Blog – Dashflow for CRE

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Morgan Stanley: Everything is a DCF

It’s official: gone are the good old days of all-risk-yield-driven Investment Valuations satisfying best-in-class practices as a primary methodology. While experienced dealmakers know when they see a good deal, best-in-class investors require due diligence (‘DD’) to back-up any deal instincts or implicitly mysterious arguments for a quick desktop valuation.

Since the 1990s this DD workload has only become more layered/complex, time-consuming, and costly for businesses. To add to that talent inflation is on the rise. But there is no going back. Most international institutions allocating money to global gateway cities like London and New York demand Discounted Cash Flows (‘DCFs’) – to satisfy rigorous processes, investor questionnaires and higher degrees of financial scrutiny. Back-of-the-fag-packet math no longer cuts the mustard.

Unfortunately teams without good software & human processes tragically reduce otherwise top deal-making instincts into an institutional drip of ‘paralysis by analysis’

Unfortunately businesses without good software & human processes, tragically reduce their deal instincts into an institutional drip of ‘paralysis by analysis’. Better teams eat their lunch by efficiently filtering new deals for their fund strategies. This also has an internal detrimental impact on staff motivation and retention. We regularly hear stories of chronic and risky methods: down to granular copy-&-paste activity between blackbox appraisal software (e.g. Argus Enterprise or MRI Software) over to butchered legacy spreadsheets to complete a Board report task.

Morgan Stanley’s recent paper “Everything is a DCF Model” explains why DCF models are important not just for valuing commercial real estate but for all cash-generating assets. It warns those professionals who tend to consider them “quaint” exercises as many remain in awe of skyrocketing valuations across many fields, not least of all technology.

Morgan Stanley’s recent paper “Everything is a DCF Model” explains why DCF models are important for valuing all cash-generating assets.
Morgan Stanley, “Everything is a DCF Model”, Q3 2021

The discipline of DCFs -i.e. to be explicit about each income and expense line over time- makes them the primary tool for best-in-class advisors, investors and lenders. Just as penning an essay brings clarity of thought to each writer, converting a business proposal into an explicit DCF reveals the inescapable dynamics of investment scenarios. Many of which are impossible to document from highly-generalised human instinctive opinions.

Not only is there a demand factor today driving the need for DCFs. There is also a supply-like tension thanks to the sheer changing structure of the real estate market:

The leasing tech community often talks about how 25-year leases are a thing of the past…i.e. how Landlords need a customer-centric outlook, and how tenants benefit from shorter terms, flex space, hybrid working options, etc. While this phenomenon is very important for the leasing brokerage industry, there is also a DCF consequence for the Capital Markets side of the real estate industry:

From an all-risk-yield perspective: 25-year leases were easier long income to value implicitly with a yield-driven opinion from a traditional RICS valuer. Shorter lease patterns and greater tenant flexibility generate more complex income & expense patterns. As night follows day, DCFs are the best methodology to work through this reality on a deal-by-deal basis.

Professionals that have been in the real estate investment business for a decade or two will have come across valuation professionals that can wax lyrical about their implicit valuation methodology, and how it is essential in order to bring into play investment comparables (‘the comps’). An entire methodology and fee-earning industry has been built upon this implicit approach.

The Global Real Estate industry is not alone in how it has shirked away from fully embracing Discounted Cash Flows as a primary methodology. The Morgan Stanley paper spells out the various arguments all professions must occasionally rehearse to themselves for the sound and proper financial reporting of cash-generating assets.

In terms of the property sector, it is a mark of great progress to see that the January 2022 RICS Investment Valuation Report moves the industry forwards. All global surveyors must now embrace DCFs as the primary methodology for Investment Valuations.

Featured

15-year Smartphone Anniversary: 9-Jan

The iPhone redefined and encapsulates what everyone wants in their pocket. It set the bar. It’s strange to think that 30-year-olds are practically tech veterans in terms of understanding how the iPhone is entering the business scene. 20-year-olds can’t remember graduate life without them.

15 years ago Steve Jobs revealed 3-innovations-in-1 in his indomitable style. It’s worth reminding ourselves of the sheer innovation leap presented to the world in 2007: “we’re introducing a widescreen iPod with touch controls, a revolutionary mobile phone and a break-through internet communicator device….. An iPod. A phone. An internet communicator…. These are not 3 separate devices. This is one device…. And we are calling it: iPhone”.

Video: Steve Jobs launching the iPhone revolution on 9 Jan 2007

Figure 1: Steve Jobs explains Apple’s UX breakthroughs for customers

To quote CNBC in the run-up to Covid in Dec 2019: “it’s possible to look at the last 10 years as the iPhone decade — when smartphones went mainstream, created billion-dollar corporations, rearranged existing industries and changed the world.”

Figure 2: Apple’s advent of mass-market smartphone/GPS drove On-Demand:

Unquestionably, it’s the most impactful consumer tech product over the past decade
apple analyst Gene Munster, cnbc, Dec 2019

The iPhone has created arguably as many new industries as it destroyed. Ride-hailing companies Lyft and Uber are collectively worth more than $60 billion, and they exist only thanks to the always-on GPS location and high-speed wireless connections that became common with the iPhone.

For sure many can raise their eyes today at the mention of an iPhone. They may prefer to mention other manufacturers and their own competitive product: an Android variety or some other smartphone. But the iPhone remains the revolutionary product. All competitors follow a similar path. They look and feel broadly the same as the Apple design: slick, slim and a seamless experience for users across all generations.

Figure 3: Apple set the bar for all smartphones today.

On this anniversary, we share 3 take aways below: sensible science prevailed, swathes of the public joined a veritable tech journey, and the initial ‘fake it until you make it’ Steve Jobs launch for which we remain grateful 15 years later.

