Proptech Potential: Canadian commercial real

PROPELLING PROPTECH

Focus Evolves from Cost Savings to Revenue Generation

CANADIAN REAL ESTATE

companies lag somewhat behind their global peers in the uptake of the IT and data-based technologies and services collectively labelled as proptech. Analysis of recent survey data from 188 companies worldwide shows Canadian respondents generally in sync with prevailing views of proptech potential, but still at a relatively early stage of recognizing and pursuing the full range of opportunities it could deliver.

“Canadian real estate companies are awakening to the digital era, albeit a bit slowly,” concludes Saqib Jawed, Partner and Proptech Lead with KPMG in Canada.

“Historically, it’s been a conservative industry, but companies can no longer afford a wait-and-see approach,” asserts Lorne Burns, National Lead with KPMG Canada’s building, construction and real estate group.

Those observations are a prelude to a snapshot of Canadian attitudes and proptech initiatives — drawn from and compared against the complete findings of last fall’s global proptech survey from KPMG — which suggests proptech is more piecemeal than strategically deployed in many cases, hindering the capacity to integrate data collection and interpretation. KPMG analysts also urge companies to better harness proptech for tenant services and to more aggressively address cyber-security vulnerability.

As an optimistic starting point, Canadian companies boast universal buy-in with 100% of participating companies reporting that they have a staff position dedicated to leading digital transformation and innovation. For more than two-thirds of companies, a senior executive, defined as “C-suite level or equivalent”, fulfills the role.

Yet, progressing to the seemingly logical next step, just 36% of Canadian real estate companies have developed and implemented a formal digital strategy and just 8% have done so enterprise-wide. That’s significantly divergent from the global survey results, which reveal 58% have a digital strategy and 29% of companies have rolled them out across their entire enterprise.

Analysts see reverberations in companies’ self-assessment of their degree of systems integration, fulsomeness of there data strategies and their cyber preparedness — noting that companies with a digital strategy are more advanced in all cases.

FRAGMENTED SYSTEMS The global average score for systems integration was a rather unimpressive 5.4 out of 10, but Canadian companies scored themselves even more critically. An average of 4.7 out of 10 was lower than other

regional scores cited in the global report, which reported averages of 5.09 in the Americas (including the United States), 4.86 in the United Kingdom, 5.73 in the rest of Europe and 6.14 in Asia. Even so, KPMG analysts are wary of those numbers.

“KPMG’s anecdotal evidence suggests that the average self-assessment of 5.38 is, at best, optimistic. According to our estimates, a property manager or developer can operate up to 30 stand-alone systems to manage finances, operations and different stages of the property value chain (acquisition & construction, marketing & sales, property management, customer & facility services, portfolio optimisation, etc.),” the global proptech report states. “The lack of integration across systems and functions results in inefficiency, task duplication and, most significantly, unreliable reporting and several variations of the truth.”

To a large degree, fragmented and incompatible systems reflect the operationsdriven agenda that both the global report and Canadian snapshot highlight. Improving efficiency has been a primary rationale for introducing smart technologies with less consideration given to how its datagenerating capability could mesh with other building systems.

EXTRACTING VALUE Global and Canadian survey results confirm that capital budgeters continue to view proptech potential from a cost-savings rather than revenue-generating perspective. Seventy-six percent of Canadian respondents identified “improved efficiency” and 55% tapped “improved decision-making” as main objectives of proptech investment. A smaller proportion, at 24%, saw it as an avenue to “improve customer engagement”,

TOOL FOR DEAL-MAKING FUNCTIONS

Proptech’s encroachment into traditional deal-making functions has caught the attention of 400 global commercial real estate (CRE) executives responding to Altus Group’s annual survey of the industry’s uptake of digital and data-based tools. They foresee technologyenabled multifamily co-living will be the most significant disruptor to the status quo within the next three years, while trends like office co-working, retail brandbox and industrial flex space cause upheaval in other property sectors.

On the flipside, survey interpreters suggest industry leaders — including approximately 40 Canadian participants — are generally optimistic about the gains in efficiency and deeper dive into the market that proptech can deliver. Insight is drawn from representatives of companies with at least USD $250 million in assets under management, amounting to more than USD $2 trillion in collective holdings across the survey base.

“Several of the most disruptive technologies as identified by CRE leaders — online transaction marketplaces, cryptocurrencies and social media apps — are platform and transaction-based and arguably disintermediary in nature with the intent of connecting processes and people,” the recently released Altus CRE Innovation Report observes. “Technologies viewed to have a high potential for significant cost savings and operational efficiencies are oriented around analytics and automation.”

