Last week LeaseInfo’s Founder and Managing Director Simon Fonteyn was featured on the PropTech Podcast where he and Kylie Davis discussed the future of retail and commercial leasing as well as LeaseInfo’s newest software platform Accurait®. You can read some key questions and answers below.
Differences between commercial and residential leasing
Kylie Davis:
Simon, my background’s in the residential space rather than commercial, in your opinion what are the key differences between residential and commercial leasing?
Simon Fonteyn:
Well, there’s a few differences. The lease contracts in commercial are much more complex than residential. So, they deal with a multitude of factors.
Kylie Davis:
And much less standardised, I imagine too?
Simon Fonteyn:
Exactly. So, they’re much less homogeneous. Residential contracts aren’t required to go on the balance sheet, because they’re typically less than one year. So, it’s really more than one year, is where leases have to be capitalised. Also, it’s much more difficult to create this product for commercial because there are so many different types of leases in commercial. There’s retail, office, industrial, self storage, potentially hotels as well.
Current problems within the industry
Kylie Davis:
What are the problems in the industry right now?
Simon Fonteyn:
Well, IFRS 16, which is a global accounting standard, which came in January 19, sort of started this process. IFRS-16 requires commercial leases to be capitalised on your balance sheet. However, COVID-19 has accelerated it, because a lot of teams are now working from home or they’re working between home and office. A lot of the actual information about the lease is contained in hard copy PDFs, or they might be even contained in a drawer somewhere. It’s very hard for teams to manage their information if it’s not in a searchable database, and it’s not actually talking to other systems. If you think about it in retail at least, rent is your second largest component. A lot of managers are forever going back to their lease documents, trying to find out what their obligations are. Particularly during COVID, there’s all these sorts of obligations. It’s extraordinary times.
So, not having that information in a structured format is creating a lot of problems for the managers. So, that’s where we’re seeing quite an uptake in interest in the Accurait® platform, inline with the broad digitization mandate, which is not just in our industry, but in a lot of industries.
Accurait, how does it work?
Kylie Davis:
Right. So, how does it work? You upload the lease in and the bot will scan it and start to suck the data out, or?
Simon Fonteyn:
Yes, correct. You can upload one lease at a time or bulk upload. It basically uses AI to process and extract the key information. It puts it in a pane that is, ready for someone to approve. The beauty about it is, it takes the information and bookmarks where it found it, so it’s very easy to verify. Once it’s locked in, that position is forever locked, so that you can cross-reference to databases, you can bring up snippets and searches. So, it creates a really easy and effective searchable database of structured data.
It manages also what they call the ‘parent-child relationship’ in leases. In commercial, as opposed to residential, there’s quite a lot of complexity. So, you may have several documents involved in a lease. You might have an agreement to lease, a lease, a fit out deed or variation. All these documents combined form your total agreement. So, it manages that complexity.
The other module that we’ve just created, which is a real game changer for a lot of our clients is, Invoice Checker. So, Accurait scans the invoice in PDF, takes the amount that the landlord or the tenant is saying that they have to pay, and compares it against the contract value. So, you have the ability to verify against contract on a continual basis. That’s very cool because, it just saves a lot of time and solves this problem of errors being generated. You would be surprised how many errors there are in commercial real estate. It’s phenomenal.
Kylie Davis:
I can only imagine. So, that’s extremely cool. I guess it’s a great use AI too.
Simon Fonteyn:
Yes, it is. The AI that we use is called natural language processing, which is probably the most difficult of all types of AI. They talk about bots, and they’re talking about facial recognition, natural language processing is really the most difficult part, because it’s very new. So, we’ve been working very hard with the CSIRO. It’s taken us a long time to get this right. But once it’s right, the opportunities are enormous, in terms of saving time. There’s also so many other things that you can do. Like, there’s opportunities to link to voice recognition like Siri. You can ask for, “Show me all the leases that are between X and Y.” So, there’s lots of opportunities to use that data, as well as using the metadata that you actually collect on trends and information about where the market’s going. So, there’s really a lot of opportunity to create further products, once you’ve got a good core product.
Invoice Checker
Kylie Davis:
I imagine too that, if I’m a retailer, I’d really want to be using a product like this so that I can make sure I’m not being overcharged or to work out what my rights are inside my contract quickly, that I can go to my landlord or my agent with, to negotiate. Would that be correct?
Simon Fonteyn:
Certainly. Also, to make sure that your lease management system, your property management system, is billing the correct amounts. That whole billing ecosystem is predicated on having the right information.
Kylie Davis:
So, how big is the market for it? Are your clients landlords or are your clients property managers or both?
Simon Fonteyn
We work with both. Well, we have more tenants than landlords, as you’d expect because there are more. One is the mirror of the other. How big is the market? Well, the market for commercial in Australia is significant. That includes office, industrial and retail. You can also add in other special types of uses like childcare, medical, self-storage, hotels. It’s a significant market. We don’t have any natural competitors in this space in Australia. So, really the market is wide open. There are players internationally who do this, but they haven’t entered the Australian market yet. So, we saw it as a really good opportunity to penetrate the market, and have that first mover advantage. That’s what we’re working on.
Kylie Davis:
Okay. So, is there opportunity for you guys overseas as well, like for exporting?
Simon Fonteyn:
Yeah, there definitely is. We already have a couple of international clients on it. We’ve got a clients in Fiji and New Zealand. We’ve got a few clients who’ve got sites in Singapore and New Zealand, Hong Kong. So, we’ve experimented with those leases, it all works. So, there’s definitely a good market for it. But, our strategy is really to work on the Australian market first, and really make sure that we’re the leader in that space before we start going overseas.
