IQ-EQ sits down with CMS Law’s Charles Kerrigan, chair of the AREF Technology Working Group, to discuss recent PropTech developments and the role that technology has to play in the real estate sector moving forward.
Technology is proving to be the answer to many of today’s challenges, including in the real estate sphere. PropTech trends were already influencing the UK real estate market, but Covid-19 may be accelerating such innovation to help overcome new pandemic-related hurdles and drive the market forward post pandemic.
In this episode, funds director Tom Miller is joined by FinTech expert Charles Kerrigan to shed some light on this interesting subject. Together they discuss the significance of PropTech for the real estate sector, the role it has to play in relation to post-pandemic market recovery and what developments are likely to have the biggest industry impact in the next 12 months.
Charles is a partner at CMS Law in London where he acts on finance and technology transactions and projects. The Blockchain Industry Landscape Overview 2018 names him as one of the UK’s leading influencers on blockchain, and he is the UK’s “recommended lawyer” for blockchain and digital technology in the UK Parliament Hub. Charles also chairs the Technology Working Group of the Association of Real Estate Funds (AREF).
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Hello, and welcome to IQ-EQ’s Real Estate Focus, our dedicated podcast series where we hear from industry experts on the latest trends and hot topics within the real estate sector. I'm your host,Tom Miller. Technology is proving to be the answer to many of the challenges faced by funds and companies today. PropTech trends will already influencing the UK real estate market, but it seems COVID-19 may be accelerating things to help drive the market forward post pandemic. For today’s episode we're delighted to welcome Charles Kerrigan, who will help us shed light on this interesting subject. Charles is a partner at the CMS Law in London, where he acts on finance and technology transactions and projects. The Blockchain Industry Landscape Overview 2018 names Charles as one of the UK’s leading influencers on blockchain, and he’s the UK’s “recommended lawyer” for blockchain and digital technology in the UK Parliament Hub. Charles also chairs the Technology Working Group for the Association of Real Estate Funds – or AREF. So he knows a thing or two about PropTech, our focus for today! Hi Charles and thank you very much for joining us today. So Charles, could you begin by telling us and our listeners a little about AREF’s Tech Working Group? Why it was set up, what it does and who else is involved.
Sure. So, AREF is Association of Real Estate Funds and it has been around for some time now. The senior management set priorities from time to time and, I guess unsurprisingly, one of the recent priorities is technology. So, I was asked to chair a group that would look at technology from a practical perspective. What kind of issues are AREF members facing? How can we provide an education service and how could we showcase some of the technology solutions that are in the market that could be relevant to members? There are about 15 of us, so it's a relatively large group, and the purpose of that is to get a good range of members feeding into it. The tricky thing about technology is that there's no ‘one size fits all’ and different stakeholders have different views of what's useful. So we've got members represented from large funds through to relatively new, small-sized funds, professional advisors, consultants. Everybody who's a member should have some representative on the group.
Thank you, Charles. So what are your views on PropTech? Do you think it will revolutionise the real estate sector or is it just a natural progression?
Um, I want to say both! Not an obvious answer to the question. So, I think it is ultimately revolutionary, in the same way that we see most substantial businesses now describe themselves as technology businesses – and generally with good reason. The issue with technology is that becoming a technology business is easier said than done, and there are lots of large technology projects that struggle to be successful. So, I think it is revolutionary, but I'll probably focus my answer to the question more on the natural progression part of it, where there is steady progress. And I think one of the general points of technology is that it takes a bit of time and it costs some money. So what you need to do is have success stories early and build on those. Start with small things. One of the things that I have been involved in is working with relatively small companies that provide services to the kind of businesses that are members of AREF and identify particular problems that can be solved by a product. So something that you can almost buy off the shelf and it works right out of the box. And those types of things tend not to be grand overarching technologies, but the kind of thing that just addresses a specific issue. And I can give some examples of businesses that I work with that are relevant to that question. There's a business called Cygnetise that provides signatory management services. So an example is something that has always been analogue – signatures in a book – going online. And the story I think with a lot of PropTech is the move from analogue to digital. That's things that are relatively easily digitalised but so far haven't yet been. So we've got signatory management. There are other businesses that provide share capital management services – a company called Globacap. Even software that allows everybody in a business to produce structure charts – they’re a company called StructureFlow. So I'm describing here relatively small businesses and one of the things that we try to do through this work is provide a bit of profile to small businesses. If there’s a customer with a need and a product to fill it, that works best for any sort of technology adoption. Um, one of the problems with technology is that it's impressive and interesting. So we have a tendency to talk about the technology too much and not talk about the customer enough.
