How real estate companies can benefit from M&A transactions in the PropTech sector

The real estate industry has long been considered conservative and strongly influenced by traditional brick-and-mortar structures. However, the emergence of PropTech has fundamentally changed this image. Digital solutions for increasing efficiency, reducing costs and creating new business models are bringing about lasting change in the industry. This opens up enormous innovation potential for real estate companies – but at the same time, the acquisition of PropTech companies brings with it its own unique challenges. Unlike the acquisition of traditional real estate or portfolios, the focus here is on intangible assets, intellectual property rights and technological assets.

This article highlights the legal peculiarities of PropTech acquisitions and shows how real estate companies can align their M&A strategies with the digital transformation. Dr Matthias Nordmann explains the key legal and structural issues, how technology investments increase company value and which regulatory framework conditions need to be taken into account. He also shows how IP rights and digital assets can be legally secured – a decisive factor for the success of M&A transactions in the PropTech sector.

Opportunities through digitalisation

The construction and real estate industry is undergoing change. Rising costs coupled with falling margins require a long-term and sustainable rethink. Conservative ‘bricks and mortar’ approaches, which still characterise large parts of the sector today, will soon offer little economic viability without a structured digital transformation. Far-reaching consolidation and automation will be virtually indispensable in terms of increasing efficiency and optimising costs. It is well known that diamonds are formed under pressure, and so the pressure on the industry also offers prospects for a growing number of PropTech start-ups as well as established PropTech companies. Smart building technologies and PropTech innovations are not only changing the way real estate is developed, managed and used, but also the strategic orientation of the companies themselves.

Market

As one of the growth markets par excellence, PropTech offers considerable incentives for the real estate industry. Forward-looking technologies can be found at all ends of the value chain, from property search, valuation, analysis and financing to digitisation in the areas of construction, development and property management. German PropTech champions such as McMakler, PlanRadar, Vermietet.de, Exporo, Homeday and, last but not least, Scout24 have long since established themselves as major players in the market. Small to medium-sized start-ups are proving to be particularly attractive options for M&A transactions, especially in terms of technology and personnel. In 2024, there were already 1,264 active PropTech start-ups in Germany, representing growth of 41 % compared to the previous year (source: blackprint PropTech Report 2024) – and the trend is rising!

Reasons for a transaction in the PropTech sector

M&A deals, especially acquisitions, offer established real estate giants opportunities to equip themselves technically for the future. Last but not least, the acquisition of late-stage start-ups opens up access to young, IT-, AI- and technology-savvy teams that can be integrated into existing corporate structures as part of so-called acquihires. The integration of AI and automation functionalities can quickly become a driver of efficiency and value creation. Traditional construction and real estate companies such as TPG Real Estate and Sprengnetter have already made their mark in terms of PropTech investments with the acquisitions of Aareon and 21st Real Estate, equipping their digital infrastructure and data expertise for the future. The resulting technological acceleration brings with it competitive advantages and access to new business models such as digital rental agreement processes and smart building services. Conversely, M&A is also an attractive exit strategy for late-stage start-ups when late financing rounds stall.

Legal peculiarities

However, PropTech M&A also confronts acquiring companies with a variety of challenges. Unlike traditional real estate deals, it is not bricks and mortar that determine value, but primarily intangible assets. 

• Such M&A deals are often characterised by typical venture capital structures on the part of the targets, where investor rights and liquidation preferences have a major influence on the terms of the transaction. Cap tables are often fragmented and complex, making thorough due diligence essential for coordinating founder, venture capital and business angel investments. Employee participation programmes such as ESOPs or VSOPs also play a key role, as they can significantly influence the distribution of the purchase price in exit scenarios. 
• Intellectual property rights (IP) are often the most important value carrier for PropTech start-ups: these include registered rights such as software patents, trademarks, utility models and design patents, related trademark rights such as domain rights and company trademarks, but also soft IP such as, in particular, copyright usage rights to software. Thorough IP due diligence of all strategically relevant areas of review is therefore a key success factor in PropTech deals. Central to this is the protection of IP, rights to databases, compliance with data protection and IT security requirements, the structure and risks of SaaS contracts, and regulatory and technical compliance for AI applications.
• A clearly documented chain of title, proof of source codes, and well-functioning term management for software patents or trademark rights are key factors in the valuation of the start-up and willingness to invest. Stable legal protection of the technology plays a central role. Unresolved legal issues can lead to costly rework or conflicts with contributors and competitors and ultimately become a deal breaker. Clear documentation is essential, especially in the area of open source compliance, as the software used may lead to the infection of derivative works under certain circumstances. The result is the threat of free disclosure of source codes, loss of rights of use, in particular commercial marketing opportunities, in the event of licence violations, injunctive relief and claims for damages, as well as reputational damage that is almost impossible to repair. It is therefore advisable, as part of IP due diligence, to request a complete list of all software components used and, if necessary, an automated scan for open source software.
• Inadequate patent compliance, risky contractual clauses in SaaS contracts, and low standards of IT security or AI governance can also quickly become deal breakers or, at the very least, lead to significant price reductions, renegotiations, or, in the worst case, the termination of the transaction. Furthermore, special regulations such as the GDPR and the recently enacted AI Regulation come into play in the context of due diligence in order to avoid exposing the acquiring company to significant sanction risks. Comprehensive documentation of historical and ongoing IP-related litigation regarding infringement, injunction and remuneration disputes, both on the asset and liability sides, is essential.
• At the same time, particularly in light of the value creation through IP, the seller's confidentiality interests, which are usually particularly pronounced in this context, must be taken into account and reconciled with the buyer's need for information. The protection of inventions, trade secrets and know-how is particularly important in this context. Appropriate confidentiality agreements and procedural, staged or limited due diligence processes are suitable for this purpose.

Conclusion and outlook

A successful PropTech acquisition requires a targeted adjustment of M&A strategies, as the focus here is on sustainable value enhancement. It is no longer sufficient to rely solely on traditional real estate M&A consulting. In-depth specialist legal knowledge, particularly in the areas of IP and IT, is crucial in order to identify and eliminate technological risks and regulatory pitfalls at an early stage. A special information request list for PropTech deals is extremely important as a starting point for the systematic evaluation of all legally relevant aspects. It is accompanied by special IP and IT guarantees (reps & warranties) in the purchase agreement documentation.