future, and you’re going through this particular period, the question you have is, what is my strategic plan? And how does technology fit into that? And the truth is that the balance sheets of the companies we’re dealing with, versus what they’re committing is very small, and the ROI is just so high, and it’s been proven. So in some senses, it may seem kind of weird, ‘Hey, why would you put money in tech or put money in this area of tech when money’s tight?’ It’s because you almost have to, when you’ve seen the efficiency of that. So you put a little bit of money in now to save a lot of money over that period.
Andrew Teacher: I guess in some respects, it’s probably the money they would have spent going to MAPIC and MIPIM over the last couple of years!
Roelof Opperman: I mean, I love those organisations so no comment on that! But I think that’s kind of what we’re thinking about. And then I think the other thing is, what is very top of mind? It’s almost similar to like – putting the question back to you of – ‘Well, despite this down period, why are people still focused on sustainability? Why are people still focused on green tech? And why should people still focused on making sure that what they’re doing in the future is good for the climate?’ Even though…
Andrew Teacher: Some of them aren’t though are they? I’d like to think that most people are, but I think the reality is that where company execs are fighting for survival, those things…
Roelof Opperman: I think we do want to be a little careful of painting too broad a brush. I think that certainly in retail there’s been that issue, and retail is really going through an existential crisis. I think in those areas there’s a lot of challenges. I think in office, obviously, they’re going through a big challenge. But I think that they’re in a much better position, certainly, to get through this, because I think even the people that are the most gung ho on working from home understand that there will be an office left at the end of the day. And it will obviously be diminished but it will still be there. As opposed to in retail, where you’re talking about real diminishment, right? And then there’s other areas that have done well. Resi is obviously doing super well, in certain areas, almost globally. Obviously, logistics has been an incredible asset class to be in. And then you’ve got these other areas, sub-areas, like healthcare or bio, that are kind of emerging, data centres that are emerging. So, I do think that we want to be a little careful with that broad brush, but I will say that, for the companies we deal with, and we’re very lucky to deal with – as you mentioned, some of the biggest – and a lot of them are listed, for them, as you’ve seen from the public announcements, and from their strategic objectives, the sustainability and the tech is still there. And I think that if I’m an executive, I realise that, yes, there’s money I need to spend, but I’m getting such a return from it. And then secondly, most importantly, even if I don’t think I’m going to do it, all my competitors are. And so the key is that if they don’t do it – if any big listed company now doesn’t care about sustainability, isn’t focused on it, isn’t spending on it – the truth is, I don’t think that executive will be there very long.
Andrew Teacher: Absolutely. And I think we’re starting to see that now. And I think that there is some of those sectors you mentioned, like biotech, and certainly some of the modular housing players that investors such as Goldman Sachs and Legal & General are backing, these potentially have quite good ESG creds alongside them, which could well open up new sources of capital. And that then opens the door quite nicely for some of the sorts of things that you guys…
Roelof Opperman: That’s right. Obviously, not to make this a macro economics discussion, but low interest rates are going to help assets. And the government, certainly I think government…
Andrew Teacher: Not to mention all the asset buying!
Roelof Opperman: If you’re worried about inflation, certainly, technology tends to be long-term a good hedge. But I think that the government’s certainly across the world, across Europe, and then I think the hope is in the US now, are really putting for this agenda on Climate Change and how important the built world is as part of that. And so, all of that is helping and I think what we realise is to solve a lot of these climate issues, but in addition, to solve a lot of the social issues – housing is a social issue and the lack of affordable housing is a social issue – we think technology is key. And technology is not where it needs to be right now, for us to solve these. There is going to have to be a lot more R&D, some in the form of venture, some of the form of corporate R&D, that goes into these solutions in order to create these solutions that are going to solve these problems. And that’s why we feel positive about the sector and why you keep seeing more money getting into it.