Notably, only 2% of CRE executives reported they had not used an online platform for a transaction or deal. Of these, online lending marketplaces were most popular — seeing take-up from 63% of survey participants — while only 49% of respondents used online property exchanges.

Respondents based in the United Kingdom are among the most prolific online deal-makers, while Canadians are generally less enthusiastic than their peers in other regions and slip below the global average in use of three of four types of online platforms.

For example, one third of Canadian respondents have used online property exchanges versus 64% of respondents from the UK; 43% of Canadians have used online leasing marketplaces versus 68% of respondents from the UK; 58% of Canadians have used online lending marketplaces versus 80% of UK participants.

Canadian respondents stand out more for their focus on data analytics — reporting fewer impediments related to fragmented data or lack of corporate buy-in than did their peers in other global regions. Even so, 45% of Canadian respondents indicate that issues related to data accuracy are an impediment. Globally, data management challenges are seen to be increasing in step with a rapidly expanding sources of data, but Altus analysts also see signs the industry is committed to sorting through the issues.

“Despite the growing complexity stemming from the proliferation of data, the industry is clearly shifting from a stage of trial and testing to one of practical innovation to solve their current challenges,” maintains Bob Courteau, Chief Executive Officer of Altus Group.

Survey respondents were also generally upbeat about how proptech melds with the CRE workforce — suggesting that jobs are shifting rather than disappearing. While a large majority expect some tasks and professional roles will be eliminated, they also predict new types of jobs will be created. More error-free work accomplished in less time should also free up resources for other kinds of higher-value projects.

Drilling down to commercial real estate’s various disciplines, automation is projected to benefit property management the most and make the least impact on investment and finance. Meanwhile, a practical application of automated valuation models (AVMs) is not expected just yet.

“Applying AVMs to commercial real estate is a challenge the industry is facing given the complexity and numerous variables involved in the valuation of commercial buildings. However, the appraisal industry continues to develop artificial intelligence/machine learning to automate and speed up processes such as reviewing leases and searching for sales comparables,” the report notes.

The complete text of the Altus CRE Innovation Report 2020 can be found at https://www.altusgroup.com/services/en-us/reports/creinnovation-report-2020

NEW QUEBEC TAX CREDIT COVERS PROPTECH

All Quebec-based businesses are eligible for a new tax credit announced in the 2020 provincial budget in mid-March. The investment and innovation tax credit, to be known as C3i, will be available for purchases of computer hardware, management software or manufacturing and processing equipment made before January 1, 2025.

“Business competitiveness increasingly relies on an advanced level of digitization. However, studies show that approximately 75% of Québec businesses have low technological readiness,” the budget document observes. “This tax measure will provide support of close to $526 million over five years to improve business competitiveness.”

Small and medium sized businesses (SMBs) can receive a refundable credit on the portion of costs greater than $5,000 when they purchase computer hardware and/or management software, or the portion of costs in excess of $12,500 for the purchase of manufacturing and processing equipment. Tax credits will be non-refundable for large corporations with assets and gross income of at least $100 million.

The C3i credit is prorated to the economic vibrancy of Quebec regions with a rate of 10, 15 or 20% depending on where a business is located. Businesses in the Montreal and Quebec City regions are capped at 10%, while most other urban areas of the province are in the 15% zone.

The budget also introduces a tax credit for businesses investing in share capital of Quebec SMBs active in green technologies, information technology, life sciences, innovative manufacturing or artificial intelligence. Qualifying investors can receive a 30% tax credit, to a maximum of $225,000 annually, for eligible investments.

Investors must be Quebec-based corporations, and have an arm’s length relationship with the SMB and core business activities unrelated to finance and investment. In addition to meeting criteria for innovative production/services, SMBs must have paid-up capital of less than $15 million and gross income of less than $10 million to qualify. Tax credits will be allocated for a maximum of $1 million of annual investment in each eligible SMB.

“Over the next five years, investments eligible for this measure will total more than $120 million,” the budget document states. “The new tax credit will represent $30 million in support for the development of innovative SMBs by 2024-2025.”

“The reasons for these low numbers are likely similar at home and abroad: the speed at which big data has arrived on the scene has left companies ill-prepared.”

with just 20% tying the investment to “revenue maximization”.

