Think about your company, are you innovating? Are you thinking ahead? Are you looking at how you can do things better and willing to be the first to take action?
If you’re reading this blog, the answers to some or perhaps all of those questions could be yes. In which case you are lucky, your company may be one that survives the next 10 years.
If you answered ‘no’ to some or all of those questions, the chances are that you and your colleagues are all going to be working somewhere else pretty soon. Harsh words, but reality is harsh, and the realities of commerce can be rapid and sometimes even brutal.
You’ve probably seen plenty of examples but just didn’t put the pieces together. Companies that don’t advance, decline. Due to increasing populations, incomes and regulatory constraints, real estate has been a great money maker for many years.
Many real estate firms have been content to rest on their laurels and ride the wave of Beta, up when the market is up, down when the market is down (which it almost never has been). Many of these companies have had no need to innovate or adapt.
Survival of the quickest
Think about companies in other industries that have not adapted, adopted or innovated fast enough? From taxis, to post boxes, landlines, to desktop computers, hotels, construction, aviation, retail and more. I bet you can easily recall at least one household name that has vanished in the past few years, because it didn’t keep up with the times.(1)
This trend is now accelerating, and the lifecycle of companies is shortening. The rewards, but also the punishments for getting it right or wrong in business are becoming more extreme, as some companies suddenly amass great fortunes and others turn to dust.(2)
What happens when the inflationary pressures that have increased real estate prices, disappear? What happens when a company can no longer rely on simply buying in the center of a growing city, and watching as the ‘value’ goes up?
There are several red flags I’ve come to recognise from meetings with companies both large and small, which identify those that will still be around in the next decade, and those that won’t. I’ll share them with you now in the belief, and the sincere hope, that if you recognise them at your own firm you can take action to prevent this happening to you.
Spotting the warning signs
‘I’ve been in the industry for 20 years and I know what goes on in the market, I don’t need new technology ’ - this statement and its many variations is a personal favourite of mine, I thought I would start with it as it is the most flagrantly ignorant.
Ask any doctor, pilot, banker or other serious professional if they think they that they have amassed so much knowledge in their career that they couldn’t possibly do any better, or if they have such a perfect clarity of information that it could not be improved upon.(3)
The answer would be a resounding ‘no!’ I can’t speak for medicine, however as a former pilot and trader I can attest that technology and the rapid transfer of transparent information has been a godsend. No more opening up charts in the cockpit, they’re all on your iPad! No more wondering what the market valuation of a company is, it’s on Bloomberg! No more wondering where that other airplane is, it’s on your screen! No more buying when you should have been selling, the trends at your fingertips!
However in real estate, time and again, often from an older generation, I have heard those exact words. What they are often really saying is ‘I’m threatened by this, I have spent a long time doing things the old way, and rather than advance, I’m going to safeguard my immediate future, at the expense of the mid-long term future of my job and the company’.
What happens to this person in that mid- to long-term future? Well, as other companies adapt and evolve to make better use of information, this person discovers that actually their memory is not as good as a database of terabytes, they discover that their emails, folders, and phone calls are not as good as instant access, and they discover that the time they spent on the old way, is now being used by other companies to easily outflank them.
Eventually, they will find that they are overworked, their bids and offers are at the wrong prices, that they miss crucial deals. When this happens a few times, and becomes a pattern, they’re out the door, regardless of how much they thought they knew.
Remember, sports teams and racing competitors have won simply by improving everything they did by just 1%. Do that a few times and you’re ahead of the rest of the market.(4)
‘I don’t need this because I have a great relationship with [X,Y,Z]’ - A senior person at a very large company said this to one of my colleagues. I don’t think their private equity owners would appreciate that hundreds of millions of their money is being spent and invested on the basis of a few pints and a candid conversation.
However, much like the ‘I already know it’ approach, this mindset shows someone who has invested a lot of time and energy into an old way of doing things. No one would like to graduate from typewriter college in the 1970s just as they were being replaced by computers and printers. Likewise no one wants to think that the traditional means by which information was gathered in real estate, namely through agents, networking and other events, is about to go the way of the dodo.
What Real Estate can learn from Finance
Finance used to be this way. Many years ago, whilst I was a child stacking building blocks, one of my investors was sat at his desk in the City of London, a phone and an embedded ashtray being the only items placed upon it. He learned what was happening in the market from phone calls, dinners, the FT and occasionally a telex machine.
Fast forward a few years, and it’s almost all computerised, entire teams have been replaced by a single operator of a myriad integrated computer systems. Why? Because those firms that could innovate faster and replace their analogue relationships with digitised systems were able to offer better prices, faster responses, lower costs and improved accuracy to their investors and clients.
Those that held on to the old ways, didn’t last much beyond the early 2000s. The chart below shows how transaction costs decreased in the stock market from the 1960s onwards, which was exactly from the point when digitisation first started to enter the stock market.(5)
This next chart shows just part of the consolidation that occurred in the financial sector in the 1990s as rapid transference of information caused margins to shrink, those that adapted and adopted early, survived and quickly bought out all the others.(6)
‘We already have this information’ - imagine its 2003. Someone offers you a new kind of phone, saying that with it you can take photos, answer emails, look at websites, play games and so much more. You say ‘I already have a phone, it makes calls and sends text messages, why would I need that?’ - knowing what you know now, you probably wouldn’t say that given the opportunity to go back in time, you’d grab that phone right out of their hands!
At the time, you might be a bit sceptical of this device, or might not have understood how much of a difference, a genuine step forward a smartphone is from the phones of the time.
I’ve seen companies which employ several members of staff, whose sole purpose was to maintain the spreadsheets and databases that gave them a fraction of the capabilities we offer at REalyse, and listened to them insist that they already have everything they need.
Imagination is not necessarily a client responsibility, and many tech companies try to emulate Apple in the way they inspired people to use their products, however it certainly helps if the client can at least think about what might be possible using a new approach.
“Innovation is the specific instrument of entrepreneurship. The act that endows resources with a new capacity to create wealth.” - Peter Drucker
Just as importantly, whilst thirty years ago you may have considered cobbling together some wire, batteries and a transmitter to make a walkie talkie, you wouldn’t now even consider the idea of trying to build your own iPhone.
Likewise real estate companies that spend precious time and resources on creating their own technology are never going to be able to beat a tech specialist at their own game.
Whilst it’s encouraging to see the early adopters and early majority making attempts, it is probably worth noting that Boeing has yet to build a car, Bentley doesn’t make microchips and Google doesn’t offer fine cuts of chateaubriand, they all stick to what they’re good at.
So that’s it really, and to paraphrase a long-standing industry aphorism:
‘It is not the most intellectual of companies that survive; it is not the strongest companies that survive; but the companies that survive are the ones that are able best to adapt and adjust to the changing environment in which they finds themselves’(7)
'REalyse (Treex Ltd) does not provide any form of investment advice or property advice or any other regulated function. Note that any information or opinions, presented or referred to in this article are for information purposes only. Any actions taken by a reader are done entirely at their own discretion, you are responsible for your own investment decisions and hold Treex Ltd harmless from the results of any such decisions'. Whilst every effort has been made to ensure the accuracy of the information herein some inaccuracies may remain.'