Joint venture property investing: Everything you need to know
Investors have had a tough time since the 2008 crash with rock bottom interest rates and an underperforming stock market.
The effects have also hit the residential property sector with banks and traditional lenders withdrawing support from independent builders – a mainstay of the sector – driving more than half of them out of the market. Hence our current housing crisis.
The imperative to build more houses is now driving a housebuilding revival and developers are looking for innovative ways, on the back of technological innovations, to fund projects. This opens up exciting prospects for property investors looking for better returns.
Most would agree that any decent investment portfolio should have some exposure to this market. Property experts Savills are forecasting a UK five-year compound house price growth of more than 14% - even better in the North East, where they are predicting more than 17%.
The numbers of small independent housebuilders halved between 2007 and 2014 to below 3,000 – down from 12,000 in the late 1980s. They built under 20,000 homes in 2013, compared with an annual figure of almost 51,000 a decade earlier.
These independent builders played a vital role with an intimate knowledge of their own markets. This makes them ideally placed to gauge the balance between supply and demand in their areas and what kind of housing is needed and where.
Fortunately, there are signs that they are returning to the market and Savills says that it’s from them that it expects any step change in supply to come.
Sadly, these independent builders are exactly the type of small businesses that have the most difficulty in raising the necessary funding from the banks on reasonable terms.
However, the solution looks to lie in the adaption and refinement of a tried and tested model - the Joint Venture Agreement (or JVA).
What is a joint venture?
In the property market, a joint venture is a temporary but formalised partnership of builders, finance houses and developers, which contract with each other for a particular development project, such as a housing estate, often through the creation of a temporary subsidiary company called a Special Purpose Vehicle (SPV).
Most property joint ventures involve one partner contributing the funds/finance and the other partner contributing their sweat equity/time and skills. If deals are properly structured and both parties have the necessary skills and resources then there’s a solid foundation to deliver a successful joint venture project.
Although it may seem like a relatively new phrase, most of the big players in residential and commercial property invest through joint ventures to some extent, and have done for some time. Large scale property deals worth more than £100m, in particular, are structured and financed by joint venturing with specialist investors, including major banks and lenders.
For investors, joint ventures can significantly enhance returns, with the JV partner or partners providing the finance share in the project’s risk and profits, whilst for developers and regional housebuilders, JVs allow the company to access funds and maximise their own financial resources to develop more schemes.
How does a joint venture work?
Once the various parties have agreed to set up a JV, they will set up and register the SPV. The SPV is usually a private limited company created for one purpose and one purpose only. This could be a housing development, a series of developments, or the conversion of a commercial building into apartments.
Investors can buy shares in this SPV and those shares will entitle the shareholder to a percentage of the profit generated by the SPV when the development is completed and the houses are sold. When the project is complete, the SPV is wound up and the investors' capital is returned, along with any profit. This share of profit mirrors the proportion of the shares held, so if you hold 10% of the shares, you get 10% of the profit.
In the unlikely event of the project being unsuccessful, your exposure is limited to your original investment.
What are the benefits of investing into a property joint venture?
One of the most notable benefits is the downside protection that comes from investing in an asset backed opportunity - the land and then the buildings on the land. They will typically hold some value should market conditions experience a downturn.
Generally calling for a lower initial investment than direct ownership, the time frames for a return – typically 18 months to two years – are short relative to the possible returns. What’s more, as the lower level of minimum investment is apparent, investors can limit their risk levels and spread it across a diversified portfolio, perhaps investing in a range of SPVs with different JVs and in different parts of the country.
And on the topic of returns, there are much higher potential returns than are possible with bank deposits or other conventional investments. We’re very often talking in the region of 1.5x money return, so if you invest £10,000, you would see a return of £15,000.
What’s more, if house prices were to fall before the completion of a project to such an extent that the homes could not be sold at a profit, there’s the option of renting out the homes until the market recovers. This option isn’t generally available to large housebuilders who carry too much stock to allow them to rent.
Ultimately, investors have the potential to get involved in the excitement of investing in the residential property sector, without having to have the expertise and specialist knowledge, and without the day-to-day hassle of managing property and/or construction. It’s not risk-free, but the rewards can be generous and the overall benefits attractive.
Looking at the other side of the coin, one of the primary benefits to the developer is access to a large pool of potential investors, arguably more so than they’ll have been able to access by other means - and as opportunities can be offered at a lower minimum investment rate, this further widens the number of potential investors.
On a commercial level, it can mean there’s no need for a debt instrument as part of the investment opportunity, itself meaning there’s not a debenture over the assets and no requirement for a fixed return.
How easy is it to get involved in joint venture property investing?
It’s clear that joint venture property investing can be extremely attractive for all parties involved. With developers getting access to investors who are looking to become involved in the property market and investors able to build up a portfolio of property-based investments without ever having to step foot on a building site themselves, it can be a perfect match for all involved.
And importantly, getting involved in such opportunities is relatively easy.
Thanks in part to the development of online platforms, smaller investors can have their share of the housebuilding revival and invest in joint ventures by buying shares in the discussed SPVs relatively online.
As online investment has developed in recent years, other platforms have taken it further with a co-investment business model. This allows large numbers of investors to invest alongside professional, experienced investors and institutions.
In the case of residential property developments by Regional Housebuilders, investors can invest as little as £1,000 in projects by buying shares in the project’s SPV through such an online platform. Their returns are based on the shareholding in the SPV, with the value of the SPV itself effectively based on the value of the homes once built and sold.
And whilst any investor should carry out their own due diligence, they can invest with the knowledge that their fellow investors include professionals who have done some serious due diligence.
There’s no limit to the number of opportunities you can invest in either, so if you’re looking for a diverse portfolio or not, the option is yours - you simply need to make sure you are aware of the risks and rewards, but you’re confident the opportunity as a whole is right for you as an investor.
Investing into property joint ventures
The property market today is so vast and varied. There are opportunities to suit almost every investor, regardless of everything from the amount of money you're looking to invest through to how active you want to be as an investor.
With opportunities at both ends of the scale when it comes to the latter in particular, joint venture property investing in many ways sits very comfortably in the middle. Providing investors with the ability to invest in a specific scheme, but without having to actually be as hands on as traditional property developers, the targeted returns, planned development periods and overall impact all come together to make such an approach to property investing particularly appealing.