US homebuyers have largely done well over the past two years as average home prices have risen sharply.
Unfortunately, the same is not true for those investing in newly public real estate startups. Here, the reverse is true, with the shares of many housing-focused companies hitting new lows this month after an already rocky year.
Overall, U.S. real estate-focused, venture capital-backed companies that have gone public over the past two years are down an average of 85% from their offering price, according to analysis by Crunchbase. None are above their offer prices.
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Some of the worst performers are down 90% or more. This includes i-buying platforms open door and Block of offersas good as domaa home insurance upstart.
For a broader sense of how venture capital-backed real estate companies have performed in the public markets, we’ve put together a chart of seven below that debuted in the past two years:
All in all, that’s a pretty staggering drop. A total of over $42 billion in post-debut market capitalization was wiped out at the start of this week.
To put that into perspective, $42 billion is well above the combined market capitalizations of the second and third largest homebuilders in the United States. (These companies, Lennar and Pulte Grouphave a combined market capitalization of approximately $31 billion.)
This is the kind of decline that usually has fairly obvious causes. In the case of newly public real estate players, four can be cited:
1. Valuations were too high to begin with: Markets were more buoyant when the companies on our list debuted, with valuations reflecting more sunny futuristic presumptions than current fundamentals.
Take Opendoor. When he debuted on Nasdaq in December 2020, after completing a SPAC merger, it commanded an initial valuation of around $18 billion.
That’s an ambitious figure given that for the three calendar quarters prior to its offering, the company had revenue of $2.3 billion and a net loss of nearly $200 million. Even for a SaaS company, that’s a high valuation based on earnings. But Opendoor’s business – the buying and selling of properties – has gross margins much lower than software.
Or consider Compass, booming real estate brokerage. The company, also a relatively low-margin business, posted a loss of $270 million for the year before its 2021 IPO. Still, it managed a post-debut valuation of around $8 billion.
2. Companies have underperformed expectations: Many companies on the list also failed to meet investors’ performance expectations.
Compass, for example, published a higher net loss than expected by analysts in three of the past four calendar quarters. He’s also made some cuts, including most recently, it seems fire around 50% of its technical team of 1,500 people.
We work also underperformed. In its most recent quarter, the workspace provider largely missed analysts’ earnings forecasts, sending shares lower.
Opendoor, on the other hand, faces all kinds of problems. The company paid $62 million this summer to settle an FTC charge that it pitched potential home sellers “using misleading and deceptive information.” The company is also facing multiple class action lawsuits from shareholders alleging, among other things, that its algorithm has not adapted to changing market conditions.
3. Investor preferences have changed: A year ago, the losing growth companies were there. Now they are out, with public investors preferring old-fashioned earnings, dividends and value stocks. This leaves our crop of unprofitable newly listed real estate companies largely out of favor.
4. Real estate markets have changed: So of course, US real estate markets are changing rapidly. Today, the average interest rate on a 30-year mortgage is around 7%. This means buyers can no longer afford to finance homes at last year’s prices, when rates were half that. The inventory sits. Prices are deflating. And demand for new mortgages has plummeted.
While these changing conditions are not necessarily catastrophic for new public real estate players, they will require adjustments and, in some cases, lowered expectations.
Where does that leave startups?
Even though public valuations have fallen, venture capitalists continue to fund real estate-focused startups at a healthy pace.
So far this year, investors have put about 4.6 billion dollars in seed through growth phases for U.S. real estate-related startups, according to data from Crunchbase. That puts 2022 on track to be lower than last year, when $7.95 billion was invested in space. But since venture capital funding is down sharply in most sectors year over year, this is not a bad performance and indicates a solid level of investor confidence.
Totals include very large rounds. The biggest funding went to Veev, a construction technology company focused on the residential construction industry. It raised $400 million in a February Series D led by Obligation. After that came To flowthe Adam Neumann-founded a home rental startup that raked in $350 million from Andreessen Horowitz in August.
Another big round went to roofan online platform for investing in rental housing, which raised $240 million in a Series E in March. And Strucka real estate finance startup aimed at making it easier to buy a new home before selling the old one, raised $220 million in a funding round in June.
The Big Picture: While public investors may not find much to like among recently opened real estate companies, private markets still see plenty of upside in the space. We will watch to see if their enthusiasm persists.
Illustration: Dom Guzman
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