The digital transformation theme is taking the world by storm and the real estate industry is no exception. Technology is rapidly transforming everything from how we find and purchase a house to the ways we take care of our homes. Real estate is also benefitting from tailwinds including low mortgage rates and pent-up housing demand. Millennials are hitting their peak buying power and home ownership rates remain low, driving a strong housing cycle with pent-up demand.
The process of buying a new house can be intimidating, with separate service providers for real estate agents, inspections, lending, appraisals, titles, escrow, insurance and movers. There are opportunities for digital disruption across each of the transaction’s phases, and consumers are demanding digital options to simplify the process and save on costs.
Lenders and servicers have become increasingly focused on automation and workflow management in order to operate more efficiently and meet their regulatory requirements. Technology is also enhancing the consumer experience during the mortgage loan origination and closing process. U.S. mortgage loan market participants work to minimise the risk in lending, servicing and capital markets, they rely on the integration of data and analytics with solutions that enhance the decision-making process. Cloud-based real estate brokerage allows agents to run and operate their business entirely online. Real estate data and analytics in both the residential and commercial segments are accelerating the decision-making process and allowing consumers to make more informed decisions. Cloud property management software is becoming increasingly popular as it offers several benefits including scalability, greater accessibility, better security, and cost savings.
Large and growing markets include the $44bn mortgage originations market, $35bn escrow market, $45bn property management services market, $99bn home insurance market, $2.5bn home warranty market, $355bn home renovation market and $18bn moving services market (figures from IBISWorld in 2019). ANGI estimates the home services market to be worth $500bn, with less than 20% of projects currently fulfilled online.
CoStar [CSGP] is a leader in the vast commercial real estate information and analysis industry, and has been making multiple strategic acquisitions to solidify its leadership. Black Knight [BKI] is a leading provider of software and data analytic solutions for the mortgage and consumer loan markets. First American [FAF] is a title insurance leader leveraging data to expand property coverage, achieve title automation, and meet the growing data needs of its customers. RealPage [RP] estimates the total addressable market for its portfolio of data analytics and on demand software solutions is approximately $18.9bn, across approximately 64.6 million units, while the HOA market represents another $1.8bn and the global vacation rentals market adds a further $130bn. The penetration across these industries remains in the very early stages; the $1.6trn existing home sales market is less than one percent penetrated. There are an estimated 1.4 million real estate professionals in the US and 89% of sellers utilize an agent in this highly fragmented industry. The workflow automation and digital productivity addressable markets are a compelling growth opportunity, broken down below:
Consolidation is another theme in this group, with multiple companies vying to acquire CoreLogic [CLGX]. Intercontinental Exchange [ICE] bought Ellie Mae, a leader in mortgage software solutions, for $11bn in August. There is also some scarcity value in this theme, with a limited number of investable names. We are likely to see more companies coming public in the future, including the likes of Sagent Lending Technologies, a firm leading the way in the modernisation of mortgage servicing.
The ICE/Ellie Mae M&A conference call yielded some wisdom on the topic:
“The U.S. mortgage workflow is in the early stages of an analogue-to-digital conversion. Today, the fragmented and largely paper-based mortgage transaction involves around 100 steps, thousands of pages of documents and can take nearly 2 months to complete. When combined with our existing network at ICE Mortgage Services, our combination with Ellie Mae will firmly establish ICE as an industry leader within a large and growing addressable market and one that is desperately seeking efficiency gains.”
“We think that there's a total addressable market that is roughly $10bn in size as customers seek efficient ways to navigate both rising compliance costs and growing origination backlogs as evidenced by the mounting number of refinancing candidates as well as a shift towards greater millennial generation homeownership.”
A good example of this digital shift is recent IPO Rocket [RKT], an online mortgage provider that has grown its share of the massive originations market to 8% in 1H20 from 1% in 2009. Its digital-first approach resonates with millennials, is efficient and highly scalable. The mortgage origination market has been rapidly shifting away from large banks to smaller, independent providers.
Opendoor came public via a SPAC with Social Capital [IPOB] and outlines the large, undisrupted market opportunity presented by changing the way we buy and sell homes. The iBuyer market saw strong momentum in 2019 before the pandemic and the opportunity remains immense for this segment as homeowners seek a hassle-free way to sell their homes. An iBuyer is a company that uses technology to make an instant offer on your home. They represent a dramatic shift in the way people are buying and selling homes, offering in many cases a simpler, more convenient alternative to a traditional home sale.
As outlined above there are exciting opportunities across the large and growing real estate market where technology is in the early stages of disrupting multiple phases, spanning the home search, buying, and managing life cycle. The industry itself has multiple positive secular growth drivers and the technology innovators will grow at an even faster rate as penetration and adoption of digitalisation increases. This strong trend has a long runway for growth over the next decade, as home ownership increases in the strongest, growing demographics.
The companies explored here are not all directly comparable as they span more traditional financial services companies and high growth tech-only companies, but the shows some of the stellar growth and profitability across the group.