Years of research and development delivered game-changing success

At a time when pseudo-science and political interventions confuse people’s respect for science, it is fantastic to see an example in which years of proper research and development trumped widely-held truths:

Many betted against touch screen keyboards versus fixed plastic keyboards of Blackberrys, Nokias and Palms.
Many thought a device for personal life (music, books, movies) could not meet the needs of the business blackberry world.
Many believed a mobile-first device cannot deliver desktop class applications and business-grade connectivity.

Figure 4: Steve Jobs explains the desktop technology packed into the first iPhone.

Many IT managers were of the opinion that business would not be influenced by iPhones. In 2017, Microsoft issued the full Office 365 suite for business iPhones and iPad devices.

It’s got all the stuff we want… [it] let’s us create desktop class applications and networking… Not the crippled stuff you find on most phones.”
Steve Jobs, Apple launch of iPhone

On each count naysayers have been proven wrong. Now it is great to see top FTSE and NYSE businesses grasping and organising B2B benefits from the resulting technologies and innovative software available on the Apple App Store.

Technology is a journey

Over 15 years, we can clearly look back at legacy moments related to the iPhone. Many overlook or certainly have forgotten the earlier iPhones limitations. Like any good tech progress, it’s a journey:

24 months after iPhone launch to introduce the App Store. Until then you very much got what you’re given by Apple managers..
24 months to upgrade 2 megapixel to 3 megapixel photos
24 months for video recording
36 months for a high-definition display…. And the list goes on.
36 months for selfies with a front camera

Figure 4. Selfies introduced new styles, branding techniques, companies and spawned new industries.

Fake it until you make it?

While the iPhone experience receives some of the highest user reviews year after year, the New York Times revealed just how close to the sun Apple flew to introduce such a new and complex technology to the world. Steve Jobs presented “the golden path” to make it look like it worked:

It worked fine if you sent an e-mail and then surfed the Web. If you did those things in reverse, however, it might not. Hours of trial and error had helped the iPhone team develop what engineers called “the golden path,” a specific set of tasks, performed in a specific way and order, that made the phone look as if it worked.
New York Times

The debate will rage on between the healthy balance between solid products and investor expectation management. But as far as this ‘fake’ launch may be concerned, we are grateful the launch succeeded, the product thrives the test of time – and new products build upon this marvellous achievement.

ChatGPT acts as different Real Estate professionals.

It seems that every journalist is writing about ChatGPT. We invited ChatGPT to a Q&A behaving like a Real Estate investor sceptical about tech, and then asked ChatGPT to review the Q&A and write an article like a Real Estate journalist.

businessman in a suit with his arms crossed

ChatGPT: “Here’s my [default] response as a commercial real estate private equity professional who refuses to explore modern technology:

ChatGPT: Look, I appreciate the enthusiasm for new technology and efficiency ideas, but my business is better without it. We’ve been running this ship just fine without all these fancy gadgets and gizmos. Besides, it’s all just a distraction from the real work at hand.

I mean, think about it. You don’t see a Premier League football team relying on technology to win games, do you? No, they rely on good old-fashioned hard work and teamwork. That’s how we run our business too – with a solid team and a lot of elbow grease.

So no offense, but I think we’ll stick to our tried-and-true methods for now. Who needs technology when you’ve got a great team and a winning attitude?”

Q: What do you think about VTS to improve your leasing operations and reduce void time in your buildings?

ChatGPT: “Look, I appreciate the suggestion, but we don’t need VTS or any other technology to improve our leasing operations. We’ve been doing this for a long time, and we know what works best for our buildings.

Besides, what good is VTS if you don’t have a good leasing team in place? It’s like a football team investing in the latest training equipment, but not having any skilled players. At the end of the day, it’s the people that make the difference, not the technology.

So, thanks but no thanks. We’ll stick to our guns and keep doing things the way we know works best for us.”

Q: You’ll save time controlling your portfolio by centralising all your data in one place with something like Coyote Software.

ChatGPT: “I understand the benefits of centralizing data, but we don’t need a fancy software like Coyote to do that. We have a great team that manages our portfolio data manually, and it works just fine.

You know, it’s like a cricket team. You don’t win games just because you have the best equipment; you win because you have a great team that knows how to work together. And that’s what we have – a team that knows how to manage our portfolio data efficiently and effectively.

So, while I appreciate the suggestion, I think we’ll stick to our current methods. After all, if it ain’t broke, why fix it?”

Q: You can’t possibly venture into the latest multi-family growth sector without a powerful residential market data resource like REAlyse. A team cannot research markets in a timely manner if they’re forced to work manually with one arm tied behind their back.

ChatGPT: “I understand where you’re coming from, but we don’t need REAlyse or any other fancy market data resource to succeed in the multi-family growth sector. We have a great team that knows how to research markets efficiently and effectively, and we’ve been successful in our investments so far.

You know, it’s like a rugby team. You don’t win games just because you have the best technology; you win because you have a great team that knows how to work together and make smart decisions. And that’s what we have – a team that knows how to research markets and make sound investment decisions.

So, while I appreciate the suggestion, I think we’ll stick to our current methods. We don’t need technology to tell us what we already know.”

Q: You take days to run Discounted Cash Flows and spend tons of money on Analysts who could be out in the market with clients and finding new opportunities. Why not liberate them by trying out something like DashflowCRE.com? Fresh, audited, easy Models produced in minutes?

ChatGPT: “Look, I understand the appeal of using a website like DashflowCRE to speed up our DCF calculations, but we don’t need it. We have a great team of analysts who know how to run DCFs efficiently and accurately, and they’re already out in the market finding new opportunities.

You know, it’s like a football team. You don’t win games just because you have the fastest players; you win because you have a great team that knows how to work together and make smart decisions. And that’s what we have – a team that knows how to analyze investment opportunities and make sound decisions.