That's interesting, and of course, products like those are applicable and useful beyond just the property sphere. Looking specifically at the real estate sector, what role do you think PropTech would play both in terms of immediate recovery from COVID-19 disruptions and building long-term resilience to any future turbulence?
Um, it's a hard question, I think, because we are some way from understanding the return to the office, if I think about it in those terms. So, I'm reminded by that question of a conversation I had about 12-or-so years ago when the development that we were looking at was property derivatives. And that was something that was the subject of a fair bit of conversation, but relatively little transactions. And I was in a meeting with the CEO of an investor and we were listening to a presentation from someone who was explaining the benefits of property derivatives. And we got to the end of the presentation and the CEO said, “This is absolutely terrific. I really can understand the value of that. But the problem is my company is invested in West End commercial property. And that's all we do. So we go up and down with the cycle and if people want more exposure to West End commercial property, they can buy more shares. And if they want less exposure, they can sell shares.” And it revealed to me, I think, a very clear point about identifying what the market wants in whatever context you're looking. And I think we first need the market to settle and identify how the return to work goes in the office; what the new landlord and tenant requirements are. I'm certain that PropTech will be able to, um, provide benefits in delivering those answers, but I don't think it can predict the answers yet. I think we need to see what happens on the ground and build from there. But, yeah, there are examples where you could just follow the logic of the technology into, say, warehouses and logistics centres where there are relatively few people working in them. So technology can operate perfectly well in buildings without many people in them, but I don't think that's what we're aiming for here. So the other theme that I think always is floating around in conversations about technology is the, sort of, ethics of the use of technology – always taking from the PropTech industry approach, taking an ethical approach to whatever it is that we're looking to do. So it's a long-winded way of saying I don't know! Um, but I think we'd start with the requirements that human beings have and put the technology around that, and that will get us the best solution.
I think your answer is very much aligned to what a lot of people are saying or hearing. So for example, in our first podcast, we interviewed BNP’s Head of Real Estate Research, Stephanie McMahon, who touched on PropTech in relation to office space. Things like automatic doors, monitoring of traffic of people, air quality. But again, she said, similarly to what you're saying, until we have a kind of ‘new norm’ or experiences, we're not seeing vast changes. And obviously all the medical advances can change how technology should influence. So on the ethics part, perhaps, is there a couple of points that are continuously being raised in your discussions, Charles? Or is it the same points we're hearing? I think a new thing that I am hearing more is – and apologies, I think it hasn't yet got a term, but whether it's SafetyTech or SafeTech or something like that. The difference between the real estate sector and many other of the sectors that have had this accelerating digitalisation in the sector is that there is self-evidently part of the real estate sector that you will never be able to digitalise, and that's the buildings. So we are still dealing with physical spaces here. I think one of the advances that is getting attention from so many businesses that I see is safety aspects of both construction and existing buildings. And it's one of the things when we talk about PropTech, we're often talking about software, and some of the things that you described – that smart buildings can identify when there are people in rooms and therefore the rooms might need less heating because of the body heat of the occupants, and when the people leave and respond to those sorts of things in terms of the ambient environment. I quite like to look at physical technology in this context as well. The hardware. And there's a company called Verton that I work with that provides a piece of hardware that makes cranes operate more safely. So if you see a crane on a windy day, it needs a lot of clearance, it's operating with someone standing underneath it holding the rope to ensure that things aren't swinging around too much. So this new business looked at the safety implications of that and developed hardware that makes it possible for the person who stands underneath the crane to be further away and not physically holding onto it. So there’s this aspect of real estate that is sometimes little talked about: that real estate development is a somewhat dangerous thing. And, uh, the regulators who look at this are concerned to ensure that standards are met and the extent that there are technology developments that could improve them, that the industry takes those on. So that I think is a good example of something where we’re bringing transparency to the fore in response to that point around ethics. Thanks Charles. And