Accordingly, the report implores real estate owners/managers to view data as more than an incidental output of operational efficiencies, and to invest in extracting and capitalizing on its value. Globally, the survey found that only 25% of respondents “have a well-established data strategy that enables the capture and analysis of the right datasets”, but that shrinks to just 5% of Canadian companies. Forty-four per cent of survey respondents report that data tends to be generated and kept in silos, benefiting immediate users, but not widely shared or consistently scrutinized for all potential insight.

“The reasons for these low numbers are likely similar at home and abroad: the speed at which big data has arrived on the scene has left companies ill-prepared,” the report surmises. “Canadian real estate has a valuable opportunity to embrace digitization to better serve tenants, customers and tenants’ customers by using data to gain a deeper understanding of their needs and behaviours.”

Similarly, the global report makes links between companies’ digital strategies and the burgeoning demand for what’s been dubbed “property as a service” (PaaS) from co-working providers. “The widespread adoption of PaaS is an acknowledgement of the need to become customer-centric,” it hypothesizes.

TRANSPARENCY & CYBERSECURITY While real estate companies may be latestarters in tapping into the value of their data, nefarious players are well aware that is lucrative. Analysts recommend proactive cyber-vigilance with a healthy increment of corporate nervousness to drive regular and rigorous testing.

Globally, 69% of respondents claimed to be quite confident or very confident of their companies’ cyber-security, while 24% stated they lacked confidence. In this case, the 7% of respondents in the “don’t know” category would also seem to be indicative of less-thanrobust vigilance.

“Somewhat surprisingly, more than a fifth of respondents had undertaken none of the five cyber-security assessments we asked about in the survey: cyber maturity assessment; system/building penetration testing; continuity management in case of breach; supplier security risk management; and data protection under the European Union’s General Data Protection Regulation,” the global report states.

Drilling down to Canadian responses, six in 10 indicated they were confident of their organization’s readiness to deal with cybersecurity risks. Meanwhile, 40% had not formally assessed cyber preparedness.

“Companies should be wary of overconfidence and institute formal measures to stay on top of security measures,” Canadian scrutineers stress.

Here, too, analysts urge companies to view the investment as more than an operating cost.

“Information security should be viewed as a strategic function and a source of competitive advantage,” the global report asserts. “Transparency is crucial here. By being forthcoming about how they handle data and privacy — even to the extent of showing how they deal with data breaches — real estate companies can differentiate their brands and foster greater trust among consumers.” zz The complete text of Canada’s PropTech

Journey, How Canadian real estate

companies are faring in the digital age can be found at https://home.kpmg/ca/en/home/ insights/2020/02/canada-proptech-journey.html. The complete text of KPMG’s global survey, Is your digital future in the right hands? can be found at https://home.kpmg/cn/en/home/insights/2019/11/ kpmg-global-proptech-survey.html

Bernice Lilley, CFM PRESIDENT

First and foremost, we hope you and your family are well. If this virus has touched your life or a loved ones’ life, please know our thoughts are with you. Community is the heartbeat of the IFMA Toronto & South Central Ontario Chapter, and as someone who is a valued member of this community, you know how strong FMs are together.

In recent weeks, we’ve seen the human and economic effects of COVID-19 – but we’ve also seen the best of each other. We see it in doctors, nurses, and first responders who are on the front lines helping people directly affected by this situation. And we see it in grocery store clerks, maintenance staff, sanitation workers, and all the essential services on the front line, who are helping to keep us moving forward. Thank you to everyone for doing their part to get us through this challenging time.

We value the safety and well-being of our members, staff and the FM community, and have taken the necessary precautions to prevent further spread of the disease by postponing a few events until further notice, including the annual April Leadership Series. We have carefully considered the guidance of the World Health Organization (WHO), the Public Health Agency of Canada, and Centers for Disease Control and Prevention (CDC) and other reputable associations to make informed decisions. These resources along with additional information are available on our website and we encourage you to visit often.

In collaboration with our sponsors and event partners, our programming team is planning for the remainder of 2020. Ensure to watch out for updates on our e-Newsletter and social platforms. Lastly, we are working closely with IFMA International on a strategy to offer virtual learning of the FMP, CFM and SFP courses.

On behalf of the Board of Directors, we wish everyone health and wellness during these unusual and sometimes challenging times and encourage you all to continue to follow the advice given by our government health agencies.

Warm Regards,

Bernice Lilley, CFM

President, IFMA Greater Toronto & South Central Chapter