So, while I appreciate the suggestion, I think we’ll stick to our current methods. We don’t need technology to do the work for us – we have a team of skilled professionals who know how to get the job done right.”

Q: Why don’t you use APRAO for residential developments and work with your lenders faster? Butchered templates and disorganised communication with project stakeholders only wastes time and makes your manual team slower than the competition.

ChatGPT: “Look, I understand the benefits of using APRAO to streamline communication and improve efficiency in residential developments, but we don’t need it. We have a great team that knows how to communicate with project stakeholders efficiently and effectively, and we’ve been successful in our developments so far.

You know, it’s like a basketball team. You don’t win games just because you have the latest technology; you win because you have a great team that knows how to work together and communicate effectively. And that’s what we have – a team that knows how to manage residential developments and communicate with project stakeholders.

So, while I appreciate the suggestion, I think we’ll stick to our current methods. We don’t need technology to make us faster or more efficient – we have a team of skilled professionals who know how to get the job done right.”

Q: If you had said this about adopting email or digital mapping, your team would be out of business! Your reasoning is also a bit repetitive. Any new ideas as to why you believe you can avoid the unstoppable march of technology in the commercial real estate investment industry?

ChatGPT: “I understand your point, but I believe that there are certain aspects of the commercial real estate investment industry where human expertise and intuition are still more valuable than technology.

For example, when it comes to analyzing investment opportunities and making sound decisions, there’s no substitute for a team of skilled professionals who know how to read the market and make smart choices. Technology can provide data and insights, but it can’t replace the experience and judgment of a seasoned investor.

Furthermore, real estate is a people business, and personal relationships and connections are still critical to success. While technology can help facilitate communication and streamline processes, it can’t replace the value of face-to-face meetings and personal interactions.

So, while I’m not opposed to using technology where it makes sense, I believe that the human element will always be a crucial component of commercial real estate investment.”

ChatGPT changes into Real Estate journalist:

“As a real estate journalist, I recently had the opportunity to discuss the use of technology in the commercial real estate investment industry with ChatGPT, a language model trained by OpenAI. While ChatGPT offered some resistance to the idea of embracing new technology, the conversation provided some valuable insights into the challenges of introducing technology into the real estate industry.

One key point that stood out was the fear of substituting human intuition for technology. While technology can provide data and insights, it can’t replace the experience and judgment of a seasoned investor. This fear may be one reason why some real estate professionals are hesitant to embrace new technologies.

However, as the conversation highlighted, technology can still play an important role in improving efficiency and streamlining processes. For example, tools like VTS and Coyote Software can centralize data and improve leasing operations, while websites like DashflowCRE can produce accurate DCF calculations quickly.

Ultimately, the success of any real estate investment strategy will depend on a combination of human expertise and technological tools. By finding the right balance between the two, real estate professionals can stay competitive in a rapidly changing industry.”

What is IRR?

What is the Internal Rate of Return?

This article is not intended to be a recital of academic articles of which there are many on the internet. This is intended as a practical guide to use IRR in the everyday office workplace, particularly, in the Commercial Real Estate investment management industry.

The Theory

The IRR, the Internal Rate of Return, is the discount rate that achieves a Present Value of zero for a given investment cash flow.

E.g. if we invest $1,000,000 today and get $1,100,000 in a year’s time, the IRR that provides a Present Value of zero for the proposed investment is 10%.

Running through the above example mathematically is straightforward:

To calculate a Present Value (‘PV’) of zero, you take the initial investment of $1,000,000 spent on Day-1 LESS the amount of, say, a £1,100,000 at sale after Year 1 and discount it by 10% (£1,100,000 / (1+10%)) which equals £1MM LESS £1MM = 0. In other words, the total expected future amounts equate to the value of our money today (£1 million) at a discount rate of 10%. Since ‘PV’ = 0, the IRR is by definition 10% for this investment scenario.

The IRR discussion in the Workplace

But the academic and mathematical description is not helpful during the hectic days of deal-making and catch-ups with investment colleagues, or indeed nuanced discussion at Investment Committee when approving a new investment opportunity. So how is it referred to in practice?

The biggest mistake…is to use IRR exclusively.
Harvard Business Review, March 17, 2016 ‘A Refresher on Internal Rate of Return’

A more common way to think about the IRR is that it’s an indicator of how fast an investment makes money. As the above ‘time value of money’ theory emphasises the classic business phrase ‘my time is money’ then, everything else being equal, the higher the value of the IRR, the better the proposed scenario for the investor. It is a truism that $100 in the hand today is worth more than receiving $100 in a year’s time – and today’s rising inflation is reminding everyone of the real impact of this theoretical and practical reality.

Time value of money and urgency are comic ingredients for the movie Jerry Maguire.

The IRR does not suffice in isolation

The IRR is exceptionally important in the Commercial Real Estate fund management industry. It is a universal and global benchmark of success against which all funds can be compared against to understand their track records. When an investment team raises a new fund they are undoubtedly questioned about what IRRs have been achieved by their vintage (read ‘prior’) funds.

But like the speedometer in F1 driving, speed is not everything. There is no point hitting a record speed if your F1 driver, team and vehicle cannot endure the necessary laps to complete the race.

Like Formula 1 sport, you need to achieve both good speed and endurance figures for a good result.

The Equity Multiple complements the IRR

This is why there are two metrics of ultra-importance for investment professionals: The IRR and the Equity Multiple. You could think of them as the essentials of speed and distance in F1 racing. How fast do I cover ground? And how much ground do I cover? i.e. How fast does an investment make money? And how much actual money does this investment make expressed as an Equity Multiple?

Equity Multiple is generally expressed in the following format: “0.00x”. Firms tend to report Equity Multiple by, for example, stating 2.00x (“a two times equity multiple”) to indicate that an investor has doubled their money during the course of the investment. E.g. $2 MM has been returned to investors following an initial $1MM investment.

