Insights

Insights series / 22 October 2021

Digitalisation is no longer optional for real estate debt management

Digitalisation is no longer optional for real estate debt management

By Simon Todd, Director, Group Head of Real Estate Service

Our shared experience of homeworking means we’re collectively familiar with some of the more prominent highlights in the digitalisation process:

  • Manual processes, like anything involving paper or multiple Excel sheets, have largely been ditched in favour of new, technology driven tools that can be accessed online and used from anywhere in the world. Straight-through processing (STP) is more secure, allows less chance for human error, allows greater auditability and provides more efficient interrogation and reporting of data at every step. A boon for ESG as well as efficiency.
  • Signatures can be gathered electronically, with the SEC and FCA accepting the use of platforms set up to do this. It’s worth noting there are “hold-out” lending institutions that do not yet accept digital signatures, putting them at a disadvantage.
  • Staff are working entirely in the cloud, logging in to company workspaces and accessing files over home internet connections.
  • Videoconferencing platforms like Zoom, Teams and WebEx have enabled business to continue through the various lockdowns. One market participant remarked that they were able to transact US$2.2bn (£1.6bn) worth of new deals without having to have a single meeting in person.

A few years ago, these practices may have been “nice to haves,” but where technology is able to increase efficiency and new working practices have already been established, they’re likely to stay, no matter where people are physically located. In other words, the tech-enabled genie is out and it's not going back in its bottle – even in the complex sector of real estate financing. 

Here we explore what this digitalisation means for our industry, what’s holding some managers back and how this has enabled others to steal a march.

Real time data processing and instant access

Real time data processing and instant access

The gold standard is real time processing and giving managers and investors instant access to their data. But there’s still some strong opposition when managers consider the switch to digital processes and better systems, usually due to existing commitments to legacy software and the expected interruption to business operations. But the need is serious: a recent Oxford Business School paper notes that, amongst real estate debt firms that do not have the proper systems in place, there is still a mismatch between data that’s passed to LPs and the data they requested be presented. 

Though it is a difficult step to take, working with the right partner can ensure a smoother transition that allow asset managers to reap the benefits of operational efficiency: increased competitiveness around deals, the sort of data-led decision making that leads to bottom-line gains and happier investors.

For now, we see overwhelming evidence of real-time processing and instant access technology becoming a permanent part of the industry’s landscape. One key example of this, is how managers have been using technology to understand their real-time cash positions. 

Real estate and debt fund structures are complex and understanding real-time cash positions can be tricky. Intra-day updates around multiple transaction confirmations or cancellations, especially where there is more than one fund, currency, and bank account, is difficult for most managers to handle in-house, especially without the right systems in place. 

There are three aspects required to do this well. First, gathering the data from disparate internal and external sources, second, efficient (and accurate) processing of that data and third, making the needed information accessible to managers and other authorised parties. An edge has been gained by managers who have scaled this hurdle – or who have outsourced it to the right partner.

Real time systems such as these, available online, have allowed managers to more ably meet their investors’ demand for more granular data and transparency, as well as staying competitive in a marketplace with tough and ever-growing competition. After all, understanding actual liquidity directly influences decision-making around a potential deal, adding value from a very early stage. From evaluating an opportunity to capital deployment, quick turnaround is paramount in beating the competition in the race to close.

Through the course of the pandemic, managers with such systems have developed a certain corporate confidence and by all accounts it is one powerful example of digitalisation in the industry. 

Hiring and upskilling

Hiring and upskilling

There’s a lot of focus around PropTech when digitalisation is mentioned, but much less emphasis is placed on hiring and training practices in regard to the people expected to use the technology. 

Lack of appropriate in-house talent was cited by over a quarter of investment managers in a KPMG survey as the reason their business is not adopting widespread digitalisation. In fact, Deloitte recently published a report revealing real estate participants are behind on hiring for advanced technology skills. The report went on to note that the pandemic will have highlighted the problems of running an overwhelmingly manual operations model dominated by traditional job roles and skills. 

This will have been especially pronounced in critical business areas like fund accounting and investor relations, especially where individuals are not well enough trained in the use of new systems. These issues are partly why outsourcing to third parties rapidly increased during the pandemic, but the choice of partner here is also important – managers should look for firms with dedicated real estate specialists on their teams.

After all, with technology automating routine elements of investment management and fund administration, with an emphasis on providing real time data, that data is only useful to people who know how to use it and can squeeze all the value-add out of it on your behalf. That’s why marrying up core sector expertise with tech skills (and vice versa) is so important.

Having the technology and mechanics in place to monitor the pulse of deals, analyse liquidity gaps and the different methods of financial engineering, is what we’re looking to support clients in the debt market with.

Cybersecurity

Cybersecurity

Whenever there’s a lot of data involved, there’s a need to keep that data secure from increasingly sophisticated hacking attacks or attempts at social engineering. The asset management industry has become a favourite target for hackers: the more data a company has, the more that company becomes an interesting target to hackers who can sell that data or use it directly to steal money. Managers need to ensure that their and their outsourced partners’ - security technology, processes and people are equipped to minimise the risk of a breach.

The main entry point for hackers is actually not technological – it's via “social engineering.” That is, gaining people’s trust, or relying on their mistakes, to trick them into giving away your data or the passwords protecting it.

Innovations

Conclusion

It’s true that some parts of the market move more slowly towards the latest innovations, especially when complex in nature, but in this case there is only one direction that this technological shift is going. It’s only a matter of time before technology will underpin every stage of our market, from acquisition, management, performance review and disposal.

The objective of all of this is ultimately to help managers generate more alpha and better respond to their investors’ need for enhanced transparency and on-demand, detailed data. We believe that the managers who have already adopted technology in their processes or outsourced the data processing activities that enable its effective use within their organisation, are already seeing these benefits.

However, quickly digitising a business represents a human change management challenge for digital adopters – for example, people building Excel side systems in a way that suits their own preferred interpretation and presentation of data. This causes the layering and inefficiencies, the larger the organisation, the worse it can become. Behavioural change management is crucial to getting the “not invented here” brigade to genuinely engage with any form of change, including new systems. 

Apple was initially successful because of the intuitive nature of the mouse and the ease of operation and hand eye co-ordination. They have grown rapidly since, but the success was grounded in initial simplicity. If they had started with something as sophisticated as the iPhone 12 the rapidity and scale of deployment would have been nowhere near as their historical past. The investment in human training and making sure that the operators are equipped to drive a Rolls Royce is crucial.

People still need the physical environment to come together, train and develop ideas. We certainly do not believe the physical office is dead but managers that do not embrace technological change are at serious risk of damaging their health. The Covid pandemic has certainly sped up the process of digitalisation, but this is the tip of the iceberg of what is to come, managers slow to adapt are going to be at a disadvantage: remember what happened to the dinosaurs?