Our December economic breakfast briefing tackled the timely topic of joint ventures in real estate development.
Our three panellists- Hanna Osundina from Balfour Beatty, Rachel Miller from Grosvenor Properties and Victor Librae from Urban Exposure- were united in viewing joint ventures as being of increasing importance and offering opportunities for the sector. Howard Kennedy's Anthony Hunt chaired an insightful discussion of their experiences.
In It Together
The discussion began with why JVs had become a popular mode of development.
Collaboration means a greater range of skills and expertise on a project than an organisation can achieve alone. Hanna noted that combined expertise can make a developer stand out when bidding for a project. Rachel highlighted the 'agility' of such an arrangement, as it allowed an organisation like Grosvenor to develop in specialist areas (such as senior living, or co-living) without needing a resource-intensive set-up of a new internal department. Grosvenor can contribute capital, brand and its reputation to a project, and smaller partners are able to bring their specialist skills to the table.
The Right Mind-set
On the theme of brand and reputation, Rachel also pointed out that an organisation like Grosvenor needed to take care in selecting its partners. Do the values and skills of the potential partners 'mesh' together well? Grosvenor aims to have a positive social and environmental impact in its projects and aims for its developments to be zero carbon by 2030, and joint venture partners need to be aligned with this.
50-50 split
Where our panel diverged in opinion was on the ideal split of power within a JV. Victor, with an investor's perspective, took the view that a 50-50 split does not work; capital should be backing expertise in a venture. One party needs a clear business plan and the other party should be enhancing and adding to that plan. Hanna's perspective was that an equal split was better, as where one partner was stronger, that party has the sway to 'silence' other skills. She highlighted the need for a partnership to be a true partnership.
Rachel offered the view that if a 50-50 split could work, this would be great, but Grosvenor was often in a situation where it was putting up more than 90% of the capital for a project, and this raised the question of how this ought to be handled. Incentivisation is a key consideration; what stops one party walking away if things go badly? A smaller JV partner might be asked to put in a capital contribution, or waterfall provisions with enhanced shares in the project might be offered.
'Just like any relationship'
When considering what challenges were faced by parties to a JV, Victor said that it was 'just like any relationship - it's great until it's not'. He highlighted some of the challenges particular to a JV: the timescale of each party's exit might be different; market change can have a more significant effect on a JV that it does on the parties individually; parties are answerable to someone else in a way they are not on their own projects. These challenges must be anticipated and dealt with, and – as with every relationship - the key to meeting these is trust. While the panellists all agreed a good JV agreement is important, Victor suggested that if the parties are haggling over nitty-gritty at the outset of the agreement, rather than drafting a shorter document, this was indicative of a lack of trust between the parties and possibly a sign they are not well-suited to collaborate.
In fact, for all of the benefits of JVs that the panellists highlighted, both Victor and Hanna queried whether such arrangements were always the best way forward. Given the challenges of collaboration, it may be better for one party to take on more debt to resource their skills gaps internally. Parties must be careful not to collaborate for the sake of it: partnership takes work and should be entered into with caution- the wrong partnership might cripple a smaller organisation.
Forward facing
In spite of the current climate of political uncertainly, our panellists identified opportunities for the future of JVs, and of the development market in general.
Local Authorities needing to collaborate to develop their land was identified by Hanna as a significant opportunity, and it will be interesting to see how the market responds. Victor emphasised that given low interest rates there was capital available for almost any development, and that he would like to see more multi-party JVs that came together over aligned interests.
Rachel raised the results of Grosvenor's recent survey regarding public opinion on developers and the planning system as something the market should be mindful of. Public trust in developers was at a dispiriting 2%, trumped by a 7% trust in Local Authorities. She called for a better quality of conversation between the public and developers to change this significantly negative perspective, and Grosvenor's commitment to social impact would be a part of that. Here our panel's opinion perhaps diverged again, as when asked about opportunities for the future, Victor raised the much-debated topic of developing greenbelt land, which need not involve 'concreting over national parks'. He suggested there was a happy medium to be achieved here- and pointed out that if you looked down from a helicopter 'the floor is full of land'. While the future of the green belt may be a matter of debate, a 2018 ComRes poll found 47% support amongst the public for limited development. If only they trusted someone to develop it…
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