to ask you a question with your transactional hat, we're seeing a lot more of our clients doing more enhanced due diligence, and DD is becoming more vital. And a lot of our clients in the industry are looking at ways of more effectively managing that. What about PropTech specifically? Does PropTech have a role to play to facilitate enhanced due diligence in real estate? Certainly. Yep. All technology is about information, one way or another. A lot of my background is in FinTech as well, and FinTech develops because if we boil it right down, banks are basically doing two things: they're doing payments and they're doing intermediation of capital. And they’re both information problems; payments, you're trying to get information from a sender to receiver via whatever system the value transfers down, and intermediation of capital, you're trying to solve the information problems that are inherent in any market. So technology manages information. Due diligence is pretty straightforward as a use case for those sorts of things. So I think we'll see this develop over time. First in the sense that more information can be measured, captured, stored and made available. Then I think we get to a next stage where we've got an amount of information that means, if you run the algorithms across the information, you're getting better insights. So artificial intelligence is just a prediction machine. It generates human type insights from a mathematical starting point. And we'll see that one of the things that will be very intimately connected with PropTech is the Internet of Things. So this with devices in parts of buildings and measuring, maintaining lots of aspects of that. So, again, it's generating more information and so much information that it can't sensibly be reviewed by human reviewers anymore. And therefore you’ve sort of got this virtuous circle, in a sense, that the diligence ou're performing on assets is now diligence based on more information, captured more accurately, measured more regularly and tested by the algorithm in a more insightful way. So I would certainly say that, whatever it is you're looking to diligence around real estate assets, PropTech will have a bundle of solutions for that. I think it's really that you mentioned the data, because another thing it could do is it could enable additional value-add decision-making on top of that specific investment, for the lifecycle of that asset, and that's a really interesting point. Charles, lastly, how is PropTech keeping up with the current market rate of change and the increased demand? And perhaps I can ask you a cheeky final question on top of that: what are the biggest developments you anticipate in the next 12 months to come out of this specific sector?
So if that's a cheeky question, then I might risk a cheeky answer. This one's a bit self-serving; my background is ultimately corporate finance. So the thing that I am most interested in, hopefully over the next 12 months, is adoption of digital assets. So, what we're describing here is the ability to digitalise the underlying representation of the interest in the building. Whether that's a share in a corporation that's holding the assets, or whether it's directly in relation to a real estate asset itself, or there are many variations on that theme. But the overall theme is that we now have a bunch of relatively new businesses that operate in the digital assets world. They take conventional assets, let's say a share in a company, and they ‘tokenise’ it – to use the language that they prefer – such that a digital asset representing that share in a company, and ultimately in the property, is created. So why bother? Well, this is again part of the move from analogue to digital, and with digital assets, there is a cost and efficiency benefit in being able to bring investors onto that platform where those assets are traded, have better price discoveries… so, particularly in a market for private assets, the markets are not well-served because it's difficult to get the breadth of investors into the market. It's difficult when they are there to give a level of transparency in relation to pricing and trading and similar. So the ultimate aim of digital assets is to provide a more cost-effective way of delivering conventional financing and corporate transactions, but in a way that allows for greater pools of investors, greater availability of information. Again, ultimately a democratisation of the industry, so that it's possible to trade in smaller shares in these assets, that it's possible to trade more globally, that it's possible to trade around the clock. A lot of these benefits, or so-called benefits, we're still trying to work out, but I think that there’s no question that the market for digital assets is growing quickly – especially in jurisdictions like Luxembourg. In the UK you can see that those transactions are coming relatively soon, and I think my expectation is that digital assets will be relatively mainstream or approaching the mainstream in/around that 12-month time horizon.
Thanks, Charles, that's really interesting and we're hearing a lot from our contacts that regulators are looking at this really seriously and how they can tokenise that. So really interesting. Charles, thank you very much for joining us today and sharing your insights for our listeners and thank you to our listeners for tuning in. .