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Proptech – disrupting the real estate sector
Digitalization is making inroads into the real estate industry too. The emergence of a couple of hundred technology-savvy start-ups and SMEs whose aim is to revolutionize traditional patterns and existing business models is the best thing that could have happened to a sector known for its inertia. Although "proptechs" are causing sleepless nights for representatives of the established real estate companies, they are also opening up new opportunities for innovative companies. As the latest issue of Credit Suisse Real Estate Monitor shows, the rise of proptech is accompanied by further major changes in the construction industry. The publication also includes a review of the latest developments surrounding the taxation of residential real estate.
Proptech, short for property technology, is now a familiar concept to many observers, and the sector itself is flourishing. After some initial hesitation, the bulk of the real estate sector already uses the services of proptech companies in one form or another. These services cover the sector's entire value chain, from planning and financing, through construction, brokerage, and portfolio management, to building management (see Fig. 1). This is reflected in the impressive growth figures for the proptech industry – albeit from a low level. However, this is merely the beginning according to the latest study by the Credit Suisse economists. Although the proptech industry has huge earnings potential, there is still a long way to go.
Second nationwide proptech survey
The hype surrounding the start-up phase of individual companies is drawing to a close in many instances: The expansion phase calls for a steady inflow of new funds, as the founders' enthusiasm and initial start-up capital are no longer enough to compensate for any errors. For that reason, proptech companies need to be critical of their own performance and to make any necessary adjustments to their strategy or operations in a timely manner. To assist this process, the Credit Suisse economists conducted a survey for the second time since 2017. The focal point of the survey was on mutual understanding between proptech and the established real estate companies.
Convergence between proptechs and established real estate service providers There is still a lot of potential in terms of mutual understanding, as evidenced by the fact that just 7% of the proptech companies questioned describe the real estate industry as "very receptive" to the solutions offered by start-ups. More than half the proptech companies in the real estate sector are nevertheless "reasonably receptive." Furthermore, the real estate segments targeted by the proptech sector only partly overlap with the fields in which the real estate industry is hoping for fruitful collaboration (see Fig. 1). Given further advances in mutual cooperation, it will be interesting to see whether the proptech sector is able to safeguard its independence, or whether there will be convergence or a merger between the two areas. It is already the case that 11% of the construction and real estate companies surveyed have acquired at least one proptech company; a further 26% report that they have taken a financial stake in one or more proptech players. It is also fair to assume that the real estate sector will increasingly seek to exploit the relevant technologies itself. This will make it increasingly difficult to distinguish between the two sectors. If that does eventually prove to be the case, the proptech firms' objective of revolutionizing the industry will have been achieved.
Residential property: Will imputed rental value be abolished?
The proposals put forward by the Committee for Economic Affairs and Taxation of the Council of States for a system change in the taxation of residential property are at the consultation stage. Five options for the future deductibility of mortgage interest are currently up for discussion. Common to all of them is that the imputed rental value of owner-occupied primary residences would no longer be taxed; at the same time, the opportunities for deducting maintenance costs would be abandoned. However, the five options differ in terms of the extent to which interest costs can be deducted in future. The options are not particularly transparent, and their impact on the effective tax burden partly depends on the property owner's asset structure as well as the current level of interest rates.
To shed more light on the matter, the Credit Suisse economists illustrated the possible consequences of the reform on the taxable income of a property owner based on model calculations (see Fig. 2). This shows that at current interest rates a typical property owner would be better off with any of the proposed alternatives than under the existing system. The situation changes, however, if mortgage interest rates rise again. With higher interest rates, owners were previously able to minimize their interest costs through correspondingly higher deductions because in overall terms the tax on imputed rent lowered their taxable income. After a system change, owners would be worse off under all options in the event of high interest rates.
Construction sector: Trend to renovation and refurbishment
The uptrend seen in the construction industry over the past 15 years will come to an end sooner or later. Right now, the growing oversupply in the rental apartment market in particular is becoming a matter of major concern. A correction is on the cards, especially if interest rates start rising again, with revenues generated from residential construction likely to decline significantly. Although the Credit Suisse economists do not yet anticipate a sustained trend reversal, a degree of slowdown can be expected for residential construction in the coming quarters given that significantly fewer residential units have been approved for construction since the second half of 2018. Currently, the biggest opportunities for structural engineering in the medium to long term can be seen in the refurbishment, renovation, and fit-out of the existing stock. The proportion of construction activity involving the existing stock is therefore greater than at any time in the past 25 years. There are good reasons to expect a continuation of this trend. They include the trend to sustainability, lower degree of interest rate sensitivity, and scarcity of land for construction. However, this will only partly compensate for the decline in new construction over the medium term.
The complete study "Real Estate Monitor Switzerland Q2 2019" is available online in German, English, French, and Italian at: credit-suisse.com/realestatemonitor