Virtual reality and its impact on real estate transactions
Property viewing from your armchair
18 July 2019
Virtual reality is the latest trend in the property sector as developers and real estate brokers provide potential buyers with headsets to enable them to explore properties rather than making site visits.
US developer Greenland Forest City Partners is using virtual reality to sell condos in Brooklyn, New York, while real estate brokerage firm Halstead Property says it will introduce virtual reality headsets and 3-D exhibits to its offices later this year.
“The advantages are clear,” says New York Associate, Jeanne Roig-Irwin. “It streamlines the process, saving time and money, and it allows "visits" to properties that are in development.” The technology is likely to prove valuable for developers or property owners involved in large transactions and/or those with numerous properties, and it is predominantly being used for high-end residential developments.
Could this technology render site visits obsolete? It's unlikely. Site visits are often coupled with engineering inspections or physical tests that cannot be undertaken with virtual reality. As Roig-Irwin says "in certain transactions, the seller takes the buyer on a tour of the property, which is sometimes the first time they meet in person.”
The benefits of virtual reality in commercial real estate
- Virtual reality is valuable in transactions where it is impossible or prohibitive to view all sites, such as large portfolio transactions or transactions involving development properties; and in corporate transactions (M&A) where property is not a critical component of the company’s business. Currently, in such transactions, site visits are not always possible, or are not undertaken on all properties, or can delay the due diligence process. It may also be used by lenders as part of their due diligence process, as lenders traditionally do not visit sites.
- It will allow tenants to visualise space and identify whether it meets their business needs.
- Virtual reality has the potential to change the due diligence process drastically in the same way that virtual data rooms have removed the need to sort through due diligence materials physically.
- Once the hardware is in place, virtual reality can provide cost savings by eliminating or reducing the need for travel and minimising personnel time inherent in site visits.
- Virtual reality only shows a property at a particular moment in time and so it would need to be periodically updated.
- The upfront cost for virtual reality hardware and a virtual video of the building, or virtual reality rendering of undeveloped property, is expensive.
- The potential for manipulation, either digitally or aesthetically (the “Photoshop” effect).
- Virtual reality does not permit testing (i.e., environmental sampling) so cannot completely replace site visits.
As this technology takes hold, there are also a set of new legal provisions and industry standards that will need to be developed, such as waivers and disclaimers regarding the accuracy of the depiction of the properties being shown.
It is likely that industry standards will develop regarding what enhancements and augmentations are common and how these are reflected in the purchase agreement. Much like the technology itself, this will require a greater investment of legal and business time upfront until such provisions become more commonplace.