IRR and Equity Multiple issues

Generally speaking, there is an inverse relationship between IRR and Equity Multiple over time. IRRs tends to diminish over time while the Equity Multiple increases. The smartest fund managers assemble the appropriate portfolio of assets to target a blended IRR and Equity Multiple their fund has offered/’promised’ to their investors.

We’ll explore this dynamic in a subsequent post.

Heinz Ketchup Metaverse Win

Location, location, location…. in the No. 1 game in the World.

🙇🏽‍♂️Take a bow HEINZ Ketchup…! For mixing old-school and new-school. See how #realestate‘s traditional ‘LOCATION, LOCATION, LOCATION’ has been adapted to a new metaverse-type situation to enhance real world sales. Check out the award-winning #hiddenspots campaign with the Number 1 gaming company in the world.

Heinz Ketchup Award Winning Case Study

This is real world corporate marketing expenditure in the metaverse direction. The beauty of it is that it’s not a gimmick. It involves finding an effective ‘safe space’ for eating in the Metaverse to digest your real-world purchases such as your favourite burger and sauce.

It speaks well of Microsoft’s strategic move into this space after its acquisition of Activision and its wildly popular game series: Call of Duty, as reported in the Guardian earlier this year:

https://www.theguardian.com/technology/2022/jan/18/microsofts-activision-plan-shows-gaming-will-be-at-heart-of-metaverse

WeWork hits Hollywood

After books, FT reports, podcasts and endless profile features, WeWork has now hit Hollywood via Apple TV’s latest series: WeCrashed.

First off: what an inspired choice to just let a fabulous unicorn walk through the offices during the opening credits.

WeCrashed Opening Credits with a magnificent Unicorn walking through WeWork’s offices.

It is Executive Produced by the two lead actors Jared Leto and Anne Hathaway, who also stars as former WeWork’s Adam Neumann’s wife Rebekah. There is a clear and fresh narrative from a woman’s perspective throughout the Apple TV series so far – a very different take to the media stories that have been fed to the property industry at large:

Adam Neumann comes across as a hapless serial entrepreneur and it’s his steely new girlfriend and wife-to-be that injects him with the necessary chutzpah to survive in New York’s cut-throat real estate business. She helps him discover his purpose: to adapt his nostalgia for his Kabutz community into an ambitious co-working space for creators. Where people can meet, find love, drive their passions, etc, etc…

To add to the buckets of real estate ambition, there is a flavour of Lady Macbeth as his girlfriend leads him towards the city high-life. He is immersed in a privileged set one-degree removed from Gwyneth Paltrow (and wow does she feed into some of Rebekah’s ongoing demons as a wanna-be actress…). The New York City lifestyle is one that evokes an immediate tension: it must be sustained, financed and continued in the name of love.

For entrepreneurs and start-up folk, the investment raising narrative is richer than expected. Adam’s initial hapless approach is infused with a happy-go-lucky and transparent approach to raising capital. He uses his now infamous buckets of charm to get his first co-working community lease off the ground. Before long he is in the top elite of 1% start-ups in the world, based in the oyster of opportunities of New York City. But with $200,000 of real cash in his 1st year (for none-start-up readers, this is a real accomplishment), he is simply mocked and laughed at. A VC-type investor in a top Manhattan restaurant muses: “I think I pay my PA that amount of money”.

The ego-centric, male-dominated, kill-or-be-eaten mentality in New York real estate starts to drive, convert and darken the protagonists. If Twitter is anything to go by, this is already surprising some real estate professionals who thought they knew the story inside out. #SomethingForTheWeekend.

Avison Young highlight new use case

UK Councils recently invested well in excess of £6 billion per annum and there are no signs of this activity stopping. We are delighted that Avison Young’s trialling of Dashflow highlights a new use case in this space: City Council teams do not commonly spend vast amounts on traditional enterprise software like Argus Enterprise or MRI Software, yet they need to demonstrate proper due diligence on behalf of tax payers with readily available software like Microsoft Excel for Desktops.

Avison Young realised Local Authorities commonly handle real estate investment scenarios in Excel thanks to its transparency (also see “mathematical proof” now required by RICS Surveyors in recent 2022 report). Dashflow’s automatically-built template models for Excel (aka the “DashModels”) allow advisors to share instantly a new, safely-checked financial model with the client.

The above enables a City Council contact to easily review, edit and amend assumptions like any professional template model user at the likes of elite-paying institutions such as Deutsche Bank. This relates directly to our DNA at Intellect Automation: to democratise cash flows and bring transparency and creativity to the investment workplace.

Top real estate Capital Markets professionals also know they need to quickly and efficiently present their investment scenarios and ideas to Clients – who themselves are under increasing pressures to ‘run numbers’ involving greater modelling complexity to explain more scenarios and potential volatility in the market. Getting an instantly-built supporting cash flow model sent from an iPad or smart device to a desktop saves precious deal time when sharing ideas with proactive originators. It’s a win-win in terms of time and speculative expense – for both the advisor and their clients.

Advisors can even text and Whatsapp an Executive Investment Summary Preview or send across the safely-checked institutional-grade DashModels to Local Authority fund managers and Assistant Analysts. This means clients do not have to wait for initial analytics to see safely modelled IRRs, annual cash coupons, equity multiples, etc – or indeed wait to allocate speculative work to an internal analyst who has to juggle the usual diaries and existing workloads.

There is ongoing public work at a Parliamentary level to ensure City Council real estate investments are properly monitored. While there is likely to be more regulation, this investment activity will continue in various forms. John Knight at Carter Jonas has a helpful run through of the issues in this Local Authority related investment sector (click here).

Join a demo to discover more about this use case. And get in touch to learn how safely-checked DashModels can also apply downward pressure on your businesses’ professional indemnity cover cost.

