It is no secret that real estate is the largest asset class all over the globe and offers numerous opportunities to institutional investors and individuals interested in investing. Even with the emergence of new trends, the commercial real estate market has maintained its importance.
Out of all the major changes in the real estate industry, the most significant one is the rise of fin-tech due to the adoption of contactless and technology-enabled business processes.
Fin-tech’s digital disruption in the real industry market has resulted in the rise of mortgage lenders and individuals. Gone are the days when institutional banks were major lenders, which stopped newbie investors from securing funds to invest in commercial real estate properties.
Nowadays, these projects can also be funded by fin-tech businesses or intermediate firms.
According to the 2018 report published by the Federal Research Bank of New York, modern fin-tech leaders had already occupied 8% of the total organization market by 2016.
As per the Home Mortgage Disclosure Act and its reports for 2022, the number of reporting institutions increased to 4,460, i.e. a 2.8% growth from the previous year. From the figures reported, it is clear that fin-tech corporations have taken hold of the residential and commercial real estate market.
Statista also estimated that the global fin-tech revenue will hit USD 295 billion by 2027, which is a clear indication of the growth and impact of fin-tech on the commercial real estate (CRE) industry.
But, what exactly is its impact and are there any limitations we must keep an eye out for? To know the answer to this question, jump right into the article below and learn how CRE and fin-tech go hand-in-hand.
Challenges of the Pre-Fin-tech CRE Industry
Before we jump right into the benefits and challenges of CRE fin-tech, it would be a better idea to discuss the pre-fin-tech CRE industry. This will help you easily identify the differences and decide whether it is for the better or worse.
Some common pre-fin-tech challenges of the CRE industry that are still noticeable to some extent include:-
- Traditional CRE was dependent on manual processes and paperwork which introduced some level of error and inaccurate data. So, these were not completely transparent and could be easily modified as and when necessary.
- Manually collecting data and filling out the paperwork can be quite tiring and time-taking. Moreover, these require a lot of manual effort, which can take up manpower and increase the workload on employees.
- Since the market was previously dominated by traditional banks, small and mid-sized investors couldn’t secure capital easily. This led to fewer commercial real estate projects and the market was completely dominated by the industry giants.
- Businesses in the commercial real estate industry were not quick to invest in automation and were highly dependent on manual processes. This means that even today, they have not adopted advanced technologies and tools and are behind in the digital revolution affecting all other global industries.
- Another downside of their dependency on manual processes is the chance of inaccuracy and improper data maintenance. So, companies cannot completely rely on this data to make business decisions.
- Due to the dependency on manual paperwork and data maintenance, CRE investors need to be present on the site where these are stored. This means that employees, investors, and business stakeholders do not have access to the data whenever and wherever needed.
It is clear that the traditional CRE method had a lot of drawbacks and this bothered the industry giants. Moreover, small and mid-sized investors were tired of holding off projects as they couldn’t secure the capital. This is when fin-tech corporations noticed that they could transform the commercial real estate industry for the better.
The Advent of Prop-tech
Other than the challenges mentioned in the above section, another major problem faced by CRE investors was the time-taking manual process of collecting receivables. This also means that companies do not have access to ground-level real-time data, making it difficult for them to manage the several properties managed by them.
This is where fin-tech launched an intelligent solution – prop-tech (also known as property technology). The term refers to all residential and commercial real estate software and platforms that aid in the management of properties over different phases of the asset lifecycle.
PropTech includes cloud-based tools and automates traditional business workflows to help CRE companies manage properties and collect receivables without much hassle. Another advantage is that they allow renters and CRE companies to communicate in real-time.
This facilitates quick resolution of issues and better management of commercial properties.
Benefits And Limitations of CRE Fin-tech
As discussed, the Commercial real-estate financing industry is rapidly evolving and it might be a good idea for you to keep an eye out.
Whether you’re a lender supporting property renovations or want to invest in CRE fin-tech, learning how these fin-tech companies are revolutionizing the industry can help you improve.
Want to navigate the evolving commercial real estate and fin-tech landscape? Check out the following points, their benefits, and limitations to get a clear idea before participating in CRE Fin-tech.
