Southeast Asia is not a backwater when it comes to proptech startups, but the sector has failed to take off in the same manner as fintech. However, this could soon be changing. Challenges and competition throughout the Southeast Asia real estate sector means proptech is needed now more than ever before.
“Proptech, to be placed in context, has lags behind the fintech revolution by almost a decade in Southeast Asia. One of the contributing reasons is that the real estate sector across Southeast Asia has enjoyed strong organic growth and the traditional way of doing things yielded good profits,” Pauline Chong, Principal at Cento Ventures, states. “This is quickly changing with rising financing costs and a cooling economic climate. There is now a strong incentive for real estate corporates and governments to invest in an improved way of delivering a better customer experience and improved productivity across the sector.”
According to Cento Ventures, a Singapore-based venture capital firm, there was USD14 billion invested in global proptech last year, but only USD380 million was committed to Southeast Asia. This means there are opportunities, especially for local startups, to succeed in the proptech space if they can tap into what the local markets need.
“Proptech is relatively underinvested into compared with other VC investment themes such as fintech, gaming and consumer tech. Cento Ventures’ near decade of tech investing in this region tells us that Asia-based startups remain highly relevant as their business models are calibrated for our region,” Chong says. “Hence, to achieve the right proptech solutions our region requires us to invest back into our region to build regional winners.”
Before looking too far ahead, it’s necessary to look back and ask: why did fintech take off in Southeast Asia while proptech took a back seat? A lot of it was due to circumstance.
“In countries such as the Philippines and Indonesia, fintech initiatives have taken off largely around providing financial services to the unbanked. Micro lending, P2P lending have all gained traction as traditional banking systems have been unable to cost effectively reach this group of consumers,” Chong explains. “In more financially developed markets in Southeast Asia, such as Singapore, Malaysia and Thailand, fintech received a strong boost from governments and banks to move towards digital transactions and cashless societies.”
Proptech moves forward in Southeast Asia
Chong notes that there are a dozen real estate corporates in the region already trialing new innovation products to better business operations, from construction tech to sales management tools. This can be seen as an indicator that Southeast Asia is ready to embrace proptech going forward.
Property developers in Southeast Asia are getting in on the act as well. One of Thailand’s largest developers, Sansiri, announced that it would invest USD47.3 million in proptech between 2018 through 2020 via its Siri Ventures arm. Also in Thailand, Ananda Development created its own venture capital firm, Ananda Urban Tech, to expand its reach into the proptech sector.
“It is helpful to have forward thinking real estate developers invest in and sponsor proptech. In our experience, a fruitful outcome is when both strategic investor and VC come together to help build an ecosystem. In this way, strategic investors get access to useful technology advancements while VCs help startups to grow and capital plan their business trajectory,” Chong notes. “The more engagement we have from real estate corporates, the better inputs there are to technologists to build better solutions.”
That being said, developers and large real estate corporates need to be smart about investing in proptech. Massive blanket investments with no clear aims can end up causing more harm than good.
“At the end of the day, it is a question of shareholder value creation for real estate corporates if investing directly into a startup. Is this the best use of corporate resources and management time? Warehousing young startups is challenging as they require a broad array of assistance from product solutioning, business development, valuation assessment to structuring their board and considering financing options,” Chong reports.
She continues, “Not all these needs can be satisfied through a strategic investor that has a large existing business to operate. Therefore, we recommend that real estate developers define clearly a stage of proptech investment at which they are ready to engage and resource accordingly for it. They should continue to work with VCs on their proptech investments and portfolios as VCs bring their own set of skills to the table.”
Invest in proptech or property
For investors, they need to ask themselves if they would rather be investing in Southeast Asian property or Southeast Asian proptech.
“The answer to this is particular to the risk and return expectations of the investor. Proptech venture capital investments can be highly lucrative and we see an influx of larger, late stage private equity investors entering the market now,” Chong says. “Proptech unicorns such as Lianjia in China and Prop Tiger in India are good examples in terms of the value created in these companies. Airbnb is now valued at USD35-40 billion and potentially headed for an IPO next year.”
Returns for proptech investors, especially early ones, are staggering. However, the opportunities in traditional Southeast Asia property investments are still worth considering although they may not be as lucrative as proptech investment.
“Property as an asset class has its attractions as well. Its brick and mortar nature and financing leverage can help juice up returns, but tends to perform high single-digits on a total returns basis. The financial risk is less, but the return profile adequately reflects that,” Chong states.
She adds that if an investor is sufficiently capitalised, they can consider spreading out their investments to get a broad portfolio comprising of real assets and private equity/venture capital. It’s the proverbial best of both worlds.
A unique approach to proptech investing in Southeast Asia
Cento Ventures’ proptech fund focuses on the Asia Pacific region. The firm looks at startups that deliver a product or service that either enables or disintermediates the real estate sector. These can include directly adjacent businesses that address logistics as well as environmental and sustainability solutions since they can impact value creation within the real estate sector.
“Based on our past investment experience, we know the key to unlocking value lies in the in-country or regional know-how to create successful businesses that are well suited to the market needs,” Chong points out.
Additionally, the VC firm has plans for a further regional Southeast Asia early stage fund and in addition to the proptech fund. Centro Ventures also has fintech- and fashion tech-focused funds.
“We have almost a decade of investing into early stage startups in Southeast Asia and neighbouring growth markets. Our investment strategy involves looking at digitising sectors and investing early, with a goal of building regional winners,” Chong explains. “We take a data-driven approach to assessing investment opportunities and allocate resources to supporting our portfolio companies extensively. We are pro-founder and have a diversity of skill sets and experiences across the firm ranging from VC, tech to private equity, entrepreneurship, banking and management consulting.”
For more information on Cento Ventures, please visit: www.cento.vc