Andrew Teacher: And what is the canvas for R&D? Because there have been warning signs that the President-Elect Biden is going to have a bit of a crackdown on big tech. Some say we’re almost back – in some instances – to the early 2000s, with the huge monopolies of the big tech players just gobbling up anything that looks like it might be a disruptor. That’s obviously not necessarily a prop tech problem, but it’s certainly a big tech challenge.
Roelof Opperman: Yeah. I don’t know that we have a good enough read on his administration and what he’s doing because obviously, I’m in the UK now though I think we all follow the election, and there wasn’t a lot of substantial debate on policy, right?
Andrew Teacher: Did you guys have a “Build Back Fifth Wall” hashtag going?
Roelof Opperman: No but we should!
Andrew Teacher: Absolutely, get some t shirts made!
Roelof Opperman: We try to stay as neutral as possible but obviously, the governments and regulatory authorities are important part of who we speak to, and who we advise in a lot of ways. And I do think that regardless of what happens in antitrust, or what happens with big tech it is just such a magical time for innovation and technology across the globe. And I do think that you’re seeing record amounts come into venture, record amounts coming to European venture, record amounts go into technology. And a lot of that is because – yes, low interest rates – but also because of the incredible solutions that people are funding into, and this incredible entrepreneurial time we’re in. And I think that we should all view that as a very positive thing for the future. And, I think that no matter what the government does in the US, I don’t think that that’s going to change anything, right? The antitrust against Microsoft didn’t change the innovation that came afterwards.
Andrew Teacher: It certainly changed Microsoft – the Microsoft of today is nothing like the Microsoft of 20 years ago. And unarguably, it’s made them a much better business.
Roelof Opperman: Yeah. I think it’ll be an interesting use case to look at that. And, again, no one really knows what’s going to happen.
Andrew Teacher: But you can compare where Microsoft is now to the pitiful state of something like Hewlett Packard for example…
Roelof Opperman: Yes. I think you have very different businesses with hardware versus software, but I think that at the end of the day, free markets that create systems that match capital with talent and at the same time, reward people who are taking risks, will create innovation. And we believe in that here, and we believe that in the US particularly.
Andrew Teacher: So let’s bring it back to property now. So some of the deals that you guys have done – you’ve backed some of the big, quite buzzy businesses in the space – Opendoor and Industrious are two of the recent-ish businesses. What do you guys look for in companies that you’re investing in? Because obviously, a lot of people will look at – you know, the first things that come onto people’s radars when they think about property in tech are WeWork, and obviously, we will know that story – so how do you navigate this space? Where do you draw the line? Because the running joke there was that they always said, ‘This is a tech business’, and everybody said, ‘No, you’re a property business.’ What is the Fifth Wall barometer on it?
Roelof Opperman: Sure. I think something we’re thinking about very deeply and – remember that most of our limited partners are big owners and operators in real estate, right? British Land, Prologis, BNP Paribas Real Estate – and yes, they obviously care about the financial return we provide. But, the strategic return is just as important, if not more important, and so we work with them a lot on just thinking about technology. And the effect that technology is going to have on the world in general and the built world of real estate. And I think what’s fascinating right now is that the line between tech and real estate is continuously blurring. Take the biggest REITs in the US right now, right? The biggest REITs in the US right now are data centres. That area was considered technology five years ago. All those data centre companies were considered tech companies, literally five years ago, and now they’re considered real estate companies. And so what is just as important as you think about the individual technologies – and yes, maybe Opendoor, maybe ibuying, maybe tenant engagement apps – is actually stepping back sometimes and looking at the forest and not just the trees. Because I think what is truly key is, how is tech creating these new operating models that are going to be the future real estate players of the world? And how is technology enabling in a sense, new asset classes that could be there, whether it be data centres, whether it be bio, whether it be single family home rental, which is now a huge asset class in the US and potentially will be a big asset class in Europe. And so I think that you do need to look at that. Now, in terms of our individual underwriting, generally, venture comes down to three big components. And then I would add a fourth and fifth. The first is certainly the entrepreneur, right? You need to have someone of high integrity, with a lot of guts, and a great vision and a great leader. And that’s part of an assessment. And there’s checks we do and there’s specific things we do as part of that. The second is obviously the market. You need a big, fast growing market. It doesn’t matter how great the technology is, doesn’t matter how great the entrepreneur is, if it’s a small market not growing, it’s not going to be a great company.
