Innovation in Real Estate: disruption or ongoing transformation? July 1 st , 2019
1. Context
Real Estate is a major GDP contributor facing significant profitability issues A major contributor to the French economy Significant profitability issues Average profitability in the Construction business in France, 2008 and 2016 (net result in % of revenue ) -0.2pp Share of the Real Estate ~17% -0.7pp Industry* in the French GDP 3.5% -1.5pp 3.1% 3.0% 2.6% 2.5% First item on the French 1 st 2.5% Households spending list 2.3% 2.0% 1.9% 1.6% 1.5% 2 Direct and indirect jobs million 1.0% 2008 2016 Structure Sub-trade Public Works * Including construction Sources: INSEE, OECD, UFC Que Choisir, BTP Banque, Real Estech, Strategy& Analysis July 1st 2019 Strategy& 3
The Real Estate value chain is highly fragmented and shows room for productivity improvement Property management Construc- Asset Development Transaction Investissemen tion management Agents Managers t High coordination Time consuming Time consuming Quality issues costs management management Real Estate Cost professional management High energy costs journey issues Quality expectation gaps Supply lags vs. Real estate Customer new customer inflation journey expectations Pain points July 1st 2019 Strategy& 4
This situation stimulates innovation, born from start up and incumbent players Start-ups creations in France, 2014- Start-ups fund raising in France, 2015- 2019e (€m) 2018 (# of created start-ups) “Innovation is critical for us and we are fully aware that 100 harnessing it is a necessity. We 375 decided to build a specific 90 innovation team and create our Including Meero fund own incubator to develop our 80 raising (€205m) innovative projects before rolling them” Innovation Director, Leading player of the Real Estate Agencies 50 204 177 40 40 64 15 Before 2014 2015 2016 2017 2018 2015 2016 2017 2018 S1 2019 2014 Cumulatively, 400 start-ups were created since 2014 which represents a tenfold increase Sources: Real Estech, Analyses Strategy& July 1st 2019 Strategy& 5
Our study aims at answering 3 key questions How is this set of newcomers in the Real Estate market 1 reshaping the industry? 2 How disruptive are they? 3 Are we talking about an evolution or a revolution? July 1st 2019 Strategy& 6
We investigated six segments to understand what is reshaping the French Real Estate industry 2 4 New house financing New software for asset & brokers property managers Asset & Property Construction Transaction management 1 3 5 6 New financing Short- and long- Site coordination software Fixed rate real estate schemes for term house rental agents security deposits & rent guarantee Sources: Strategy& analysis July 1st 2019 Strategy& 7
2. Key facts
Key fact 1: we identify three major innovation applications across all investigated segments 6 SEGMENTS New house New Site Fixed rate New financing Short- and financing software for 1 coordination 2 3 real estate 4 5 6 long-term schemes for asset & software brokers agents house rental security property deposits & rent managers guarantee TYPES OF INNOVATIONS Software solutions Algorithms and calculations Business process automation Common features emerge: proposed solutions are highly specific, customized and user experience-oriented Sources: interviews, Strategy& analysis July 1st 2019 Strategy& 9
Key fact 2: all segments are not equally innovation- savvy Illustration based on the first two segments 2013: Finalcal starts its overseas 2018: Strategic partnership expansion between Finalcad & Eiffage; Finalcad equips 90% of Eiffage sites Maturity From 2010: Second 2019: new players account wave of players for less than 1% of cumulated market share 2003: launch of 2017: outbreak of the Resolving first platforms 2000 2005 2010 2015 2020 Sources: interviews, Strategy& analysis July 1st 2019 Strategy& 10
Key facts 3: innovation brought by start-ups does not necessarily mean disruption for existing players There are three types of interactions between start-ups and incumbent corporate players Competition between start-ups and incumbent corporate players Complementarity Plain competition Market extension • Mostly observed in the B2B • Mostly on B2C segments • Less frequent: start-ups segments with start addressing overlooked • E.g.: new house financing complementary value market segments brokers and fixed rate real proposition • E.g.: new financing estate agents • E.g.: site coordination schemes for security software, software for asset deposits & rent guarantee & property managers Whether complementary or in competition, start-ups are boosting innovation among existing players Sources: interviews, Strategy& analysis July 1st 2019 Strategy& 11
