Many PropTechs feel that venture capitalists are less willing to invest than before.
The crisis in the real estate industry is ricocheting out further, with PropTechs starting to feel the pinch.
According to the latest PropTech report by the consulting firm Blackprintpartners,which specializes in the digitization of the construction and real estate industry, 55% more PropTechs have been affected this year by insolvency or liquidation than in the entire previous year. Blackprint is forecasting that more PropTechs will exit the sector this year than since the high of 2016. At the end of June, a total of 72 PropTechs in Germany had economic problems, 28 of them since the beginning of the year and 41 in the past 12 months, according to the report.
Nonetheless, despite the challenging market conditions, there were 70 new PropTechs launched in the first half of this year, which is broadly the same as the 73 launched in the same period last year. There were 803 active PropTechs headquartered in Germany at the end of June.
‘For the first time ever, there was more than one investment in the triple-digit millions in a half-year period,’ said Lukas Linn, author of the report and an expert on PropTechs and venture capital at Blackprint. In total, the companies announced an investment volume of €644 million. That's double the amount raised in the first half of 2022 and 84% of the total raised last year.
PropTechs struggling with ‘overall economic tension’
However, a large part of the capital flowed into two rounds of financing which indicates that many PropTechs are ‘struggling with the overall economic tension, in particular the cooling of investment enthusiasm’, according to Sarah Schlesinger, a managing partner at Blackprint. The demands related to the sustainability of the construction and real estate industry, among other things, are increasing, while PropTechs as a research and development department lack funds to develop the necessary solutions due to the lack of venture capital.
Sarah Schlesinger, managing partner, blackprint
One third of the German startups in the Blackprint report are active in the planning and construction phase. As in the previous year, most of them - just under 19% - focus on construction and refurbishment. The number of PropTechs in energy efficiency increased by 2% in the first half of 2023 to 10.5 %. Smart building efficiency is up from 8.8% to 9.8%.
The majority - 64% - of them can be defined as early-stage companies with a maximum of ten employees. Nevertheless, a rising level of maturity can be seen in the increasing proportion of PropTechs with a large workforce: In total, 9% (2022: 7.5%) have 51 or more employees. Of the large PropTechs, the highest proportion (26.4%) is in the smart building or energy efficiency categories.
So what defines a PropTech? Essentially, it is any technology-based, including tech-enabled services, solution for the property business. This encompasses not only physical property, but also anything that interfaces with it: finance, sustainability, construction, insurance, brokerage, management etc.
aedifion wins first PropTech Innovation Challenge (PIC)
Earlier this month, aedifion won the first PropTech Innovation Challenge (PIC) in Germany. The Urban Land Institute (ULI) announces the award across Europe to search for young #Citychangers. In each of six European regions, a preliminary decision was made by a jury of experts, from which aedifion emerged in Germany. The respective winners will now participate in the European final round. European PropTechs that have developed novel, scalable and competitive solutions were eligible to apply.
‘As a scalable platform concept, aedifion impressively demonstrates the innovative, engineering and information technology solutions that can be used to identify and address the major levers of decarbonization,’ said Niklas Kohl, Schroders Capital Real Estate and ULI PIC Champion for Germany. ‘Especially for inventory management or building operation, this is key for the future of the real estate industry.’
As Sabine Georgi, managing director of the ULI in Germany, Austria, Switzerland put it: ‘Our urban living spaces are facing immense challenges and we need innovative approaches to solutions in order to be able to continue to make cities livable in the future. The PIC has shown that the market not only offers great ideas, but that there are also young people who have the courage to implement them. We are convinced that with the winner we have found a company that will significantly support us in moving forward in decarbonization. By using aedifion, a significant proportion of CO2 emissions from buildings can be saved, as they are controlled according to demand and user needs and therefore do not run permanently and at 100% full steam, even though this is not at all necessary at all times. I congratulate all the finalists and, of course, the winner aedifion with Dr. Johannes Fütterer - keep it up!’
Energy efficiency leads the way
One thing is clear: energy efficiency has become the new buzz word, which isn’t surprising given that four-fifths of electricity is to come from renewable energies by 2030, and buildings are also increasingly to be heated with them, according to plans by German Economics Minister Robert Habeck (Greens). In addition, the building sector has failed to meet the climate targets set by the German government in recent years, meaning that the need for action on decarbonization is likely to remain great for the foreseeable future.
According to Blackprint, more than one-third of all investment rounds raised in the first half of 2023 were for PropTechs with a sustainability and energy-focused business model. This segment also accounted for five of the eight highest financings. For most others, especially early-stage startups, the Blackprint analysis reveals challenges.
This all feeds into the financing rounds that have been concluded recently. PropTechs with a focus on energy-efficient real estate are responsible for €535 million, or 83% of venture capital and a third of all investment rounds. ‘Energy efficiency is the new favorite category for PropTech investors,’ according to the report. Two PropTechs account for the vast majority of capital raised in this category: 1Komma5° and Enpal each raised €215 million in financing rounds. Among other things, both companies offer solar systems for roofs.
What is now putting pressure on PropTechs are the longer sales cycles and the industry's focus on its own challenges, according to Schlesinger. Decisions are being made more slowly because there are fires to put out in many places. That's where a collaboration or innovation project with a PropTech moves down in priority.
Berlin most popular PropTech location
Almost half (48.6%) of the newly established PropTechs are located in the metropolitan areas - 41.4% in Berlin, Munich and Hamburg alone. Around 73% of PropTechs are based in the German states of Berlin, Bavaria, North Rhine-Westphalia and Baden-Württemberg.
According to the report, a total of 455 (56.7%) of PropTechs are based in Germany's seven largest cities. Berlin is the top city with 24.4% of all German PropTechs, but is down 1.4% on the previous year. Munich, a popular location for innovation, is in second place with 11.8% (up 0.1%) and Hamburg is in third place, ahead of Cologne and Stuttgart in the ranking. Frankfurt is in sixth place with 3.1% and Düsseldorf in seventh place with 1.7%.
However, many PropTechs feel that venture capitalists are less willing to invest than before. Nevertheless, 41% of those surveyed recorded a completed financing round last year, 67% of whom raised less than €1 million each from investors. In addition, 33% concluded financing rounds with a volume of more than €1 million, whilst 19% of them received more than €2 million. Overall, the number of financing rounds has hardly changed compared to the previous year, although the duration of the fundraising process has tended to decrease.
‘As necessary drivers of sustainability and digital transformation in the construction and real estate world, PropTechs are more relevant than ever before,’ Schlesinger said. ‘While the digital readiness of established companies has risen sharply in some cases, for the first time the clear gap between them and those who have largely slept through digitization so far becomes apparent. The age of PropTechs has just begun.’
