10 reasons joint venture property investing could be for you
As an investor at any level, there’s a good chance you want to invest some of your hard-earned cash into property.
The Wealth and Assets survey by the Office for National Statistics (ONS) has revealed that 49% of non-retired UK adults chose property as the most sound investment choice for maximising finances, making it consistently the most popular investment option since 2010.
The proportion of people who still put property as the top investment option has grown by 9% from 40% back in 2010-2012.
One of the best routes now available for doing is through a joint venture (JV) property investment - and there are 10 clear reasons why.
1. It can be hard to do it yourself
The most obvious way into the property market is to build a property yourself or buy one and renovate it.
It might sound simple, but it’s not. You need to know the building trade and if you don’t have the necessary skills and knowledge yourself you’ll be at the mercy of contractors. You need significant capital, which could be tied up for far longer than you planned while you still have to meet ongoing expenses.
On-going costs, apart from wages and financing costs, can include:
- Hiring contractors
- Structural survey
- Fees to external agents
- Structural issues such as subsidence or even asbestos
- Maintenance and repairs
There’s a significant element of risk and you need to be sure you’re building the kind of homes people want to live in, in a place where they want to live and at a price they are willing to pay. This is not a route for the inexperienced or fainthearted.
2. Buy-to-let is arguably past its best
In the 1980s and 1990s, a lot of people made decent money out of buying properties and renting them out. But the golden age of buy-to-let looks to be over. The government, fearing it was distorting the housing market, put a brake on the whole sector and hit buy-to-let investors with a stamp duty hike, restricted tax relief on interest payments, and tighter regulation on mortgages.
This worked. In a recent report, property expert Savills argues that not only have these measures already led to a steep fall in those buying investment properties with mortgages but that the decline is far from over. Interest rates are still low and the introduction of restricted interest tax relief has been staggered, so the full effects have yet to feed through. Savills forecasts a further fall in buy-to-let numbers.
There are without doubt still some experienced investors in the buy-to-let sector, but, for the average investor, most agree this route is no longer the best into property.
3. Shares and property funds are okay, but they have some big limitations
An easy way to invest in the UK property market is by buying shares in a housebuilding company listed on the stock exchange. Shares in a company such as Bellway, Barratt, or Talyor Wimpey would allow you to benefit from the UK housing market in a relatively safe way and you can easily exit by selling your shares. You’re unlikely, however, to benefit from the kinds of returns available through other ways of investing.
Real Estate Investment Trusts (REITs) have been around in the UK for about 10 years and most of the UK’s largest property companies have converted to REITs, including big names such as British Land and Land Securities.
A REIT is a property investment company that can be easily traded on the stock exchange. Buying shares in REITs is also a relatively safe way to invest in residential property, but, again, it’s unlikely to generate the same levels of return that a more direct participation in the market can bring.
Also, in times of crisis, it can be difficult to get your money out as the REITs need time to raise the cash needed to meet call for payments because properties – unlike shares – can’t be sold instantly.
In 2016 following the EU referendum, property funds run by Standard Life, Columbia Threadneedle, Janus Henderson, M&G, Aviva, and more actually suspended withdrawals as investors rushed to take money out.
4. Joint ventures are tried and tested
Housebuilding calls for a mix of different disciplines and expertise, as well as significant capital. Over the years, it has been found that JVs form an ideal vehicle for the realisation of projects.
A Joint Venture Agreement (JVA), which is a partnership between builders, finance houses, and developers, creates a Special Purpose Vehicle (SPV) as a temporary subsidiary company in which the investors buy shares. It’s a limited company and the money invested into or lent to it can only be used on a specific development.
For example, in January, the bank OakNorth completed a £29.2m deal with the property developer Regal London and its joint venture partner KKR, a leading global investment firm to develop a site in Clapham Road, South London, with 62 residential units and more than 17,000 sq ft of commercial space.
Thanks to developments in web-based platforms and fintech, property investment through participation in a JV is now readily accessible to retail investors with a modest amount of capital.
5. A joint venture allows you to partner with the experts
Online platforms have become an increasingly popular way to make money in the housing market, as they allow the small investor to fund a specific development project by working in partnership with professional developers.
Co-investment is a refinement of crowdfunding, where ordinary investors invest alongside professionals such as finance houses, builders and developers. Platforms like these now offer property investment opportunities in which the investor can take an equity stake in a residential property development project by buying shares in an SPV.
Another reason for their popularity is they allow investors to partner with smaller, independent builders on local developments. Such builders were a vital component of the UK housing market, but many were forced out by the credit crunch when they could not get funding needed from the banks.
6. Joint venture property investments are secured
As the investment in the JV is in the form of shares, the investor’s risks are reduced, as exposure is limited to the amount invested. Added to that, there’s also the security of investing in an asset, namely land. This means that, even if property prices were to fall, there’s still the option of renting out the homes until the market recovers.
In its latest report, Savills notes that while the government has put pressure on buy-to-let, it is showing growing support for the build-to-rent sector. It hasn’t yet delivered enough new homes to compensate for the flight of buy-to-let investors and so demand will remain high, and Savills predicts this will drive rental value growth.
7. You don’t have long to wait
The nature of property developments is such that the timeframes for a return on your joint venture investment – typically 18 months to two years – are short relative to the possible returns.
8. Joint ventures are an effective diversifier
You can invest as little as £1,000 in a property JV via an online platform. This allows you to essentially dip a toe into the property market water before deciding whether to invest more.
You can also invest in a range of developments, across a multiplicity of platforms, choosing different timescales, different types of developments, and different parts of the country. This can help you to achieve a balanced investment portfolio – in other words, minimising risk by avoiding putting all your eggs in one basket.
9. Attractive returns are achievable
If the houses sell for more than was projected, the return for investors could be higher than forecast, because the amount returned to investors is a percentage of the profit achieved equal to the proportion of equity held. If an investor holds a quarter of the shares in the SPV, they will be entitled to a quarter of the profit.
No rate of return can be guaranteed, but property JVs are likely to be more rewarding than investing in shares or property funds. Also, currently, developments are likely to take place against a background of rising property prices - in its report, Savills forecasts a UK average compound growth in house prices of just above 14% over the next five years.
10. You can contribute to positive impacts
JV property investments allow you to invest in local developments, providing an economic and jobs boost in areas you care about by supporting local builders. You can see the development you are funding and witness the impact it is having now and in the future.
You are literally being proactive in your efforts to directly tackle the UK’s acute housing shortage.