Is “Proptech” definition out of control?

Until very recently, there was a strong consensus that Real Estate is fundamentally different from an imagined virtual world. The 2018 movie reference to Steven Spielberg’s ‘Ready Player One’ was used to underline the potential dangerous differences of real vs the imagined: the imagined place being where you can enter with your helmet, and act and triumph within a virtual space while the majority of real humans may be dressed in rags and surviving a slum-like existence.

Spielberg’s *Ready Player One* movie underlines the stark difference between urban slums and imagined worlds.

But the consensus about the difference between the real world vs the imagined seems to be rapidly disappearing. And Proptech discussion is playing a part in merging these two worlds in our investment minds. This is because of the rapidly changing definition of Proptech:

So what does Proptech mean? It is increasingly a vast catch-all label – especially for professionals who brandish their innovation and tech credentials or latest product offerings. Today Proptech is used to cast an ever-wider net over human and business activity. As new property fashions and services abound, many find a quick-buck home under the Proptech label.

Proptech fashions come and go

WeWork is one fashion example: its subleasing of fitted-out space was announced as the brave new world of Proptech as recently as 5 years ago. But a growing body of opinion in real estate realised that it is a modern-looking IWG-type flex-office Landlord that was disguising itself as a tech start-up of a primary order.

MIPIM Cannes influenced the “Proptech Investor Landscape” discussion:
“WeWork: seemingly just a startup itself until recently … with its latest valuation pegged at $20B … it has always considered itself a platform for creators”
MIPIM World Blog, 2017

Decorative antique edison style light bulbs against brick wall background

Landlords think our business model is shit. We hang Edison bulbs up…
Head of leasing, Wework galactic HQ, new york CITY, 2016 – APPLE tv series based on wework STORY

Such was the evident lack of Proptech within WeWork, that they bought a Proptech company to strengthen their tech credentials. Discontent in the market grew – at one London RREF (Reading Real Estate Foundation) event a frustrated RICS surveyor blasted a poor WeWork panellist – and mocked their business model underpinning their slogan “to elevate the world’s consciousness.”

WeWork continued to trade on its tech credentials until it stretched all investor credulity via the ill-fated $42 Billion IPO. Remaining Proptech illusions ended when a Property CEO -not a Tech CEO- replaced Adam Neumann.

The next Proptech fashion

Forbes Magazine confirms the blur between the real and virtual:
“Just when you thought land was finite, cue the Metaverse“
Forbes, The Metaverse and Commercial Real Estate, 22 March 2022

Today, there a new Proptech fashion is in full flow: the monumental growth of Metaverse. Interest mushroomed after Facebook’s parent company adopted the name Meta. For simplicity’s sake, the Metaverse (aka “on the internet”) is selling virtual parcels of interactive computing environments users can visit online. For many PropTech enthusiasts, these sales were instantly described as “Property transactions” – and herein lies a new source of major FOMO for today’s real estate executives:

The Place of Property

…the Place of Property is not a central and serious theme of debate, but rather the subject of unreflective assumptions.
Professor Donald denman, Cambridge university, 1977

Metaverse discussions are quickly flowing: e.g. “Property” can be owned inside an interactive computing environment, therefore it can be “leased”. You’ll need Meta-like “brokerage advice”. And interior designers for virtual “fit-outs”. When ready for “occupancy”, you’ll probably pay a Meta-lawyer fee for a similar “lease template” and even have an app to access both your physical office and your Meta-like office -… while you’re at it, why not buy a digital home where you can hang up that NFT wall art to impress the next cyber-date? You can see how a leap of faith in the essential historical power and premise of traditional ‘Property’ can extrapolate into imagined asset values and growth of related services.

Be in no doubt that interest is manifesting at the most senior Executive levels. The Financial Times reported “interest from family offices, hedge funds and wealthy individuals looking to buy up land in metaverses alongside institutional investors” (FT, Would you buy a house in the metaverse?, 28 Jan 2022, London). Take this CBRE initiative to establish its own office presence in the Metaverse:

Above is CBRE’s Metaverse Office versus CBRE’s redeveloped West End Offices in London below.

We don’t judge the merits of the Metaverse in this blog. But we do think it’s worth reflecting on the unquestioned and nascent taxonomy. The liberal use of business legalise and real estate transactions in the real world does not necessarily translate into virtual computing. Many parallels between urban world and the virtual world only work in a playful sense, and we must remain vigilant.

The marketeers of the Metaverse understand the emotive and seductive power of Property. It has powerful social, economic and political power connotations throughout the ages. Fear of being priced out of the market is the greatest common FOMO for generations of young professionals. The Metaverse advocates are only too happy to sell the promised multi-million “footfall” of eyeballs that will soon visit your Meta-paradise office, home or store space.

Fifthwall sticks to Proptech

So much is the institutional pressure building in the Proptech industry, one of the largest and dedicated VC funds in the world, Fifthwall, felt compelled to clarify its position on the Metaverse. At MIPIM 2022, Fifthwall explained they had never received so many requests about one subject.

Brendan Wallace

CEO – Fifthwall

It was a relief to hear that Brendan Wallace, CEO at Fifthwall, decided they will not be investing in the Metaverse today. Many of their Limited Partners are focused on the business of real bricks and mortar. Their Partners are pooling money for the first time into serial tech investing dedicated to supporting the ‘urban environment‘ – luckily, this term has not been hijacked by the Metaverse… yet.