Andrew Teacher: And you’ll return probably 10 x?
Roelof Opperman: Yeah. I mean, our lawyers get nervous when we talk about return, but it’s high venture return. So I think it’s what you would expect.
Andrew Teacher: Yeah, I think that people listening to this, typically are looking at relatively modest returns from real estate, so that’s an eye-watering number.
Roelof Opperman: Sure. And then the third component is obviously the product. And what’s funny about venture capital is that, generally, venture firms focus on one above the rest. But you almost always look at those three things. So is this the best in class product? Does it solve a solution? Does it solve a problem? Is it a solution to a problem? And is someone willing to pay more than it costs to get it? And then I think there’s a fourth thing for Fifth Wall, which is how do we influence the outcome? And what I mean by that is we’ve got these 60 partners across the world, we’ve got an increasingly big presence here in Europe. And the question we have is, how are we influencing this company, either through our partnerships we create, so either direct revenue partnerships, in some cases, our LPs being literal customers, or the partnerships we create with them by which the product or service is sold through the LP or through the investor. And so I think that that’s a big component for us and what we do.
Andrew Teacher: That’s the Fifth Wall ecosystem, basically.
Roelof Opperman: That’s exactly right. And I think, in some cases, somewhat a different insight in the underwriting because we actually integrate our investors in our underwriting, we make them part of the underwriting process, we solicit their opinions, we have standard ways of doing that, we, if they’re open to it, get them to try the technology. So in some senses we should get great intelligence from that underwriting with our partners.
Andrew Teacher: So in terms of Europe, you’ve now got a European fund that you’re looking at that’s just going to be an extension of what you’ve been doing in the States, or is it going to be a different strategy? Is there a different risk profile, you’re going at different stages?
Roelof Opperman: Yeah, so a number of our partners announced the first close on our European fund. And it’s actually pretty simple. It’s exactly what we did in the US, but now applied to Europe. So the idea really, is…
Andrew Teacher: Better culture, better looking, and better coffee?
Roelof Opperman: Exactly, exactly, and certainly better at cricket! And so I think that’s the idea, it’s that we really are out there looking for the latest and greatest entrepreneurs, invest in them, and then partner them with our European ecosystem partners.
Andrew Teacher: So they have to be European based, or they just have to be active in Europe?
Roelof Opperman: European based. So that that’s what we’re looking at. The funds we had before have all been US focused. This will be European focused. And then I think the second element of it, which I think is pretty unique to Fifth Wall, is that once we get these businesses big enough in Europe, and once we get these businesses big enough in their domestic territory – so let’s say a Parisian based business in France, a UK based business in London – then we want to actually take it to the US, we want to keep them based here in Europe, but then we want to really get them in that US ecosystem. Because obviously institutional real estate capital is the biggest asset class in the world. And we luckily have the best network there, in terms of our partners. So we want to grow it here do really well here. And then the first thing we do is inject it in the US. And the great thing about real estate people is that they don’t really care what the tech comes from, they just want the best. And so our job is to go and find the best and then help them grow.
