Proptech: benefits and challenges of the digitalisation of real estate

Digitalisation knows no boundaries, it is impacting businesses in all industries. The real estate sector is no exception and is embracing some of the most significant technological changes. This provides tremendous opportunities for efficiency, growth and transformation.

These opportunities come from a powerful combination of technology, data and ubiquitous communications. Hardware, such as sensors, has been increasingly miniaturised. There is now nearly unlimited, scalable, cheap, data storage provided by the Cloud. The adoption of new technologies by business such as shared platforms; virtual reality; data analytics; artificial intelligence and machine learning; robotics and blockchain are transforming operations and creating new revenue streams in all real estate sub-sectors.

This article covers some of the key trends for 2017, as well as the legal implications that need to be considered when introducing new technologies to internal operations, changing business models or entering into partnership arrangements.

Implications of new technologies

Virtual Reality

Perhaps the most obvious development in proptech has been the rise in online brokerage (in particular in the residential sector). Virtual reality (VR) is growing in popularity as a way of marketing property – the benefits to clients, possibly located overseas, of being able to experience space remotely are compelling. The use of VR in property is already a global US$1 billion industry , Goldman Sachs estimates that this is set to treble by 2020. We expect to see real estate companies partnering with tech companies to develop tailored use of VR.

As with other novel tech, the use of VR raises a number of IP issues, including ownership of the underlying code (and whether or not the code is patentable), rights in databases of material and a possible need to clear content appearing in virtual walkthroughs (for example on billboards or logos), use of which may not qualify as “fair use” – all of which is complicated by the international accessibility. As ever with new media, clarification of the position will come with decisions of the courts and, possibly, new laws. Pending this clarification, sensible clearance and editing strategies are recommended.

Smart Buildings/Internet of Things (IoT)/Automation

Smart buildings are already changing the way in which real estate is managed, in particular IoT will infiltrate our buildings and homes, taking care of routine maintenance tasks, detecting malfunctions and defects before they become an inconvenience. We will see more automated control of properties. There are, however, associated risks, such as increased vulnerability to cyber-attacks, loss of data and loss of access to confidential information. As an integrated, digitalised system, the smart building poses a heightened security risk.

Operators and tenants should ensure that suitable systems are in place. These should includ firewalls, anti-virus and anti-spam software. Proper due diligence is required to ensure that counterparties have appropriate measures in place (with the correct certification). Ultimately, for most businesses, it is not a question of “if” but “when” cyberattacks will occur and all businesses are encouraged to have their cyber-incident response teams and processes in place. These processes should be thoroughly tested, through wargaming, in advance of needing to rely on them in the heat of an attack. Cyber risk insurance may be appropriate and tenants should consider requiring landlords to take out suitable cover.

Sometimes overlooked is the increased use of open source software. Open source software is often published under a warranty-free licence, sometimes requiring any program that incorporates the open source code to be made freely available, curtailing the ability to exploit proprietary software – careful due diligence and rights management is recommended (particularly where development is outsourced). Contractual issues also arise between operators and tenants, with both keen to ensure that they have sufficient access to data, but potentially vying for “ownership” and the rights to exploit that data.

Digitalisation by its nature gives rise to unintended consequences. Increased reliance on technology and automation can render many tasks, formerly undertaken with human intervention, redundant. This can lead to redundancies and industrial unrest which , in turn, may lead to an increased need for people with expertise in industrial relations and employment law to resolve matters. Any business which relies on a significant workforce would do well to prepare for this.

3D Printing

Last year, a firm in China achieved what many thought was the stuff of fiction, the building of ten houses in 24 hours using a proprietary 3D printer. It won’t be long before others follow suit and begin fabricating buildings (or at least components of buildings) on site. Digitalisation enables an element of personalisation and it may become possible to order a custombuilt house over the internet for next day delivery!

As with other new technologies, 3D printing is pushing the boundaries of copyright law. We are already seeing a proliferation of online file-sharing platforms, many of which are very unclear as to ownership of shared work product, in particular in the form of Computer Aided Design (CAD) files. Once again, we are in the early days of commercial use and immediate intervention from lawmakers seems unlikely. In the meantime, clarity as to the licence types under which files are shared is recommended. As are security arrangements around the sharing of those files. 3D printing also raises liabilty issues between the producer and user of the code; for example, in the event of failure of a component deployed in the fit-out of a building which has been designed by computer, by one party, and then transmitted for production, via 3D printing, by another.

Media provision

Digitalised spaces can offer enhanced opportunities for providing media content. Operators of public spaces should be aware that screening protected material is likely to constitute a “communication to the public” under copyright law and doing so without the necessary licence could put them in breach. A regular domestic licence will not be appropriate for screening in public spaces. Operators will, therefore, need to consider any licence requirements and attached costs prior to rolling-out such displays.

Connectivity

Proving the appropriate connectivity infrastructure is obviously a key consideration when developing commercial property (be it broadband, mobile or WiFi). As businesses become increasingly reliant on access to data, agreements for the provision of connectivity, whether with telecoms suppliers or tenants have grown in importance, in particular around the negotiation of KPIs, cybersecurity and liability provisions. Telecoms regulation also comes into play in this context, since developers offering connectivity services are likely to be regulated (under European law as “electronic communications providers”, bringing with it a host of ompliance obligations).

