The benefits of a joint venture investment - June 2019
July 1, 2019 / Written by Rich Harvey
Over the past 18 or so months, everywhere you look, the discussion has centered on the downsides of the softening in property prices.
And it’s true. Things haven’t been spectacular.
But in difficult times often comes opportunity.
That opportunity, in a market with lower prices and reduced competition, is to seek out quality development opportunities at a fraction of the cost you would find in a stronger market.
I know what you’re thinking. Taking on a development project, be it a subdivision, duplex, new build or something a bit bigger, like a few units, is quite the undertaking.
But sharing the work, cost and reward with an experienced partner is a fantastic way of making the most of good conditions without having to shoulder the whole burden.
Joint venture projects aren’t as daunting as they sound, and the upside could be significant.
It’ll be the trend of 2020
Our office is seeing a rise in the number of clients, both vendors and potential developers, wanting to pursue a joint venture project.
For vendors, they’re considering the consequences of selling in a market to a cohort of traditional buyers that’s smaller, more discerning, taking their time and not willing to pay prices they once were a few years back.
So, they’re interested in being considered by potential joint venture partners.
For those pursuing a project, the softer market conditions mean there’s less availability of good land that’s ripe for development. Those who own it are sitting on their hands.
They want to find potential prospects to speed up the process of capitalising on the bottom of the market and the currently discounted prices.
As buyer’s agents, we’re being asked to bring these two parties together to work on a joint venture development.
It’s a good partnership – one has the expertise and know-how, while the other has the site and the willingness.
In some cases, we’re meeting vendors who have also got development approval in place but who aren’t able to secure financing due to the more conservative lending environment we’re in.
The banks have moved the goal posts and taken with them the ability for ordinary investors to borrow for construction costs – a joint venture partner eliminates this hurdle.
The volume of enquiries of this type has increased in recent months as savvy investors see the writing on the wall in terms of the market bottoming out.
For almost two years now, nervous developers have shelved projects and held off pursuing new ones. There hasn’t been a lot of activity due to jitters.
That means a looming under supply of new dwellings will begin to hit just as the recovery begins. It also means the construction sector has been very quiet and is acting very competitively to secure business.
Higher demand on the horizon, lower supply now and into the future, cheap construction costs… you do the math.
The benefits could be enormous
A joint venture partner brings more to the table than money – although that’s obviously a big part of the equation.
For vendors, a partnership of this kind brings someone who, in many cases, has practical development experience.
They’ve been here before and they know how to navigate the tricky processes involved.
They know how to work with councils and various planning guidelines.
They know what’s involved in getting a project from concept to completion.
Many have practical construction experience, as either tradies themselves or having worked with them for years.
Some are architects looking to make their own mark on the city. Many might’ve done a smaller-scale project – taking an old house, knocking it down and putting up a duplex to make a tidy profit – and are looking to replicate the formula again and again.
Whatever the developer’s background, they are looking to work with someone who also brings something to the table – and that is land.
At the best of times, land is a scarcity. In a soft market, it can be as rare as hen’s teeth in a prime suburb with good investment fundamentals.
Chat to our team and
And the best part…
With a joint venture, where a vendor brings the land and a project partner brings the financing ability and development expertise, there are other big benefits.
Namely, the developer doesn’t have to pay stamp duty on buying a land site. That saves a pretty penny.
They also don’t have to fork out for expensive holding costs while they’re getting the approvals, making a start on construction and selling the end product.
This huge cost savings can mean a thicker profit margin, which is shared among both parties at the end of the project.
How to increase your chance of success
Obviously, you’ve got to make very careful and strategic decisions before jumping in feet first.
There’s a lot of opportunity but there are also risks that you must mitigate by doing your homework to find the right partner – regardless of whether you’re the vendor or the developer.
If you’re the vendor, make sure you work with someone who has experience and a solid track record. What have they done to date? What was the outcome of past projects? Were the people they worked with happy at the end of the day?
The vendor should also be careful to not overestimate the value of the project and simply hope that it achieves that kind of price when it’s all said and done.
They should make considered and realistic choices. They should know the market now and what it’s likely to be like in the future.
For developers, they should target areas that are ripe for growth when the market begins its recovery.
They should seek out suburbs with good mid- and long-term growth fundamentals in terms of demand, supply, dwelling type, the current demographics, future population shifts, local amenity and gentrification, to name a few.
They should avoid ‘overcapitalising’ regardless of the arrangement not hinging on them forking out for a site.
I mean, they should avoid making wild predictions about the upside of the project that aren’t based on reality. They should know what they’re getting into and execute a project accordingly.
And both parties should spend a lot of time together discussing the project, expectations on both sides, what they want to achieve, how they anticipate working together and the level of involvement – or non-involvement – from the vendor.
To have our development team to contact you:
call us on 1300 655 615 today.