3. Deep dive by segment
Sources: Strategy& analysis July 1st 2019 Strategy& 13
1 The site coordination software segment shows strong signs of imminent business transformation Most of the building blocks for success are here… “The SMEs market is extremely promising. There 2 are tens of thousands companies that are not Proven track record equipped with our technologies but have a deep 1 interest in site coordination software on Acute need smartphones and tablets.” from clients Start-up co-founder “The adoption rate of site coordination software is growing among large groups, though it is still used on a minority of sites. It should increase in the coming years driven by productivity savings generated by this technology. » Start-up co-founder 3 4 Material means of Will it become the €25m €200m implementation new standard? 2019 Market size Market potential over the next decade Sources: interviews, players publications, Strategy& analysis July 1st 2019 Strategy& 14
Sources: Strategy& analysis July 1st 2019 Strategy& 15
2 In a thriving market, new house loan brokers bet on technology and evolving customer expectation House loan broker’s market share in House loan brokering distribution volume, 2001-2022e (% of total loans) Digitization of incumbent channel by age bracket, (% of brokered players loans) 44% 100% 100% “We are developing a set of digital tools to automate our process. 20 However, we will keep on 34 34% developing our network as customers’ key concern is to be supported through the process.” Deputy CEO, Leading player in the house loan broker market 18% New entrants perspectives 80 66 “We will benefit from millennials entering the house-buying age. Millennials are less loyal to their banks and ready to opt for a 100% online broker” 2005 2017 2022e Average < 35y Co-founder, Start-up House loan brokering market size (€ bn) On line In store €0.3bn €1.4bn Sources: Interviews, Strategy& analysis July 1st 2019 Strategy& 16
Sources: Strategy& analysis July 1st 2019 Strategy& 17
3 Fixed rate real estate agents are still trying to reinvent the agency’s business model Significant customer dissatisfaction An unaffected rate of intermediation An apparent of French people have a An apparent paradox An apparent paradox of house sales are paradox 69% negative image of real estate 85% intermediated in France agents Adding value… …vs. killing costs “We have enriched our service offering: “Thanks to digitization and process Two sets of virtual visits, geo- tracking, … We do not automation, we are able to provide a full competing want to level down our services to enter a range of services for a fixed price, way answers price war with start- ups” lower than traditional agencies.” Innovation Director, Leading player Co-founder, Start-up What about a hybrid model? An outcome • Fixed rate agents business equation is tricky since they seem to be still in An apparent paradox competitive only in large cities • balance International benchmarks suggest that new players will need to find a balance between “do -it- yourself” and “do -it-for- me” business models Sources: interviews, CNRS, Xerfi, players publications, Strategy& analysis July 1st 2019 Strategy& 18
Sources: Strategy& analysis July 1st 2019 Strategy& 19
4 The asset & property management software segment shows strong potential for market cooperation Incumbent players « There is a clear trend towards Start-ups hybrid systems . Companies will keep on investing in ERP for core functions but business related ones will be increasingly business-specific » Best of breed approach Technology Expert, Consulting firm • IT core model focused on finance • Acquisition or in-house « There is a clear complementarity développent of issue-specific between start- ups’ software and ERP. solutions I do not believe that start-ups will move up the value chain and become ERP providers. They will remain focused on analytics and reporting » Expert, IT for Asset management firm Newcomers in the market should trigger renewed R&D investments among incumbent players and foster new market dynamics in a rather concentrated industry Sources: interviews, Strategy& analysis July 1st 2019 Strategy& 20
Sources: Strategy& analysis July 1st 2019 Strategy& 21
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