Financial Inclusion – Benefits
It is clear from the previous section on prop-tech that the future of commercial real estate is streamlined and digital. Moreover, with the advent of advanced technologies like Big Data Analytics and AI & ML, the fin-tech landscape will expand quickly.
These technologies help alternative lenders and financing institutions better assess a borrower’s creditworthiness. But, how is it different from the vetting process in traditional banks and financing institutions?
Well, traditional banks have strict money lending policies that take a lot of time to get approved. Another disadvantage is that these institutions generally do not approve CRE projects financed by small and mid-sized investors.
This means that those new to the CRE investment industry do not get the opportunity to bring their projects to life. However, the fin-tech companies and alternative lending institutions include innovative and non-traditional methods of lending and borrowing money.
This means better financial inclusion and higher opportunities for investment and commercial real estate projects.
Financial Inclusion – Drawbacks
Better financial inclusion means better financing options and a higher number of commercial real estate projects being fulfilled. However, these new technologies are not yet advanced enough to process data and offer analysis.
This means that although CRE companies can utilize these software solutions to aid their decision-making process, they cannot completely rely on them. They might also bring unanticipated financial losses and other negative business consequences whose effects we cannot even fathom.
Underwriting commercial real estate loans is not an easy task and requires a high level of skill and expertise. With the increased availability of these technologies, several lenders will come to the forefront. This means that there is a high probability that they will miss out on numerous factors that are often considered and make miscalculations. An easy solution is to adapt to the technology but only to use it as an aid before making business decisions.
Another factor to consider is that these institutions often finance borrowers who might not be approved by traditional banks. This is why these institutions have high-interest rates and other complicated terms borrowers must consider.
Since established residential and commercial real estate investors can easily seek financing from traditional banks, they would not prefer to sign up for these high-interest rates and terms.
Data Security – Benefits
Since alternative lenders and fin-tech companies use advanced technological tools, they can be expected to have detailed security protocols in place. This means that customer data is well-protected and can be accessed by investors and stakeholders as and when needed.
Most of these companies use cloud-based solutions and technologies which help store and maintain data at remote locations. So, customer data is accessible to business owners and other stakeholders all across the globe. This means that stakeholders can easily view the data as needed and make informed business decisions.
Data Security – Drawbacks
Although fin-tech companies are known for their technological advancements and digital services, there is no set security benchmark in the industry yet. This means that the security and data protection in place is completely dependent on the company and its development team.
When companies use software solutions that do not implement advanced security protocols, customer information security and privacy become a top concern.
Technology and Recordation – Benefits
A huge advantage of fin-tech over traditional lenders is the added speed and convenience of their digital services and technology. According to McKinsey’s 2022 Digital Payments Consumer Survey, about 89% of respondents prefer digital payments and banking services offered by traditional methods.
This is a clever indication of the change in consumer behavior and the preferences of the modern borrower. Lenders who have shifted to electronic recording of deeds and other contracts, also offer numerous benefits to borrowers.
Proptech also allows lenders and borrowers to maintain data and documents with 100% transparency. This means that borrowers do not need to worry about inaccurate data and representation, while lenders can easily communicate contract terms and other policies to borrowers.
Another great advantage of prop-tech is that borrowers and lenders can view the data as and when they seem necessary.
Technology and Recordation – Drawbacks
Although there are several software solutions and applications in the market that help lenders improve their business processes and better cater to customer needs, global adoption is quite limited.
According to an article published by the Economic Times, the global adoption of the fin-tech space is only 64%. This means that early lenders and traditional financing institutions need to catch up to allow their teams to digitally collaborate and enable real-time communication between lenders and borrowers.
When early lenders and traditional banks invest in these technologies, they can expect to get ahead of the competition and help set an industry benchmark for these technologies. This, in turn, might solve other drawbacks like security issues and protocols.
The global COVID pandemic has served as a catalyst for changes in the digital and financial sphere. Quicker adoption of fin-tech in the commercial real estate industry will lead to the sanction of more projects and boost societal development.
However, businesses must focus on data security, transparency, and privacy to better fulfill the needs of borrowers. Interested to invest in CRE fin-tech and get a prop-tech solution developed? Get in touch with the best development company with experience in commercial real estate and get ahead of your competition today.