Platform economy in the real estate industry
Platform business models such as Alphabet, Alibaba, Amazon, Tencent or Netflix have been coming into the public eye for some years now due to their market capitalization and market power. Seven of the ten most valuable listed companies in the world operate as platforms. While the focus remains in the USA, Chinese platforms are also on their way to the top of the world. Europe has a value share of only 4 percent among the 70 largest platforms. There is no sign of a catch-up process yet, despite increasing interest. Platform business models are in the process of fundamentally changing the economic principles as well as the interaction and communication behavior of markets and companies.
It is important to understand the complex principle behind platform models. After all, simple economic platforms already existed in the analog world. Buyers and sellers have met in marketplaces for many centuries; newspapers, for example, bring readers and advertising companies together. Many demanders, i.e., buyers and readers, attract many suppliers (sellers or advertisers). What is new about digital platforms is the focus on interactions between the two sides of the market, the revenues from the interactions (network effects), their global dimension and low transaction costs due to the use of digital technology.
These economic and managerial effects lie primarily in a change in market mechanisms, which usually leads to a shift in trading venues and thus capital. The result is significant shifts in wealth, especially to the countries of the platform operators such as the USA or China. This is because with every transaction, every book purchase with Amazon, every cab ride with Uber or every apartment rental with AirBnB, a portion of the transaction sum flows directly into the coffers of the platform operators.
As a result of this shift, a market metastructure of the platform economy has been established alongside the classic market mechanisms for several years. Since 2014, the third generation of the platform economy has been established. Characteristics - in addition to those of the first generation (marketplaces with supply and demand without intelligent interactions) and the second (share economy: focus on intelligent interactions between supply and demand or sharing of resources, capacities and skills) - are primarily the complete monetization of information along information economy criteria, the analysis of dynamic ecosystems and the derivation of new approaches for the design of ecosystems as well as network effects based on complementary alliances. By using information economics, dynamic ecosystems and alliances, no monothematic constraints exist. This makes horizontal, vertical and lateral diversifications far easier to establish. Third-generation platforms are thus able to model new markets and change existing mechanisms. Above all, they have a strong focus on generating network effects through more partners as well as their customers.
Practical example: platform economy in the real estate industry
After the retail, media, and travel industries, platform business models have the power to cause tectonic shifts in the real estate industry as well. Digitalization has so far largely bypassed the real estate industry. Although marketplaces such as Immobilienscout have been successfully bringing providers and buyers together for many years, significant shifts in value creation have not yet occurred in the industry. This could now change with a new generation of digital platforms such as WeWork, Realconnex and Immofred, as well as fresh concepts such as "co-working", "space-as-a-service" or the use of data and analytics.
The platforms' attack on the business model is coming up against an unprepared industry that has so far hardly recruited or trained any digital minds, as a study by the German Property Federation (ZIA) and the consulting firm EY Real Estate shows. A second finding of the study shows just how much catching up is needed: two-thirds of the participants cite a lack of a cross-company digitization strategy as a hurdle to innovation. Most industries in Germany are now much further ahead. In the real estate industry, however, there are technical and economic conditions that provide a good basis for building a platform business model.
1. Legal framework
The legal constraints are characterized by a complex legal framework designed to protect market participants, their interactions and transactions. Industry-related decisions require extensive knowledge and consideration of these constraints.
Real estate represents high values over a long lifetime. For this reason, projects are characterized by high financial and time implications. These factors require decisions that are forward-looking and responsible.
Both the market and the properties are sometimes very heterogeneous. For the properties, location, the way of construction and equipment play important roles.
Both its role as an investment property and its financing lead the real estate industry to interact with the financial markets. Dealing with real estate places high demands on thinking in contexts that take into account business and economic aspects.
Platform approaches around functional areas and the real estate ecosystem can be derived from the regulatory and task focus:
1. Functional area land acquisition
- Major players are private owners, community of owners, municipal owners and institutional owners.
2. Functional area planning and approval
- Players are urban planners, municipalities, building inspectors, architects, civil engineers, building services engineers, project controllers and facility managers.
