A productive real estate sector through creative destruction

A productive real estate sector through creative destruction

The enormous potential of the real estate business has remained hidden for long. As the RYM Indoor Environment Program analyzed in depth market-based housing funds, the modern method quickly unearthed 10–20 percent of unaccounted for value. – The mathematics of real estate appraisal dates back to the 20th century, says Seppo Junnila, Professor of Real Estate Business at Aalto University. Standards are being reformed while the research program is underway.

The real estate business involves sixty percent of Finland’s national wealth. It covers half of the climate conservation and energy saving potential and a fifth of jobs and the value of production. Nearly all consumers are its clients – through a ”user interface”, as Junnila puts it. The total value of the building stock, civil engineering constructions and developed land is estimated at about EUR 600 billion. The bulk of this potential remains unexploited – the business awaits to be discovered.

Three factors increase net national product: capital, labor and innovation. The importance of capital wanes quickly after the start, that of labor slightly more slowly. Although both move more flexibly in today’s global economy, they cannot increase productivity to any significant degree. Innovation is another matter:

– Innovation is the engine of capitalism. There is no capitalism without innovation, as Junnila quotes Joseph Schumpeter, the Austrian economist. – Innovations are the only means of increasing welfare in the West which makes them a favored tool of economic policy.

Innovations can be divided into product innovations related to goods and services, process innovations, marketing innovations, and organization innovations. – The innovations of our sector are mainly of the three last-mentioned types rather than product innovations, Junnila reminds us. – We have a complex value network, and its restructuring, in particular, involves innovation that increases productivity.

Creative destruction gives birth to a new business model

Even though the business model is the most important part of innovation, only a few percent of enterprises give it any thought. Its development is of utmost importance especially in the real estate business: since the old, linear models no longer work, new network-like models must be introduced. In our sector it means making properties connected to each other by data links nodes of the network – functional and economic hubs – through which real-time data moves in both directions.

– Thus, the important question is who manages the created ”Internet of Buildings”, Junnila emphasizes. After all, it can be managed from anywhere in the world.

IoB opens dazzling possibilities for new business. It should not be considered merely a means of controlling energy consumption and property management, but its contribution to assisted living, health and security, and a multitude of life style solutions should also be studied. The buildings are equipped with remote-controlled sensors that allow users to control their spaces which, again, automatically adapt to their needs.

New solutions and inventions are discovered through creative destruction – that is also Schumpeter’s idea. Old habits, routines and methods disappear and new ones emerge in their place: – An outsider comes and presents a much better business model that starts spreading spontaneously requiring little effort, Junnila desribes. – The first indication of such development is worldwide activity: the construction and real estate sector has traditionally been highly localized.

The most noteworthy external heavyweight players include Toyota and Google. In the Toyota model, the car is the uniting factor which was gradually expanded to buildings and then citiesy. People can manage their energy use by a mobile device, for instance, from a shopping center parking garage. Google, for its part, exploits its e-commerce expertise.

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