Andrew Teacher: What I’m interested in is some of the differences – if you think about the real estate sectors across Europe, they are a lot more immature, particularly with say residential – you guys have been doing that in the states for nearly 30 years. And we don’t have any really mature multifamily businesses, domestic businesses across the UK and in Europe, really. Biotech is something we are only just figuring out. And data centres yeah… we’ve got data centres, but I guess the point is there’s lots of growth here and, proptech and tech more generally could be quite a good mirror, as you said a bit earlier, into some of those future trends, understanding what’s a trend, what’s a niche, what’s a blip? And what’s just a kind of cyclical oddity. So let’s talk about some of the things that you consider trends. And let’s try and understand where the tech fits into that. So, Biotech, Life Sciences. Let’s start with that because that’s obviously very topical right now. The UK has worked out that it needs to actually invest in diagnostics. The US is realising that the booting out Obamacare maybe wasn’t such a great idea. Although I guess, we’ll see. But I think there’s obviously massive social and political decisions to be taking on healthcare. But right now there’s tonnes of money going into this; NASDAQ’s going crazy for biotechs. And these companies, from a real estate perspective, the rents aren’t a barrier for these guys, they can afford to pay whatever they need to pay to be in the right places. So where does the tech fit into that world, when we’re talking about labs, research facilities, innovation districts and campuses?
Roelof Opperman: Yeah. We are a technology firm and we invest in technology, but a lot of the stuff we’re investing in, as well is – call it kind of tech-enabled innovation. And the reason I say this as a preface is that – take Airbnb, for example, a great example. If you look at Airbnb – is it a tech firm? And I’d probably tell you no, right? It uses the web and yes, it uses technology, but is it at its heart a technology company? Probably not. It’s just a new business model and it’s tech enabled. And so I think a lot of what we’ll be talking about, or thinking about, particularly in this area, will be more in that particular area. I think talking broad brush strokes in terms of medical, I think you’re going to have a few things that happen that are interesting. One is certainly that you’re going to start seeing medical or what we would call just generic practitioners that are part of the office environment. I think this will be a big amenity for office owners in the future of having a ground floor Medical Centre where people can go if they feel sick or something happens. I do think that that will be one of the big amenities that a premier or Class A office will want, that actually will obviously get people back in the office because it’s like, ‘Oh, well, I have to go to the doctor, the doctors down in the basement, I can book whenever’. So I do think that medical will be part of that as retail recedes and we think about alternative uses for the ground floor space of an office building. I think the second you have to be looking at – and there’s been a number of funds looking at this and I think Blackstone just raised a life science fund that has a long life – I do think you need to start looking at the lab space as almost in a sense the future office space. I think that the lab space has even better attributes to it than the office. First of all, labs are very expensive. There’s equipment in a lab that you can’t work from home with. That’s why you go to the lab. And I think the same models that we’re thinking about the future of office can very much be applied to a lab type setting. And I think increasingly, people are going to look at that. And actually London, in a lot of ways, has a has a tonne of this going on. There are a lot of labs in Marylebone. Stanhope did a project in White City. Some of the leading medical and science institutions are here. I love walking around London, because so many famous medical things happen. I live down by near Paddington, I think it was the polio vaccine, or it was one of the vaccines that was developed here, which is pretty incredible. You’ve got such history here and such great science, that it’s a great city to see this happening. But I think that lab space is going to be something people definitely look at. And then I think if we move over to logistics, I think that the government and everyone is going to be taking a whole new look at supply chains within medicine. And I think that that’s going to have a huge impact on the storage and logistics areas. And there will be quite a bit of opportunity there my opinion.
Andrew Teacher: Yes, the medical space is quite interesting, as I think what people have seen is that maybe going to a GP surgery full of loads of sick people just because you’re sick as well is not necessarily a great idea. But then the flip side of that when it comes back to funding is that we spend billions of pounds in the UK, conducting and undertaking relatively low level primary care procedures in hospitals that could be done locally in the community. And that’s a lot more prevalent across mainland Europe. You don’t just go to some generalist general practitioner, if you’ve got a specific ailment, you go to that specialist. And that would strike me as making a lot more sense. But I think from some of the research that we’ve been doing in the space – we work with BioMed, a Blackstone portfolio company, that’s developing a lot of lab space, globally, and they are one of the biggest owners in the UK. But we’ve been doing a lot of research as a business over the summer and actually, the increasing investment in AI in digital health and people’s ability to personalise their healthcare could have quite profound effects on the real estate outcomes. Like you say, being able to go into a local chemists and do your blood tests so you don’t have to go to the hospital and conduct all those sorts of things. Is that something you guys are looking at?
