Originally published in Property Investor News Magazine
Funding joint ventures, and the principles behind them, have been used for many years in the property world. And as the market continues to change, they are becoming increasingly important, frequently used and relevant, especially for small- and medium-sized investors and developers.
This trend looks set to continue over the coming years. The spirit of the joint venture partnership is becoming almost omnipresent thanks to recent and ongoing regulatory, economic and technological changes.
But first, what is a joint venture, and specifically what are funding joint ventures in property about?
A ‘joint venture’ is an arrangement between two or more parties to co-operate in order to achieve a common set of goals, outcomes or objectives.
Each party contributes valuable components, for example (but not limited to) finance, land, time, and skills. Efforts are underpinned by aligned incentives. The result should be greater value and impact for all parties involved than they would have had access to alone.
The joint venture partnership model is, and has long been a commonly used approach in property, in particular in relation to funding. This is partly because property deals require, attract and are capable of generating substantial amounts of cash. And it is partly because the investors interested in making money from property often lack the skills, time or access to other resources such as land needed; meanwhile, the parties with land, skills and time rarely have enough funding to achieve everything they want to, alone.
A property finance joint venture, in practice, can range from High Net Worth individuals sponsoring a developer to convert an office to a block of flats, to an institutional investor funding the acquisition of an industrial estate.
It might be via traditional platforms such as a fund (e.g. institutional sponsorship of a property company), a Special Purpose Vehicle (e.g. HNW investor sponsoring small developer), an alternative finance platform (e.g. private investors funding a medium sized developer), or the stock market (e.g. shareholders sponsoring the long term ownership of cash flowing offices, warehouses or student accommodation via a Real Estate Investment Trust).
The activities of larger investment and development companies have used the principles of joint venture funding for some time. And, thanks to recent and ongoing regulatory, economic and technological changes, the activities of small- and medium-sized property investors (e.g. the small scale landlords that make up so much of the UK’s Private Rental Sector) and developers (defined as those building fewer than 100 homes per year), too, will increasingly be guided by the principles of partnership, alignment of incentives between parties, and the division between provision of funding vs other components of value, at all scales.
Reason 1: regulatory context and change
Firstly, regulatory change has encouraged SME property investors and developers to shift their approaches, becoming more professional in order to comply.
Trigger regulations include, but are not limited to:
- Mortgage interest relief, which discourages the ownership by individuals of buy to let property through taxation, reducing the number of individuals investing directly in the residential space
- Stamp duty surcharge, which discourages individuals from buying additional residential properties to hold or develop, so that individuals are less likely to invest directly, and independently in the residential market
- Encouragement of institutional investors, with measures ranging from taxation reliefs for REITs (holding) to facilitating Build to Rent (schemes of 50+ units for development then renting out) through planning/viability, which encourages the development of multiple units held by a smaller number of more professional or corporate entities
- Increasing prevalence of local and national standards and regulations, from Building Control to HMO licensing, meaning strong and specialist knowledge is required by all active parties to ensure compliance.
The increasingly costly and complicated regulatory framework, combined with policies encouraging larger companies ahead of SMEs, means that SME property projects are less efficient and profitable relative to i) the past, and ii) their larger counterparts’ projects.
Projects which could previously be financed and run by an individual, have become less attractive to take forward independently.
Reason 2: globalisation and finance flows
Secondly, as globalisation has taken place, international capital flows have become easier.
Loose monetary policies in many developed nations continue to encourage spending and investment, internationally.
Despite the context of ongoing global political and economic uncertainty, an example being the implementation of Brexit and uncertainty around this, the long term fundamentals of Western, and specifically UK property will continue to attract funding from overseas.
This is because the UK property market is still seen as relatively stable, politically and economically, with high quality investment stock, a mature and transparent market, and a well-enforced legal framework protecting rights such as title ownership.
Further, exchange rate differences, for example the low value of the pound relative to the past, and to influential currencies including the Euro and the Dollar, mean that UK property is now relatively cheap for many international investors, which exaggerates inflows of investment.
Yet investors who are able to bring money into the UK property market lack the ability to directly manage teams, deal opportunities and resources on the ground. Consequently, for many international investors it makes sense to partner with specialists and providers based in the UK, acting as the funding investor.
This model also delivers greater value for the UK property developer and operator teams, who are freed up to focus on their craft rather than being distracted by constant capital raising.
Furthermore, investors with money – at home and abroad – want a greater risk-adjusted return on their portfolio of investments. They are able to achieve this by splitting their funds, and diversifying between strategies and locations which, if investing alone, they might not have had capacity to implement.
Reason 3: Technology and accessibility
Thirdly, technology is opening up the property world, notably through greater access to information, and via alternative finance platforms.
On information: thanks to resources freely available online, it has never been easier for potential funding investors to find out about new opportunities, strategies and markets for investment.
Compared with what the investor previously knew, and had access to in their local market, these new opportunities may offer stronger potential profit, more stable or stronger income, greater leverage of professional skills, time, systems and experience, and the opportunity to diversify and improve the investor’s risk-adjusted portfolio returns.
Meanwhile, technological advancements have resulted in a wide range of alternative finance platforms, for example equity crowd-funding, which open up the realm of property finance joint venturing to investors for whom property investment might not otherwise have been possible at all, let alone in a potentially profitable way.
Many potential investors, both large and small; experienced and inexperienced, lack the time, skills, access to land, and specific expertise to carry out projects for themselves.
Thanks to the technology behind alternative finance platforms, acting as a finance joint venture partner is becoming as quick and easy as ordering on Ebay.
And, with inward investment more easily accessible, the developer or business owner offering access to a different strategy is freed up to focus on and specialise in his craft.
So, this accessibility can create a true ‘win-win’ for the investor and operator, and the possibility for more efficient, effective and valuable deals through easier access to joint venture funding.
Finance joint ventures have been important in the property world historically for the simple reason that resources are unequally distributed, and we can all be more efficient by specialising in our area of value, and partnering with shared goals.
Regulatory, financial and economic, and technological changes are making the specialization of roles, diversification between investment opportunities, and benefits of partnership between funding vs other partners all the more vital in the small- and medium-sized deal space, in particular.
In the wider market, I am increasingly seeing investment partners increasingly specialising in investing and finance, and providing access to funds; the developers specialising in finding and building deals; and the managing agents specialising in operating and optimising assets.
And as competitors professionalise, specialise and partner to deliver greater value for a given input, everyone else must follow this, to compete.
The words of Helen Keller will become increasingly relevant in the realm of investing in, developing or holding property: “Alone we can do so little. Together we can do so much”.
Strategic funding partnerships and the principles behind the funding joint venture will become increasingly relevant, important, and perhaps even vital for small- and medium-sized investment opportunities, and the operators who create them, going forward.
About the Author
Anna Clare Harper is CoFounder of Anglo Residential, Host of The Return: Property & Investment Podcast and a leading Strategist in the SME residential investment space.
Her business, Anglo Residential, is an FCA-registered Alternative Investment Fund that has recently secured seed funding to build a £100m+ housing portfolio. She also works in a non-executive capacity to help property businesses, HNW and sophisticated investors in designing real estate strategies.