Apps are valued based on their usage and their users – Why isn’t the same applicable to real estate?
It’s interesting how technology companies and their products are valued by investors. At TheHouseMonk, we look closely at a lot of metrics around the usage of our products, and investors look at them in keen detail as it helps them identify how much value can be assigned to our (or any) product.
While current revenues from the product tell one story, it is easy to understand that usage and the users of the product paint a better long term picture of the technology asset.
One thought here is around why real estate assets aren’t valued in the same fashion. Valuing real estate assets is complicated but it is done through one of the following methods –
Analysis of properties sold in the same location in the recent past
Looking at land price, adding construction cost and a margin for the developer
Cashflow analysis of the rental yield from the property and arriving at a valuation
While there may be many more, I think we should start considering valuing real estate similar to how we value technology apps.
Applying Instagram product metrics to real estate
Instagram is one of the most popular apps, and we are going to look at 3 core metrics which are vital to understanding how the photo-sharing app is valued, and how the same maybe translated to real estate as well.
Daily active users (DAU): For Instagram, how many users sign back into the app daily is an extremely important metric which helps them identify stickiness of the product. In the real estate world, such a metric would make sense to value a coworking space or an office. How many members/employees come into the office every day? If the members are predominantly working from home and not using the office facilities (even if they pay for it), it would be a long term problem for the coworking company
Time spent in-app/day/user: Another important metric that Instagram would track is how much time does one spend inside the app, once they open it. It helps them understand whether the app adds great value to users – Otherwise, they won’t spend a lot of time inside it. The parallel to this can be derived in the world of Hotels and Hospitality. Do guests just check-in to your premise and leave for the entire day and only came back at night to sleep? Or do they spend time in your restaurants, massage parlour and lounge? The answer to this would help you understand if you are just a place to crash or whether your patrons like your full experience.
Wealth/income level of your users: Understand the disposable income and wealth of your users is a key to identify how much you can monetize them in the future. If you have power users from the US who earn $200,000 a year, you can make a lot of money from them compared to users from, say Africa, who may make only $10,000 a year. Taking this analogy over to the real estate world – A commercial office space which is leased out to Google would be much more valuable than one leased out to a small business, even if all other parameters are the same, simply because you have so much more potential to up-sell more to Google
There are MANY more metrics like growth rate, user retention and churn, etc. which help in arriving at the valuation of Instagram, and the many of the same can be used to analyze real estate assets as well!
My aim with this article was to start a discussion around how we value real estate assets, and that a lot of the traditional valuation methods are not making sense anymore. Of course this method needs to get more refined, but this is a starting point. Do you agree? Would love to hear your views!