Despite unpredictable economic and political headwinds, the European real estate sector continues to flourish, albeit in some regions more than others. Competition for deals is fierce and speed is often of the essence: so much so that, according to research1 recently conducted by Drooms, over 50 per cent of real estate professionals in Europe are compromising on the quality of their due diligence in their rush to complete deals quickly.
However, modern technology has a solution for those seeking to complete real estate transactions more efficiently. Our research also revealed that where time pressures on due diligence have led to a potential decrease in quality of the process, parties to a transaction have found a solution in technology enabled with artificial intelligence (AI), such as virtual data rooms.
Real Estate is big business
According to a Real Capital Analytics (RCA) report published in February 2018, Europe’s commercial property investment market returned to growth in 2017, when it registered the third strongest annual expansion on record.2 It also revealed that deals of more than €500m in value accounted for almost one quarter of 2017’s acquisition volume and that the UK regained its title as Europe’s largest market after its investment volume increased by 12 per cent.
The UK secured its top spot thanks to several large transactions such as CC Land’s purchase of the landmark Cheesegrater building for £1.15 billion.
This growth in the value of transactions is not the only challenge facing real estate professionals. There is also increased competition for real estate investment opportunities, driven by the huge amounts of cash reserves, or ‘dry powder’, available in the marketplace.
Successful transactions depend ultimately on high quality and detailed due diligence but as mentioned, competition for the most lucrative deals can sometimes lead organisations to compromise on this stage of the process.
Intelligent due diligence in real estate transactions is important for two key reasons: the increasing value and complexity of deals; the need to understand more of the context and detail around variables including current and future infrastructure; legacy data about sellers’ litigation and financial records; and tenant payment information.
Despite the high volumes of information that need to be processed, the real estate sector is still some way behind the curve in terms of technology and a significant number of important processes are still conducted manually.
But the volume and breadth of documentation involved in real estate due diligence continues to grow exponentially and is reaching a critical point: it is becoming increasingly important for key stakeholders involved in transactions to quickly and efficiently navigate their way through the mass of information involved and to focus on the key points and it is increasingly obvious that will be impossible without the help of technology.
Our survey clearly shows that over the past two years there has been an overall increased focus on due diligence and 73 per cent of real estate professionals believe this focus will increase further over the coming year. This is set to be driven by factors such as increasing deal costs and inherited tax risk and other liabilities. It has meant that investors simply cannot risk lowering the quality of their due diligence as the stakes grow ever higher. For this reason, AI is increasingly being regarded as a solution for today and not technology for the future.
The need for technology in real estate due diligence
The application of AI in real estate transactions is accelerating, despite perceived barriers such as a lack of relevant skills to implement the required technology. I am not surprised by this because for some time AI has been applied successfully to processes such as due diligence and decision-making. But for real estate this is just the tip of the iceberg and AI’s use will increase significantly over the next five years.
This is particularly encouraging because, in my world of virtual data rooms, it heralds an age in the not-so-distant future when fully-automated due diligence reports will be available in 95 per cent of all cases at the touch of a button. The remaining 5 per cent will be managed by specialists. This will significantly improve the entire process, which can still be very long-winded.
The need for technology to be applied in the real estate transaction process is self-evident. But the solutions must also be elegant, intuitive and as powerful as those used by the consumer retail platforms that we all know and love while still applying ‘search and suggest’ capabilities to ensure that everyone involved in a deal can share and collaborate effectively. This includes the ability to translate documents from multiple languages in real-time, which is a must-have feature in an era of cross-border transactions and international due diligence teams.
The only way forward is for ever smarter due diligence processes that can harness these capabilities of machine learning and – further down the line – AI.
What does the industry think?
A key aim of our research1 among real estate professionals across Europe was to gauge their views on the current use of AI, their predictions for its future use and what factors might prevent its adoption.
Key findings from our research include:
- Only one in five (18 per cent) say AI will eventually substitute human skills
- More than half (54 per cent) of property professionals already use AI to improve the keyword search process in real estate transactions
- Over two thirds (69 per cent) believe AI gives their firm a competitive advantage by enabling a higher volume and variety of documents to be searched at high speed
- Over half (53 per cent) cite a lack of confidence in AI’s ability to match human intelligence and decision-making
A closer look at the benefits
More than half (54 per cent) of real estate professionals say that they use AI to improve the keyword search process when working on transactions. However, this figure rises to 69 per cent of respondents who say they will be using AI for keyword searches in five years’ time. Other processes that will become more widely used include foreign language translation, identifying red flags, routing documents to the right decision-makers and topic-modelling.
The majority of real estate professionals believe that AI already benefits their firm and gives it a competitive advantage by enabling a much higher volume and variety of documents to be searched at high speed. Almost the same number say that AI speeds up the due diligence process, while a third believe it improves the accuracy of decision-making. Other benefits of AI include minimising risks and liabilities in an overall deal, reduced reliance on legal services and securing the best deals before other professionals.
When asked where AI has the greatest impact in terms of improving the efficiency of processes, three quarters say identifying relevant documents in a virtual data room. More than two thirds say it is avoiding time-consuming manual review processes and half cite prevention of human error. Other benefits highlighted included the ability to automatically create contracts and reports and deciding who needs to view and make decisions about data.
The barriers facing AI
Despite these benefits, there are still perceived barriers preventing the uptake and use of AI in the real estate industry. The biggest of these barriers is a lack of confidence in AI’s ability to match human intelligence and decision-making, followed by a lack of skills available to implement relevant AI technology; technology being too difficult to use; a lack of trust by senior management in AI; and concern that AI will replace investment professionals’ roles. Only a small number of respondents say the main barrier is a lack of demand.
Most respondents believe that AI will always work best in conjunction with human intelligence, compared with a fifth who think AI will eventually be a substitute for human skill and intelligence in real estate processes. Very few think that AI will never be a substitute.
What does the future hold?
As a pioneer in the digitisation of due diligence in real estate, Drooms’ technology is helping to change existing processes by integrating AI into its virtual data room. The aim when building AI into our virtual data room (VDR) technology is to enable real estate professionals to reduce the amount of manual review work, eliminate unnecessary errors and reduce reliance on expensive third-party costs. We are just one example of the application of AI, but a very good one.
Crucially, it is not a battle of technology versus humans. Despite its ability to automate a tremendous number of processes, AI will always work best in conjunction with human skills and intelligence. AI needs to learn from human behaviour and there is no substitute for years of experience, instinct and knowledge. However, AI complements those elements and adds huge value by making real estate processes much more automated, efficient and cost-effective.
Jan Hoffmeister, Co-founder and Chairman of Drooms
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