Issues caused by COVID-19
Kylie Davis:
It’s interesting that you’re launching this product as we’re coming through COVID because, COVID and locked down has really hit the retail industry hard. We’re not allowed to go shopping at all. We’re not really supposed to be gathering anywhere. So what’s that been like?
Simon Fonteyn:
Well, it’s been challenging. The whole business, which is the retail data business, has been affected because there is less retailers around and they are not doing deals. We launched the product in end of 2018, so it’s got quite a few clients already on it. We are seeing an uptake from other users, not just retail. So, childcare is definitely an area of interest, medical, non-retail, anything with a commercial lease is a target market for us.
However, having said that, the bigger retail clients are actually the ones that need this product the most, because they’ve got so many leases to process. Being able to manage it, particularly remotely, is becoming increasingly important for these retailers. So, we say there’s definitely an opportunity. You know the old saying, “Never waste a crisis?”So, we’re seeing this as an opportunity which should accelerate if anything, demand for this product.
Changes to the industry over time
Kylie Davis:
Simon, tell me about some of the big changes you’ve seen in the commercial real estate industry over that time. What are some of the three or four things that you’ve seen change as commercial real estate and retail real estate has or hasn’t moved towards better technology?
Simon Fonteyn:
Well, let’s talk about retail. Retail has already been in a structural change for, I believe the last decade. The obvious changes are the rise of online or Omni channel. Starting at the turn of the decade in 2010, you might’ve had like 4% or less of sales online. Fast forward to 2020, and we are now seeing up to 12 to 15 percent of sales being conducted online. So, that’s been a major change.
We’ve also seen a lot of international retailers coming to the Australian market and they’ve pinched a lot of market share off your local. So, if you think about the Zaras, Uniqlos, Top Shop. Then, there’s been a few entrants that have failed when they’ve come here, for example, Forever 21, Debenhams, there’s been a lot of change in the way the dynamics of the industry have evolved.
On the supply side, you’ve had shopping centres really expanding their footprint significantly. They’ve outstripped demand every year. So, you’ve got a situation where supply has started to get ahead of demand. We’ve also had aggressive rental growth demanded by the landlords. So, there’s been a lot of structural and cyclical changes in the retail industry, which has to some extent helped us, because people are scrutinising their rents more and more. So, keeping up with that has been a significant challenge. But, I guess that’s the reason LeaseInfo exists.
Office, I expect to also have significant corrections, just by the way that businesses are adjusting their workflow and work force management. That’s impacting on the demand for office space. I see this as a forever changed model, that the demand for office is going to change. I guess one of the big winners will probably be industrial, with logistics as a result of more transactions done online and the need for fulfilment centres to meet that demand. So, there’re structural winners and losers, as a result of this COVID period. But, the commercial property industry is, and will be forever changed as a result, not just here but globally.
Kylie Davis:
Yeah. In terms of our shopping centres, how do you think they’re going to change as we come through this? Obviously, we’re going to see a lot more vacancies for an extended period, I imagine?
Simon Fonteyn:
Well, there are many different changes across the shopping centre model, for example the anchors, the traditional anchors of shopping centres, are already starting to indicate they’re closing. Think about Target and Bing Lee, they’ve already announced wholesale closures. You’ve also got the issue of the department stores. In America, there’s been several that have filed for Chapter 11, and they may or may not come back. In Australia, there’s Myer and DJ’s, which have very challenged business models, and what happens to that space. Then, you have a whole lot of specialty stores, which have challenged business models. Fashion, parts of the food services sector. So, there’s a lot of restructuring that needs to happen as a result of this.
Vacancies will be one issue, but a resetting of rents is really going to be very, very critical, because as I mentioned, rents have been running ahead of retail sales growth for the last decade. So, corrections here are inevitable. Leasing contracts, leasing structures, the footprints of retailers, how much space they need in a post-COVID world, with Omni channel and with their supply chains being affected. So, the whole retail model is affected right from supply chain up to storefront.
The Future of LeaseInfo
Kylie Davis:
So, what does that mean that the future looks like for your business, for LeaseInfo and Accurait?
Simon Fonteyn:
Well, I guess we’ve learned from the past that we need to continue to diversify. We’ve now got four pillars of our business. We’ve got the lease data, which provides the information on what’s happening in the market. We’ve got the Accurait system, which digitises the lease, we have a lease management software platform called My Portfolio, which basically manages the leases, does your critical date reminders, manages your IFRS16 and lease accounting and the last module is acting as leasing consultants and the valuation work, which we continue to do.
We’re well diversified in terms of our business, and the four pillars counteract each other. I think the future for us looks like, there’s going to be significant opportunities with with Accurait. Accurait and My Portfolio are going to be the growth engines of our business, and also opportunities for expansion into other markets, and as you mentioned, expansion overseas. All that is predicated on the ability for a business like ours to execute. Execution risk is actually very, very challenging, particularly when you’ve got a business like ours which has got multi-disciplines. So, you’ve really got to be able to not only have great technology, but you’ve got to execute really, really well. You need a really diversified skill base to do it.
In our business, we’ve got tech people, we’ve got lease experts, we’ve got lease accounting experts, and we’ve also got valuers and property consultants. So, putting that all together, and a multidisciplinary team, that all works together. It’s I guess our biggest challenge to make that all come together. There’s great opportunities, but it’s sort of a new world order of blending different skills together to create one product.
Kylie Davis:
Yeah. I guess collaboration across different expertise areas is one of the key challenges that we all face in any kind of business at the moment, because we’re moving away from that single discipline area.
Simon Fonteyn:
Absolutely, this is the key to the future success of not just LeaseInfo but for teams and businesses globally.
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