Smart contracts/blockchain

Carrying out property transactions over the internet will increasingly become reality. However, an inherent problem is ensuring the integrity of data and fraud prevention. The use of blockchain technology, (which is a type of distributed database that facilitates secure interactions between multiple parties) could, eventually, make real estate transactions safer, more efficient and cheaper. Moreover, it could aid data transparency and, eventually, enable the use of smart contracts for real estate transactions.

However, while blockchain is likely to be one of the most talked about technologies of 2017, we believe the practical applications will take a little longer to gain market acceptance. This is partly because it will take time for any of what are likely to be numerous competing applications to reach critical mass, but also because of legal uncertainty. In particular, there is currently little regulatory framework (which is an issue receiving much attention from law and policymakers; however, formal structures are likely to take some time to put into place). This means that participation agreements will need to be detailed to govern access, promulgate rules of conduct and apportion liability. In addition, legal enforceability needs to be carefully considered, alongside other important issues such as tax liabilities.

Implications for new business models

Data-driven business models

Data is the currency of the digital economy. Technological advances in the built environment offer new opportunities to deploy that currency. For instance, sensors and location-based services make it possible to monitor operations and maintenance, thereby increasing efficiencies, enhancing customer experience (for example, in terms of car parking and targeted information services), as well as improving the value of tenancies by gathering data in relation to both historic and forecast footfall, delivery and warehousing information and customer profiles. Consumer data can be collected for use in behavioural advertising, whether provided by individuals themselves or by the sale of data to third parties.

Here, it is key that the anticipated collection, storage and processing of data is permitted under data protection legislation. Stricter rules on data profiling will come into force under the new General Data Protection Regulation (also known as the GDPR), compliance with which will be mandatory from 25 May 2018 and unprecedented fines, of up to four per cent of an organisation’s annual worldwide turnover (or, if greater, €20,000,000), may be awarded for serious breaches. In the UK, online behavioural advertising is also regulated by the Advertising Standards Authority, which requires businesses to be clear about their data collection and to provide tools so that consumers can choose to unsubscribe.

Where businesses rely on the exploitation of data, key considerations run beyond compliance. In many cases large data sets are created with data input from business partners. Businesses will need to work out the provenance of their data (does it come from other businesses? The State?). It is important to establish the facts to ensure that there will be continued access to data on a known-cost basis and whether there is freedom to commercialise compiled data.

Data-reliant businesses are well advised to make sure they have (or put in place) the right data access arrangements (for example escrow arrangements guaranteeing access should the supplier ever fail) and the right contractual framework in order to ensure guaranteed supply, as well as comfort that the data will be clean and accurate and has been collected, stored and processed lawfully.

Flexible workspaces and flexible stores

With many workspaces becoming virtual, the concept of a “fixed office” as we know it is changing. However, where office space is required, co-working can be more flexible, as well as offering opportunities for networking, collaborative sharing and innovation. The idea of purchasing a membership to shared work space is very different from entering into a lease for office premises. Co-working spaces normally operate on short-term membership contracts that offer more flexibility than fixed-term leases and, to avoid security of tenure, co-working licences should ensure that members do not have exclusive possession.

Shifts in consumer behaviour also mean that some retail tenants also want to move away from rigid, long-term arrangements. Landlords are increasingly focusing on creating compelling destinations to lure retailers, which could involve creating areas for events or leisure activities in retail centres. While tenants will be focused on flexibility, landlords should ensure they have the necessary levers in leases to influence the layout of stores, including the number of concessions, or to terminate tenancy, if they need to react to fast-changing events. They also need to be able to support existing tenants while any changes to layout are carried out. Security is also important here since tenants will want to be reassured that IT and communications infrastructure is secure.

Implications for partnerships and M&A

The move to increased tech-centricity of business is changing corporates’ profiles, their third party dependencies, as well as their credit ratings and the availability of finance. As a result, digitalisation is driving deals. We are seeing rises in joint ventures and partnerships; spin-offs and exits; corporate venturing (as a way for established businesses to harness the innovation of start-ups); tech fund formations; and M&A (sometimes as a replacement for R&D).

Digitalised businesses are different – inherently more complex and more connected – that requires a wider view in undertaking due diligence in order to properly assess the values and risks associated with a transaction. These can take the form of market risks (will a blockchain based real estate operation ever gain sufficient market adoption?), technology risks (are virtual reality and enhanced reality just the latest fads?) and legal risks (such as those identified in this article in relation to IP, data and cybersecurity). All of this affects our legal analysis and advice when advising on transactions in the digital economy.

Compliance can be a particular headache when looking at acquiring early stage companies. This can be related to the application of law, whether existing (are Uber drivers really employees rather than self-employed? Is letting a property on Airbnb an unlawful sublet?), or the new (will the use of drones for aerial photography be restricted?). Assessing whether compliance issues will affect the sustainability of a new business model is further complicated because of the tendency of the business models of early stage companies to flip faster than their compliance analysis. Nevertheless, it is worth doing proper, targeted, due diligence in order to assess what is being acquired, in order to secure appropriate warranties, put in place structural separation and assemble a plan to resolve issues.

Conclusion

As with any new development, digitalisation gives rise to uncertainties and complications. However, success has always meant thinking ahead – and right now that means thinking about digital. Quite simply, if a company doesn’t have a digital strategy, it doesn’t have a strategy and without a strategy, it may not have a business.