“We have a number of great European operators like Segro .. Merlin .. Colonial .. Redevco .. BNP Paribas Real Estate .. Knight Frank .. Ivanhoe Cambridge .. PGIM Europe …. we’re super excited to have all these Partners.”
Roelof Operman, Co-Head Europe Fifthwall, MIPIM CANNEs 2022

Fifthwall is to be applauded for resisting a Metaverse investment within current Proptech-defined fund strategies. Public opinion would not have blinked twice had they jumped on the Meta bandwagon – with a new $160 MM fund backed by the likes of Segro, BNP Paribas Real Estate and Knight Frank. This position marks a welcome reminder of the past ~5 years of emerging discourse: leading Proptech funds are raised from the likes of Redevco who are “your trusted partner in urban real estate”. Fifthwall’s own brand name comes from 4 walls of a physical property complemented by a Fifth Wall of assisting technology. Nothing in this Proptech field was a focus on technology for computing’s own sake.

Other Proptech investors like PiLabs, Metaprop, Proptech1 have also been focused on technology that complements the real world. Instead of Proptech, perhaps any Metaverse “property transaction” can be defined has a TechProp investment, or VirtualTechProp investment.

Defending and defining the taxonomy of Proptech is important as in any other professional sector. Otherwise fraudsters and bamboozlers will simply benefit from blurred terms and lax usage of language in a fast-growing industry that appeals to the world’s largest investment funds.

Oxford University: Defining Proptech

Andrew Baum and the team at the Future of Real Estate at Oxford University published one of the most read pieces of research to define Proptech. The great thing about this academic-oriented report is that it is backed by practitioners like Andy Saul and others who are involved with strategy at CBRE, CBRE Global Investors, Newcore Capital Management, Pilabs etc. Plus they benefit from a raft of advisors who are practitioners in the field.

Andy Baum’s report Proptech 3.0: The Future of Real Estate from University of Oxford.

The first version of their report Proptech 3.0 attempts to define Proptech. It helps explain why Property is real and “the true third asset class” (Proptech 3.0: The Future of Real Estate, www.sbs.oxford.edu, p.14) compared to equities and bonds. It provides a grounding for the definition that constitutes the amalgam of Property + Technology = Proptech. Just take 3 examples from the Oxford report:

• Property is a real asset, and it wears out over time, suffering from physical deterioration and obsolescence, together creating depreciation. This does not apply in a virtual world. Unless they invent deterioration rules in the Metaverse coding – but why would any Meta designer encourage the risk of unnecessary degradation?

• Property supply side is highly inelastic. Not so in the Metaverse where the constitution of the owning entity (e.g. a DAO) could decide overnight ‘to issue’ new land or expansive additional territories faster than an IKEA kitchen extension.

• Property is highly illiquid. It is expensive to trade property. This is not the case with an imagined virtual space. There are no obligatory registry searches (Web 3.0 transactions are supposed to free us of the mundane Web 2.0 due diligence searches, right?!), no essential building surveyor reports to determine the structural quality or dimensions of the virtual space – and no real-world taxes… at least not yet.

Not even New York has the power to issue all the land it wants and any time it wants like Decentraland or other Metaverse owners. Land Reclamation is as good as it gets in the real world…! Like New York City’s plan below:

Keeping it Real: language matters

“Real Estate investments” in the virtual space are a misnomer. They can be dangerous and misleading. Providing a false sense of security by appealing to the sacred property rights many of us cherish in the real world. Electronic Real Estate Investments or Virtual Space Investments would clearly not sound like “Property Transactions” for the average layperson on the street. Professional terminology is best to be respected.

Let’s build on the Proptech taxonomy and good work completed by Property’s senior researchers and investment fund practices over the past 5 years. And may investors be as clear as Fifthwall about their stated goals within Proptech boundaries, and we wish everyone else the best of luck in defining, explaining and promoting the virtual reality of TechProp adventures in any Metaverse coming to your screen.

Artistic impression of how Virtual World meets Real World.

Celebrating the Power of 2

In fee-earning professions where the go-it-alone attitude is often rewarded, the power of two can be severely undervalued. The unstoppable force of 2, the partnership of 1 + 1, and the secret sauce that helps many game-changing endeavours survive and thrive in finance, tech or war can be overlooked.

The capacity of two checks, two supporting systems, two perspectives can improve daily work life immeasurably. Moving from a solo endeavour to the beginning of a team is game-changing. The doubled-up strength, creative feedback loops that ensue and complementary skillsets often pack a superior punch compared to the progressive single person, the brave individual or the stubborn-headed lonely mindset.

Something magic happens when there is suddenly more than one. Going from 1 to 2 has a vast impact compared to growing from 2 to 3. And what a better time to celebrate it than at 22:22hrs 22-2-22. Here we explore examples of ‘2 power’ in finance, technology, travels and battles. From a software perspective, today technology can achieve winning human-and-machine combinations (see Gary Kasparov’s thinking below). Much of this also applies to real estate brokers and investment companies which often avoid the extra ‘2nd step’, the extra ounce of effort that can bring institutional Quality Assurance to the world of Discounted Cash Flows (‘DCF’).

Where do we see the power of 2?

Take a look at the Start-up world. VC investors like to invest in teams with at least 2 co-founders. Key-person risk is immediately slashed in half. Like any investors, Investment Committees don’t like risking having all their ‘eggs in one basket’.

Or consider the age old profession of Accounting derived from the renaissance invention of double-entry booking-keeping attributed to Francesco di Marco Datini. This novel innovation was based on every entry being made twice – this additional *yet minor* effort of booking everything twice makes it far easier to detect mistakes.

Strategic double-prongs are infamous in war and strategy games. For example, the double-check in Chess (annotation symbol: ‘++’) is when the King piece is checked by two pieces simultaneously. It is an immensely stronger attack than a single check, and gives the respective player a higher degree of control and visibility of where their rival can move next.

EXAMPLE 01

Historic accounting innovation

The simplicity of 2 entries in double-entry book-keeping makes complex business possible. This novel innovation was based on every entry being made twice – whereby the extra effort of recording everything twice makes it far easier to detect mistakes.

