Proptech Metrics Could Change The Future Of Financial Analysis
By Frederic Hoo, Director, Sectors and Solutions, KPMG in Singapore
November 23, 2020- Human progress is inevitable. In every imaginable facet of our lives today, we are constantly bombarded by change brought to us by technology. Technology adoption is changing our everyday expectations and is slowly shifting our behaviour towards instant gratification.
In the last decade, technology has permeated the built environment. Real estate now has to be human-centric in design—the indoor temperature must be optimal, the lighting comfortable, and the selection of shops needs to be interesting to the visitors.
The consequences of a poor user experience have cascading effects for the asset owner because with social media, everyone is free to share opinions freely and quickly. This could mean reduced visitation or non-visitation of the affected site. An even more adverse impact could be an unfavourable reputation, particularly if there have been safety incidents.
In addition to design, technology is also changing the other pillars of the built industry: fabrication, construction, and asset management. Asset owners can employ cutting-edge developments in video analytics, Internet-of-Things, 5G, digital twin, and wearables to help manage the asset in ways which were not possible previously. We can now measure who is using the space and how the space is used, which contributes to customisation of the building as a service to the users in the way they want it. In short, data is now the new currency because it will enable the analytics to improve performance.
Technology offers new metrics
The importance of this is when we examine the fundamentals of what makes REITs attractive currently, we analyse financial metrics such as Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO) alongside the growth prospects of the REITs. Now, we should start to examine the technology levers used to increase rents, optimise space use, maximise occupancy rates, together with a REIT’s acquisition and overall management plans.
Let us examine just one of the basic parameters: footfall. Gone are the days when we employ staff to stand at the entrance with a traditional clicker to tally the count for reporting at the end of a shift. Human error and the mundane nature of the role aside, we do not obtain useful insights from this activity. Does a person who walk into a mall always translate into revenue for the tenants?
Proptech, as a class of technology, permits the deployment of data gathering from multiple channels such as Wi-Fi and Bluetooth tracking, smart beacons and video analytics. Given the insights of foot-traffic and the location of crowds, staff can be deployed more effectively, and sales activities can be more targeted. Malls may also track conversion rates: from the moment the latest flagship products at a storefront catch the attention of a customer to how long he or she lingers among the shelf arrangements and eventually leading into a completed sale. This conversion rate could matter more than the total absolute sales figure because tenants with high conversion rates help to improve rental yields and occupancy rates.
That is not all. That same set of data can also reveal how tenants and asset managers can be smarter about staffing by matching peak timings. Gleaned information on the demographics of the footfall alone is a treasure trove of personalisation and marketing initiatives. Are these initiatives vital? In the KPMG 2020 Customer Experience (CEE) report, personalisation is one of the top three drivers for customer experience excellence in this new world of individualistic needs from consumers.
Greentech and sustainability
User experience does not stop at customisation. Each succeeding generation is going to care more about factors of sustainability and its associated impacts on society than the generation before. As such, one can infer that assets with a stronger Environmental, Social and Corporate (ESG) theme resonate better with the public and offer a premium over the average performer.
Construction has an impact to the environment, and it is made worse if we throw in embodied carbon determinations and wasteful operational requirements. Technology can help alleviate some of these impacts.
Greentech, in the form of digital twinning solutions, boasts such high levels of accuracies of energy and water usage simulations that asset owners can now quickly determine return on investments on high capital expenditure. The power of such sustainability technology is further exemplified in the ability for modern software to craft designs that consider weather patterns, natural light data, and can consider the effects of biomimicry and integrated passive cooling designs.
This rising sophistication is matched by a heightened awareness of sustainability at the c-suite level. In Singapore, 80% of CEOs interviewed in the KPMG 2020 CEO Outlook COVID-19 Special Edition, iterated that they want to lock in sustainability and climate change gains their companies have made as a result of the global pandemic.
Taking the right approach
This brings us to the approach undertaken by companies. Undoubtedly, there are many fascinating use cases of proptech and buildtech around the world—from implanting sensors in concrete to improve scheduling to automation and AI in processing data for business planning and operations. Any failure in implementation is often due to a lack of sound strategy and commitment, with the latter being the more fundamentally important of the two. KPMG has also concluded that a piecemeal approach to technology is sub-optimal. According to the annual KPMG PropTech Survey 2019, 58% of the respondents said that they have a digital strategy in place, compared to 52% in the previous year. However, a more in-depth analysis showed that less than a third has an enterprise-wide strategy, and we concluded that respondents are setting practical boundaries during implementation. This dramatically reduces the efficacy of proptech because firms aren’t taking a holistic approach to achieve an amplifying effect.
A strategy is also ineffective if it is not underpinned by true commitment. A telling sign is the calibre of the person tasked with leading the transformation. About 65% of the respondents told us that the leader responsible for change does not have a background in digital technology. A skilled professional must have the ability and experience to know whether to develop technologies in-house as opposed to leveraging commercial platforms, taking into consideration control, time-to-market, and cost. The courage to recognise the need for a different skillset and therefore, a diversified workforce, is critical to enable a seismic corporate culture shift.
The 4IR or 4th Industrial Revolution is spinning the wheels of transformations of other sectors, and these sectors are demonstrating incredible results of enhanced methods. The construction and the rest of the real estate industry need to transition quickly, and yet there is malaise in the adoption. The hesitation at some organisations can be attributed to cost, with a lack of talent further reducing the momentum. There are also considerations in the areas of governance, risk management, and culture changes.
The truth is that we need to harness technology better. It is no longer a question of whether we need to, but it will soon be a battle of survival if we do not. We may not fully comprehend how to leverage for maximum benefits or even know where to start. One thing is for sure: fortune favours the brave. The leap of faith is especially necessary with the rapid implementation of 5G across most of Asia which is surely going to drive a new frontier. With enhanced connectivity, data insights are going to be the undisputable kingmaker, and as such proptech could alter the future of benchmarking and performance metrics.
About the Author:
Frederic Hoo is Director of Sectors and Solutions at KPMG Singapore. In his current role, he is responsible for growing key client accounts as well as developing digital solutions in sectors such as the Built Environment. He is also responsible for the Ignition Centre, which welcomes clients on a learning journey about innovation.