Roelof Opperman: Yeah, I think that’s a little too out of the built world but it is important for us to understand that and to follow it, because I think it does have a profound effect on real estate. I think a lot of our great investments come out of thematic work we do from working with our partners and thinking about these ideas. And it is important for us to understand that and what’s happening, because again, it’s where that line of tech and real estate blurs right, it’s where you need to know. And I do think what’s interesting is – and the example I always give is – one of the most sought after presentations we give is this presentation we give on autonomous vehicles and the effect on real estate that autonomous vehicles will have long term. And we are likely not going to be investing in any technology that deals with that, but it’s very important to understand what autonomous vehicles are going to do to real estate if you are a real estate investor. I think it’s critical to think about the future. It’s kind of like if you had if you had known what Amazon was going to do to retail – and some people did, and they went heavy in logistics and it’s paid off. So you can’t just myopically focused on real estate and say, ‘This is real estate tech, this isn’t and therefore I don’t care’. I think you have to have a multidisciplinary approach because at the end of the day, it’s about how we move around and how we use these physical assets.
Andrew Teacher: Hmm. Finally, then just before we close, obviously, we’ve got COP26 coming up in the UK shortly, and we do have this focus on ESG. What should CEOs of some of the REITs be saying to their boards on this? What should their top line strategy be on how they’re using tech, how they’re supporting the ESG demands that investors are placing on their shoulders? Are there some off the shelf opportunities that you see on the horizon?
Roelof Opperman: I actually think what you need to do is have a very serious board discussion. And I really do think you’re going to have to budget a decent amount of spend to meet these goals. And I think the best way to do that is to just explain it to your board and explain it to your investors, just like anything, but understand that there are really great long term payoffs for this. There’s a number of technologies, obviously. There’s energy efficiency technology that pretty much is where it needs to be – it could get better, but it’s in a pretty good spot. There’s a number of material sciences that I don’t do out of this fund, but is something that’s out there. But I actually do think, unfortunately, where the technology and innovation is versus where it needs to be to hit these net-zero targets, is incompatible right now. I think there’s going to have to be a much bigger round, or rounds, of R&D in the space to get us where we need to be. And so I think the biggest thing is if I were a CEO of a massive company that’s listed, the first thing I would do is just figure out what the heck my carbon footprint is, and what’s contributing the most to it. And what you’ll often find is, it’s almost like an 80/20 – 80% of your carbon comes from 20% of your activity. And then I would really focus on two or three big projects that are going to mitigate that as best I can. But I do think that that’s the thing. I think the second thing that’s coming down the pike is that right now, a lot of people are able to do Net-Zero based on carbon offsets. So they’ll build a new building, it’ll have a huge carbon footprint, but they say, ‘Don’t worry, we just planted 20,000 trees in North of England.’ I think PR wise, that’s going to be very untenable in the future. One of my partners, Brendon describes it as weighing yourself and then putting one foot off the scale. I think increasingly, the press and the media and investors are going to say that’s not good enough. We need the net-zero to actually mean net-zero. And I think the way we’re going to be able to do that is better materials. Something like cement is a huge contributor to carbon in a new project. And then I think the second thing is going to be not only energy efficiency, but energy generation in a building so that you’re contributing back to the grid, and therefore offsetting your carbon based on that.
Andrew Teacher: Yeah, that’s an exciting point. I’m definitely going to be using that ‘one foot off the scale phrase’ – I think we could probably be using that after a few more months of lockdown followed by Christmas, Hanukkah and everything else. But yes, the concrete thing is really interesting and we’ll be hearing from a proptech business that’s focused on that in the next couple of weeks. So look, we’ve covered so much ground, thanks so much Roelof Opperman from Fifth Wall. Fascinating discussion. We’ve covered heaps of ground there and obviously you can head to fifthwall.com to find out about all of these awesome things that you guys are doing and look forward to receiving my “Build Back Fifth Wall” t-shirt very soon.