Joint Ventures… The Answer To Development Funding?
After watching Bank of England Governor Mervin King on last night’s news, it’s still clear that no one really knows how long or deep this recession will prove to be. His comments are completely at odds with that of our clueless Chancellor Alistair Darling. King’s opinion that “there are pretty solid reasons for supposing that there will be recovery next year, but also pretty solid reasons for questioning if that will be sustained” is far gloomier than the predictions made by Darling in his recent budget.
Personally, I consider King’s more conservative view as the most likely outcome. Having said that, here at LandLounge Towers we’ve definitely seen a significant increase in activity from both land buyers and landowners in recent weeks. Perhaps a small sign of increased confidence in the market?
Many of the developers I speak with say they’re now looking for sites once again, although they admit they’re being far more “choosy” than in the past. The lack of sensible development funding is still their main gripe which, combined with a severely restricted mortgage market, is severely hampering recovery. Most agree that there is a small but steady increase in demand from home buyers.
How long will this situation continue? Who knows? Only last week, one particularly successful developer told me that his bank had previously funded seven successful and highly profitable developments over an eight year period. Their response to his latest request for funding… no problem, as long as he was prepared to profit share!
Opportunities in face of adversity: Joint Ventures
As a result of the on-going funding crisis, developers and landowners have been forced to find new ways to do business. One solution which is growing in popularity is Joint Venturing.
For those land owners fortunate enough to have little or no borrowings against their land, a joint venture with a suitable developer provides a real opportunity to achieve returns significantly higher than the current land value.
But it’s not just landowners who benefit. With a joint venture, the developer no longer has to find funds to cover the land purchase and in a market where sales are likely to be slow, this can result in significant finance cost savings. Lenders tend to be far more receptive to JVs because the loan to value ratio is far lower… as is the risk.
There are various ways to structure a JV deal but by way of a fairly typical example, LandLounge recently brokered a JV deal involving a residential site in North West England. The landowner had originally been offered £900,000 at the peak of the market but for reasons beyond his control wasn’t able to sell at the time. Current offers were around the £600,000 mark which understandably the owner was reluctant to accept.
LandLounge were able to negotiate a Joint Venture deal with a local developer whereby the parties established a 50/50 split agreement. The landowner put his land into the deal at an agreed price of £700,000. The developer undertook to build out the development on a fixed price contract. All other costs were fixed. So the only significant variable is the length of time it will take to sell the houses and the impact this will have on the amount of interest payable on the loan.
On completion, the landowner will earn £1m and the developer £300,000. The bank will be repaid first, then the landowner will receive his £700,000. Thereafter the profits will be shared 50/50.
It’s not hard to see why this sort of deal is becoming far more commonplace. The landowner will achieve a figure far in excess of what his land was worth even at the peak of the market. Meanwhile the developer gets to develop a site in a difficult market with significantly less risk. It’s a win-win situation.
There are countless other ways to structure a JV deal depending upon the characteristics of the site in question. Another recent deal involved a site with consent for detached houses. We brokered a similar deal to the one above but in this instance, rather than putting the entire site into the deal from the outset, the landowner released plots individually as they were developed and sold.
Landowners take note… LandLounge have a long list of developers actively searching for JV deals. If you can establish a JV agreement, you may have to wait a little longer for your money but in this market I’m sure you will agree it’s a small price to pay. If you have a site which may be of interest to our developer contacts, let us know.
Likewise, if you’re a developer looking for JV opportunities, please get in touch so we can add you to our contact list.
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