3. Functional area creation
- Characterized by the developer, construction industry, building trades and the building products manufacturer.
4. Functional area management
- Whose protagonists operate brokerage (real estate agents), leasing and management, maintenance/modernization, supply/disposal, cleaning/securing and facility management.
5. Functional area disposal
- With stakeholders such as demolition companies, construction material recyclers, landfill operators and waste management companies.
6. Functional area financial management
- Driven by commercial banks, mortgage banks, insurance companies, building societies, real estate funds, the public sector and private individuals.
These opportunities can be applied when building a platform business model. Applying lessons learned from successful platform models in other industries to the real estate industry reveals a tremendous opportunity. Third-generation platforms in particular enable multifaceted interactions between the two sides of the market. A platform could efficiently solve structural challenges regarding key focus areas in the real estate industry. These include the exchange of data in terms of quality and structure as well as the flexible integrability of software.
In principle, the following individual or complementary options are possible when building platforms:
- Establishment of alliances, who share their resources, capacities and skills in the context of tasks or life cycles of properties on the platform.
- Establishment of service and product alliances on the platform, enabling horizontal (value creation), vertical (segment-related aspects) or lateral (mix of horizontal and vertical) assortment design.
- Establishment of corporation and collaboration alliances with a focus on shifting market share in the real estate market and trading volumes from traditional business to platform business in order to change market mechanisms and rules.
- Establishing alliances around curated, industrialized or standardized real estate, software solutions, sensing, data and technologies to create a significant competitive advantage for platform participants.
While a platform makes it much easier to combine different services and products to ultimately meet customers' needs quickly and appropriately, companies in the real estate industry can expand their core competencies through alliances, cooperations and targeted collaborations.
Examples of platforms in the real estate industry
Modern platform models have also been establishing themselves in the real estate industry for several years now. In addition to the platform giants from China such as Alibaba, Tencent or JD.com, there are some interesting and promising approaches:
- WeWork, a successful platform that offers more and more aspects of living and working with an extensive ecosystem on its platform, in addition to establishing modern and flexible working environments, startup coworking and incubation;
- Realconnex, a modern and promising platform that has established a comprehensive dynamic ecosystem of the various tasks, functions, services and products of the real estate industry on its platform;
- Lendinvest, which offers innovative fast financing with the involvement of various partners from the real estate ecosystem;
- PeerStreet, which enables investment loans on its platform with two-sided markets (supply and demand) for houses and residential properties;
- Eiddo, which establishes a smart ecosystem with buyers, sellers and service providers on one platform and enables interactions;
- Brickvest, which enables investments for private equities, project developers and asset managers, among others, on its platform with multi-sided markets;
- Quintoandar, a third-generation platform that serves as a hub for the diverse needs of apartment and property managers, establishing a comprehensive ecosystem in the process;
- Doozer, a German platform that focuses on an integrated platform for craft services for the real estate industry, establishing supply and demand on its platform with curated services;
- Immofred as an interesting platform approach from Germany focuses on a dynamic ecosystem to simplify and automate the management of private rental properties with the tasks and duties of the private landlord via curated functions.
Strategies for platform implementation - hope is not a strategy!
Even small platforms can create new markets, opportunities and business models or significantly change the industry with the help of intelligent ecosystem interactions and network effects. Business areas may be replaced, changed or renewed. There are both opportunities and risks here. Once the platform business model has been worked out, the next step is implementation. The following applies: Hope is not a strategy!
The following models are conceivable for implementation:
- Build your own platform business model: Recommended for companies that want to establish platform models as platform initiators and pioneers in the market.
- Build a platform with additional partners: This model is suitable for platform initiators who combine complementary elements upfront and pursue a common strategy.
- Use existing platforms as a sales channel: In principle, it is recommended that every company use existing platforms as another sales channel as part of its sales channel strategy.
Platforms therefore offer opportunities to complement classic business models and to work together within an industry for the benefit of all. Those who start earlier have a better chance of actively confronting and helping to shape the changes in the markets.