EXAMPLE 02

Wingman superiority

More power and range: we cannot avoid a nod in advance of Top Gun Maverick movie in 2022….In military flying terms, the number two or Top Gun “wingman” role is essential support for aerial combat. It makes a flight both safer and more capable: amplifying situational awareness, increasing firepower, and allowing more dynamic tactics. It is a game-changer compared to flying alone in risky and hostile environments.

EXAMPLE 03

Double-prong attacks

More control over future events: the double-check in chess gives a player more control over their rivals’ possible next moves.

EXAMPLE 04

Business agility in pair-coding

Higher quality in less time: the godfathers of the Agile manifesto reveal that one of the most productive methods of coding (and checking for mistakes) is by a team of two working side-by-side called pair-coding. E.g. one can write, while the other can control the mouse and review logic, spelling and technique in real time.

EXAMPLE 05

Essential excess power: two jet engines

Always better safe than sorry: Commuter jets can continue their journey with one jet engine if the other fails completely. This is a significant margin of error safety, and is the difference between falling out of the skies or landing in a civil fashion!

EXAMPLE 06

Human+machine wins

Unbeatable combination: while tech boffins live in hope for human-intelligent AI, there is a certainty for business today: an average-skilled human working with an average computer will always beat the smartest person or the most powerful computer working alone.

And what happens when the Power of 2, and the simple double-checks elude us?

COVID-19 REPORTED CASES SPREADSHEET ERROR

Photo credit: Sky News

During COVID, the UK government experienced a highly-embarrassing mistake in its handling of recorded cases. They simply used a spreadsheet with too few rows like Excel ’95 which has a limit of 16,000 rows – when evidently more rows were required for reporting cases across the country.

In a recent survey, half reported that companies’ processes were not capable of spotting the errors in financial templates they had constructed for their firms.

We find that the power of two eyes, two checks, automated or manually, has many benefits for the financial sector:

Tim Hartford wrote an excellent account of the above UK spreadsheet error in the Financial Times: the Tyranny of Spreadsheets. Many indeed feel exasperated by the potential complexity of man-made spreadsheets but -also- they tend to offer no solution(s). While Blackbox software may automate inputs and outputs, they never offer the simple financial transparency that illustrates the mathematical proof of DCFs. At the risk of needing a spoiler-alert to Hartford’s above article, Bill Gates keeps a very cool head. He simply says the easiest way to avoid appalling errors is to ensure you double-check the spreadsheet.

We return to the power of 2 again. We believe in the provision of Quality Assurance tools for the real estate and finance industry. Solutions that help real estate fund managers, investors, advisors, brokers, JV partners and lenders double-check immediately, safely and rigorously ‘the numbers’ produced for a property investment. Numbers often come from a trusted and professional colleague, but like the rest of us – he/she/they are simply human and prone to errors which can be addressed with a simple double-check and 2 reassuring answers.

🥂 5th Anniversary of Dashflow for CRE!

This month we take the briefest of moments to reflect on and celebrate our 5th anniversary of our start-up endeavour: our journey to bring the benefits of Dashflow into the Capital Markets space of global Commercial Real Estate. We want to express our gratitude to all those inside and out of the team who help make this B2B company a reality each day. We all wake up with good ideas in the morning, but the cliche is true: it’s only the hard yards of team execution that deliver company results.

The Illusion of Predictability

Investopedia reckons that the failure rate of start-ups after Year 1 is 90%. The odds of surviving are eye-wateringly low. It is a privilege to be on this journey with each year that passes. When you add the fact that successful founders average 45 years of age (compared to headline grabbing lists about ’30-under-30` from Forbes and bright unicorns like Theranos), it’s best to focus on the task at hand rather than stats that can form an Everest of threats in your mind.

And there are times to be grateful for being in a start-up instead of a mature corporate. While cash flow predictability is off the charts when starting from scratch, the perception of risk can negatively spread across all start-up issues. But when you take a step back, you realise countless peers, colleagues and friends in established organisations churn over roles within 12 to 36 months. Their families grow, job changes come and go, and some make overnight moves into the latest hot sector. While this feels ‘normal’ and people do not associate the above to similar HR start-up risks, it remains the case that ‘mature’ corporate life brings just as much change to just as many people.

Joining a start-up undoubtedly means a lot of things will be uncertain on paper and in the mind. However, it’s worth examining the many positives. To name a few:

• you will learn more and faster.

• you have more control over the colleagues you choose to spend hours of your life with.

• you can help ensure that you limit the bureaucratic documentation that comes with your company/entity.

• your relevant professional network can grow many times more in mere months.

• of necessity, your transferable skills develop rapidly in an entrepreneurial environment – e.g. communication, collaboration, compromise, negotiation, persuasion, self-discipline, team spirit, leadership.

It’s not a coincidence that Sandhurst graduates has some of these transferrable skills and many move into (and are welcomed) into the finance industry when they finish their military careers. In many instances, it can be easier for managers to teach new recruits an existing business model & routine rather than retraining numerate staff to give them those skills in a pressurised commercial environment.

Riding the wave

When introducing a completely new tool to the technology sector you have to be riding the wave. It is part of the parcel of success: work + preparation + some luck. Today, as we look back at this half a decade, attitudes have changed beyond recognition. Professionals recognise that in an increasingly competitive world with faster Apple chips in everyone’s pockets, the speed, competence and rigour with which advisors and Fund Managers can respond to clients and LPs is paramount for surviving and thriving in the market place.

Not only are attitudes changing but the regulatory framework is also changing. A few days short of our anniversary this month, the RICS Investment Valuation Review was published. It represents a revolution in property standards, requiring surveyors globally to adopt the Discounted Cash Flow (‘DCF’) as the primary valuation methodology. When we started this conversation, we were outside the tent. Did users wish to improve their analytical standards? But in 2022 we are most definitely inside the tent as the RICS focuses on the essential ingredient of *trust* in investment valuation reporting. Those who do not improve their analytical standards will soon find themselves in a dwindling minority.

