In the venture capital world, coincidences are rare. It is always about someone identifying a paradigm shift that others quickly follow. At present, it seems that brokerage companies are in vogue in the US venture market. Last month, New York-based real estate brokerage company Compass raised $450 million from the SoftBank Vision Fund, which valued it at $2.2 billion. This fundraise came only a month after it raised $100 million at a valuation of $1.8 billion. While Seattle-based online real estate broker RedFin went public and listed on the Nasdaq in July 2017, realty startup Home61 raised money in October last year from Peter Thiel’s Founder’s Fund. RedFin’s IPO was 13 years in the making. They never were the darling of the venture world, so what changed? What is the underlying paradigm shift here?
Historically, venture capitalists only backed classified companies in real estate like Zillow and Trulia, which merged in 2015 in a deal valued at $3.5 billion. They provide leads to real estate agents who then do the hard work of closing the deals. Other venture-backed efforts to close deals without brokers have failed in varying degrees—RetailMLS and BuyFolio in the US market and Housing.com in the Indian market. Real estate brokers are directly involved in 89% of the deals done in the US annually. Over time, VCs have realised that brokers are here to stay, but technology can change the profile of a real estate broker completely.
The profile shift in real estate is very similar to what happened in the local cab industry with the emergence of Uber and other cab-hailing apps. London cabbies took pride in their intricate knowledge of the city’s routes and it took years for a new taxi driver to master the lanes and bylanes of London. However, the Uber app’s capability to navigate routes automatically disrupted the industry. This overnight transformation powered by technology meant that anybody could now drive a cab in London. A similar change is happening in the real estate market today.
Suave, self-employed brokers who claim to be the best advisors and can close deals as they understand the market are being disrupted by the seemingly modest, unassuming employees of companies like RedFin and Compass. These employees do not necessarily possess in-depth prior knowledge of the local markets, but rather use technology and data analytics provided by their employers to guide the customer. In fact, technology enables them to do a much better job in guiding the customer based on actual data and they are also able to quickly develop local expertise.
The self-employed brokers depend on commissions from closed deals; therefore, the pressure to finalise deals is enormous. They live by the words, “Coffee's for closers only,” which is a line from the Hollywood movie Glengarry Glen Ross that follows the lives of four real estate agents across two days. In the pursuit of closures, the customer’s interest is sacrificed many times. Customers are not provided with complete information. In sharp contrast, the employees of new-age brokerage companies have their incentives aligned to the customer satisfaction score.
These trends are now visible across the globe. In China, Lianjia, another tech-enabled brokerage firm with offline operations, raised $1 billion in 2016. It controls 40% of transactions in the rent and sale market across China and is valued at $8 billion.
In India, which is the third largest real estate market in the world, funded players like 99acres and MagicBricks have ridden the classifieds wave in real estate as pure-play Internet startups and have emerged as the better-known consumer brands. However, there has always been a ‘local’ component to the user experience in real estate, currently managed by the local brokers. With no specific qualifications or licence required to be a real estate broker in India, this segment sees a huge influx of semi-skilled and unskilled youth looking to make a quick buck in the profession. Given that most brokers are less-than-professional and pushy, customers are left with a bitter experience when interacting with them.
However, like in the US market, a paradigm shift is occurring in India. Many have realised that a user’s offline experience needs to be effectively managed in the real estate sector. Recently, real estate veteran Anuj Puri launched Anarock, a firm focused on the primary residential sale market. Anarock has developed an internal team of sales agents who will consult with its customers. With Rahul Yadav, the former chief executive of Housing.com joining the firm’s ranks, Anarock has been sprucing up its tech to aid the sales team. Others like Squareyards and Proptiger also focus on the primary sale market and have developed their internal sales team to create a relationship with the customer. For the 40% of people who stay on rent in India, another startup, FastFox, is looking to provide end-to-end assistance through its own agents.
The Indian real estate tech space seems ripe for disruption. It needs to be seen how investor interest plays out in this sector.
Pallav Pandey is the co-founder and chief executive of Gurgaon-based home rental firm FastFox.com