In 2017, Venture investors deployed over $5 billion in real estate technology… This is as a result of population explosion that attracts investments.
Maduka Nweke
Nigeria is one of the most populated countries in the world. Its population density has always had far reaching effect on its demands for real estate. In reality, population density is an economic advantage to most countries. However, the reverse is the case in Nigeria where the population has become a disadvantage considering the acute shortage of almost everything including the endowment of nature like oil and space. While considering that Nigeria has the manpower, the technical and technological know-how and resilience to endure harsh weather, the country is lagging behind far more compared to its other peers in the comity of nations. The resultant effect is the impact of policies, implementation, enforcement and supervision that made the ease of doing business a Herculean task. To worsen the situation in the country just recovering from recession, real estate market ought to grow because good investors see recession as the veritable opportunity to invest, especially in real estate. But that was not the case even though the population of the country will support that venture.
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Demographics are the data that describe the composition of a population, such as age, race, gender, income, migration patterns and population growth. These statistics are an often overlooked but significant factor that affects how real estate is priced and what types of properties are in demand. Major shifts in the demographics of a nation can have a large impact on real estate trends for several decades. For example, all the children born between 1945 and 1964 are an example of a demographic trend with the potential to significantly influence the real estate market. The transition of these children to retirement is one of the more interesting generational trends in the last century, and the retirement of these children, which began back in 2010, is bound to be noticed in the market for decades to come. There are numerous ways this type of demographic shift can affect the real estate market, but for an investor, some key questions to ask might be: How would this affect the demand for second homes in popular vacation areas as more people start to retire? Or, how would this affect the demand for larger homes if incomes are smaller and the children have all moved out? These and other questions can help investors narrow down the type and location of potentially desirable real estate investments long before the trend has started.
In the aftermath of the extreme boom and bust of the American real estate market over the past 15 years, research partners set out to explain movement in house prices at the state level in the United States (US) using fundamentals or market drivers other than forces like speculation. More specifically, they focus on explaining house price appreciation using one key fundamental variable, which is population growth. The earth is becoming much more populated, creating more demands for assets. Literature put forward in the past focuses on demographics and consumption, but not so much on real estate finance. Meanwhile, real estate assets constitute 54 per cent of the world’s wealth.
Demographics are a particularly useful angle of study for explaining house price appreciation because of the simplicity of the concept. So as the demographics angle is so logical, it really illustrates the basic economic equation that entails higher demand in combination with a limited or inelastic supply that equals higher prices. In that way, it is a simple story.
In 2017, Venture investors deployed over $5 billion in real estate technology, more than 150 times the $33 million invested in 2010. Once a sector seemingly ignored by the Venture industry, real estate technology has come front and centre, notably producing two of the three most valuable startups in US; the WeWork and Airbnb. This, in a way, is as a result of population explosion that attracts investments. Driving this investment explosion is the evolution of real estate technology from its initial phase of software and market places complementing the incumbents to a new era where technology-enabled players are going head to head against the sector’s largest incumbents (hotels, commercial landlords, brokerages) and consuming massive amounts of investor capital as they scale. As challengers mature into leading players, we believe we are entering a third phase in the evolution of real estate technology. The businesses that define the emerging third phase of real estate technology are likely to look more like the earliest technology businesses in the space – more complementary than competitive to incumbents and deriving their value proposition by utilising new technological capabilities. This phase, likely, will include companies that leverage sensors and virtual reality to create smarter spaces, machine learning to standardise and draw insights from industry data and platforms to more efficiently manage transaction services as well as to design, manage and outfit physical spaces.
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Real estate represents a significant portion of most people’s wealth, and this is especially true for many homeowners in US. According to the most recent Survey of Consumer Finances by the Federal Reserve, 65.2 percent of American families owns their own primary residence. The size and scale of the real estate market make it an attractive and lucrative sector for many investors. Given that US real estate is a $35 trillion asset class, and represents a multifaceted market generating over $1 trillion in revenue annually, according to IBISWorld Industry Reports, the strong interest in companies built to serve, arbitrage or compete with the incumbents is not surprising. Nevertheless, up until a few years ago there were only a handful of significant US real estate technological success stories.
During the beginning of the 1960’s, the People’s Republic of China had a growing population of 600 million people. In the aftermath of a famine and the Cultural Revolution, the growing Chinese population was becoming a major issue. The government felt that the economy was not able to support the massive population, and thus began the propaganda campaign to encourage the use of contraception. It was not until 1979, when China created and enacted the One Child Policy, which included government forced abortions and sterilisations, which successfully prevented millions of births.
Now, 30 years later, the effect of the One Child Policy has successfully limited the population growth and created a rising economy. The new concern that stands is that as the Chinese workers age and head to retirement, many cities will experience an outflow of population as well as declines in output of production. With the demographics of the labour supply rapidly aging, the economy will likely have lower production output levels. This raises the questions of how it would affect the economy and housing prices.
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