At the very beginning, we saw only occasionally glimpses of the wave that we were hoping to ride. There were some memorable examples of leadership in those early days. In 2018, Savills CEO Mark Ridley made a powerful appeal to the property industry via his talk at a RREF event (Reading Real Estate Foundation) in the City of London:

“Above all you need to be financially aware. We [the property industry] can no longer blag. We have to be accurate at what we do.”
Mark Ridley, CEO Savills PLC

Mark Ridley appealed to the Property industry to be more accurate in what they do (i.e. potentially in support of DCFs and explicit investment valuation methodology)

Pounding the street and valuing each open door

In 5 years we’ve seen a sea change in our property sector. As late as 2018 it was still quite a challenge to find senior leaders who took an interest in Proptech or the more American term: CRETech. Each time a door opened, we were grateful for the opportunity of a new conversation, new stories and new lessons to share, experiences that take time to accumulate.

It was rare, especially in pre-Zoom days, to find industry leaders who were prepared to spend the time to explore new tech ideas. It is the most successful who seem to approach them with an open mind and engage with those outside their usual professional and social circles in which they are most comfortable. We’re only human after all. Malcolm Gladwell writes convincingly about the shortcuts, conveniences, familiar habits and prejudices that help us survive and thrive as a species.

Simon Prichard RICS & Gerald Eve, Lesley Chen Davison, Jamie Ritblat of Delancey, Chad Pike from Blackstone and University of North Carolina Hill, Robert Gilchrist from Rockspring, Patrizia AG, Steve Williamson from CBRE and Andy Martin from BNP Paribas Real Estate.

Open-minded professionals are accustomed to encountering new ideas outside their experience and area of expertise which they are able to interrogate and debate without prejudice.

Our company has benefitted from a vast range of experience from across the real estate industry: Chad Pike at Blackstone, the RICS Chairman Simon Prichard from Gerald Eve, Gary Garrabrant from Jaguar Growth Partners, Nic Fox at Europa Capital, Andy Martin at Strutt & Parker, Steve Williamson at CBRE Finance, Robert Gilchrist and Edmund Craston from Rockspring now Patrizia AG, James Ritblat’s Delancey and the indomitable Lesley Davidson – to name just a few.

We thank them all and we look forward to the next five years.

The 200-year Healey & Baker Party

The Royal Automobile Club was the setting for the Healey & Baker 200-year party towards the end of 2021. It was a blast from the past. Familiar faces from the pre-Cushman & Wakefield era were mingling, hugging, joking and circulating the room from one scrum surprise to another with a precariously wobbling stemmed glass in hand. Some hadn’t seen each other for over 2 decades since the doors closed at St George Street off Hanover Square and moved to Portman Square under the umbrella of ‘Cushman & Wakefield Healey & Baker’ after the USA parent takeover.

Proceedings kicked-off with former Senior Partner Paul D. Orchard-Lisle CBE, TD, LLD(hc), DSc(hc), MA, FRICS….. aka ‘PDOL’. You could hear a pin drop in the vast Mountbatten Suite packed with professionals from both yesteryear and today. He reminisced about how many of those standing recalled their experiences upon receiving a ‘pink memo’ handed down from management and trembling at its potential consequences!

People arrived in groups – enjoying a few sharpeners before the event commenced.

Healey & Baker’s footprint on the UK Commercial’s Real Estate market was evident and continues to be seen all around today. Beyond Cushman & Wakefield, H&B alumni are across the major advisory firms such as JLL, CBRE, Knight Frank and Colliers International. And then starting with A: ACRE, Acuitus, Apache, Aurum Real Estate, etc…. there was a veritable A-to-Z alphabet soup of Property firms out in force to enjoy the welcome outing with friends after severe lockdown restrictions.

While school reunions can be awkward. It was notable to sense the sheer ‘smell of the room’, a warmth and merriment of long-time colleagues coming back together. The odd tear in the eye after a hearty hug, no doubt compounded by months of solitary experiences. By any measure, the H&B people made the rather austere surroundings of the Mountbatten suite melt away and it was a joy to behold.

Peter Bill and Damian Wild from Estates Gazette compiled and edited a superb booklet to celebrate the occasion. Littered with anecdotes, profiles, and histories about those who built the Healey & Baker business.

Peter Bill and Damian Wild from Estates Gazette compiled and edited a superb booklet to commemorate the occasion. Littered with anecdotes, profiles, and histories about those who built the Healey & Baker business and the context of the surveying profession through the economic life of the country. About how the industry became less about countryside management and more about supporting the vital economic activity of unlocking property to facilitate rebuilding after the war – and then further professionalisation of the surveying profession as it served the boom of offices, the advent of major shopping centres, the recognition of ‘sheds’, and other asset or transaction types such as Sale & Leaseback activity and OpCo/PropCo splits. Setting Healey & Baker’s real life characters against these sweeping changes of the real estate industry is a recommended treat for any Land Economist and Land Management student.

There were also some reflections about how times have changed. Healey & Baker’s HR tactics wouldn’t go far in today’s environment. This included the ‘mushroom approach’, where they thought it best to keep staff in the dark and occasionally cover them with s**t. It’s of course very easy to compare old and modern standards – just like criticising MS-DOS applications compared to a very modern and intuitive smartphone app…! And while it may be grotesquely humorous in hindsight, the mushroom culture did create a work place in which life-long bonds were created.

As those retired Partners look back at our daily pace of work, there is a sense that the buoyant, rewarding and rich “work-hard-play-hard” culture they presided over has been diluted beyond recognition. It seems to be more about work today. And PDOL, at least, believes things are a degree less fun than what they used to be.