A recent study by ING indicates the restrictions for innovation in real estate The real estate sector is not known as an innovative sector. The growth in labour productivity in the sector has stagnated for a long time and, in comparison to other sectors, there is hardly any investment in R&D. Important explanations are:
• Long operating life of real estate: which means that new technologies are slow to replace the old.
• Capital intensive: This makes entry difficult for starting entrepreneurs with good ideas.
• Intransparent market: Each real estate object is unique. This means that there is less direct competition on the real estate market, which reduces the drive to innovate.
This image is clear also when you look at the figures. Investments in R&D are very low in different European countries. This is much higher in other sectors, such as services.
So why is there still little innovation in the real estate sector? The traditional culture is often mentioned as a cause. But why is the culture traditional and why has there been relatively little innovation for a long time? This concerns the specific market structure of the real estate sector. This inhibits innovation. The most important factors are:
Long operational life of Real Estate
The long operational life of real estate means that new technologies are slow to replace the old. The car fleet, for example, has been entirely replaced with new cars in just one or two decades. For real estate with its operational life of sometimes over 100 years, this process is a lot slower. The addition of new technologies to an existing building is also costly. Although this sometimes does happen, upgrading the total stock is slower than for other goods. When making improvements to leased real estate, for instance making this more sustainable, there is also a problem of ‘split incentive’. If it’s mainly the tenant who profits from the sustainability investments, the incentive for landlords to invest in this is low
High entry barriers
Investing in real estate is extremely capital intensive. This results in considerable entry barriers for property investors. Not every starting entrepreneur from another sector with a good, innovative idea can just enter this sector. This means that it is the current real estate owners who largely determine what is built. As tenants also find location to be much more important than an innovative building, the incentive to invest in innovations is limited. New developments are therefore implemented less quickly. High entry barriers are not present in all real estate sub-sectors, such as real estate agents.
Each real estate object is unique. This means that there is less direct competition on the real estate market. For the average market operator it is also difficult to estimate the value of a real estate object independently. The owner of real estate knows more about real estate than the rest of the market. This gives the owner of real estate market power. Moreover, many regulations and complex ownership structures make real estate transactions bureaucratic, complex and intransparent.
Consequences for the real estate sector
Real estate owners: From “investing in bricks” to entrepreneurship To respond well to changing demand in the market and the opportunities offered by PropTech, real estate investors will start to operate more as entrepreneurs. This means focusing on more things than just the value of the property, duration of lease contracts and tenant creditworthiness. A real estate entrepreneur will have a rewarding business model in which he/she creates added value and ensures continued demand for his/her (Space as a) Service.