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Cost during transaction & Cost of raising funds

PropTech Asset Management > Blog > Cost during transaction & Cost of raising funds

The change of ownership of the property is one of the costliest events during the life-cycle of a property. Every stakeholder who is involved during the transaction process has to be paid. This starts from the lender who is often charging a fee to provide the funds and ends with a property manager, who is charging a setup fee in order to take on the property in his portfolio.
So, a list of participants during the transaction can be as following:
The bank, the surveyor, the buyer’s broker and lawyer, the seller’s broker and lawyer, the notary and the city council who’s registering the transfer. Depending on the property location, type and the size the number of participants can vary. Often the fees are pegged to the price of the property, where all participants are charging a percentage, instead of a fixed fee. In Germany for example, a private buyer of a residential property who involves a broker can roughly estimate to pay around 15% in addition to the selling price. Then the price of the property is not hundred percent instead becomes actually 115%.
By having so many different participants during the transaction process it is obvious that this transaction process is very costly. This might be another reason why a property is being held for such a long time before it changes hands again.

A number of start-ups are working on technological solutions to improve this situation. Their aim is to reduce the time for communication and try to optimise transparency. There are digital platforms, where it is possible to dedicate roles of the transaction participants and see their progress of accomplishing the required work.
Other start-ups are focusing on replacing the intermediary that is the real estate broker. They are using algorithms to match the perfect property of the investor. This could lead to omitting the entire sales process, where the broker is pitching and convincing the vendor to sell and the investor to buy. Instead they are using pictures, videos, virtual tours and augmented reality to make a property so attractive that the buyer does not need to be persuaded any more. By being able to scale this technology it is possible to charge a lot of people a small fee instead of charging large fees from a few transactions.

Cost of construction

In the past determining the cost of construction was a matter of experience and an estimation. This is not satisfying for an investor with a finance background. You would like to have an exact figure, determining the cost to constructing a building. The problem is not that the engineer, architect or the contractor could not provide an exact figure. Instead, during the construction a number of variables can change. Sometimes even the investor comes up with new changes during the construction phase. This investor was not aware of the implication he would cause for his additional request to change something at the building.

The construction industry took on two new ways to improve the construction process. The first way is copying the automotive industry. The automotive industry is able to calculate the cost of building a car by its penny. The entire production is happening within a factory, which is lean and automated. There is a trend of constructing parts of the building in the factory in order to shift it to the construction site and to install and finalise it. Some companies go one step further and decide to construct the entire building in the factory and transport it to the land in order to be placed and used without any further requirement of construction.

Due to the evolution of technology it is now possible to fully plan and visualise before starting the construction. This is the second way. It is possible to show all participants final results of the development project from every angle in a three to five dimensional virtual model. This means planners can show the process and progress of development, the components, which are being used and installed and finally the implication of change in terms of cost and time. In this way all contractors are able to visualise the installation of their components within the building and also understand the problems or errors virtually before the problem happened in reality. Furthermore, the architect and the civil engineer are able to show the investor, who might be from the financial industry, the implication of cost and time for any changes he requires before, during and after the construction period.
This does mean that every construction can be calculated with hundred percent certainty. It can always happen that someone discovers a not anticipated Second World War bomb on the construction site, where the construction has to be stopped immediately or they might be still accidents which can cause delays in the completion of the development project.

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