Where next for partnerships and joint ventures?
Partnerships and joint ventures remain a cornerstone “in vogue” as a model for property development and/or regeneration. There is still a huge amount of interest from both the public and private sectors in partnership working. However, market softening and the ever ongoing uncertainty of Brexit continue to be a real challenge.
We are seeing currently seeing a number of partnerships and joint ventures hitting rocky water; failing to hit viability hurdles and/or being unravelled and reconfigured; others are increasing the numbers of affordable homes on the back of additional GLA/Homes England funding. So do partnerships and joint ventures remain a tenable delivery structure?
A match made in heaven?
In boom periods, tensions between joint venture partners are often brushed under the table as the profits roll in. In tighter economic climes, the choice of partner becomes ever important.
Obviously, there is a question of financial ‘robustness’ to consider. Even the largest of organisations, both public and private, are not immune from financial strain. Do not let your partner see you as a ‘soft touch’ to bolster their own financial uncertainties. Equally, if not more important, consider again the type of partner that you are looking for, whether that be an investor, house builder, contractor housing association, for profit RP or a local authority or some other partner. What do you really need from any partner? Is it funding, expertise, access to land or supply chains, or something else?
And what about a cultural fit?
Do not underestimate the importance of ‘regime’ and ‘ethos’ and consider if this flows through an organisation.
We have seen more than one partnership unfold over the last couple of years where the ethos of the partners was based very heavily on individuals’ relationships, and in the absence of those individuals, cultural differences of the organisations made it very difficult for them to continue to work together.
What happens if the dynamic of a partner organisation changes or key personnel leave? Parties may want to consider if they want “exit options”, in the event of change of control or key personnel defections, but bear in mind requests are likely to be reciprocal.
Gold plated or solid gold?
Whilst obviously entering into a joint venture or partnership is a commercial negotiation, it is important that all partners take on board that it is a partnership, i.e. two or more organisations working together. Quite simply, you cannot have everything on your wish list.
As margins tighten, and boards scrutinise prospective deals, it is inevitable that parties will want to get the best deal they can. However, overtly aggressive negotiation and heavily negotiated “pre-nuptial” joint venture agreements often mean the partnership can start on precarious footing, with one partner feeling they have “lost out” to the other before the hard work has even begun.
In our experience, partnerships and joint ventures are most successful where all partners get a fair reward for the inputs they have made. That is part of the reason why net cost/open book financial models have been widely adopted.
It’s an old adage, but “treat [partners], as you would want to be treated” really does apply in successful relationships.
New entrants and new markets
While some of the more traditional partnerships are stalling, we are seeing an interesting trend, although not one yet with a huge take-up. That is the involvement of a wider team in the partnership relationship, so for example architects or other professionals are being given a stake in return for their input to the profit. It is not for all, as for smaller consultants, their contribution may not equate to a worthwhile share in partnership profits.
Where we are seeing increasing use of this type of relationship is with SMEs, where traditional contractor organisations are expanding into development. We have worked on a number of projects where contractors have taken no, or minimal, contracting return, but are rewarded with an upside in outturn profits. Models such as this have the advantage of helping partnerships and joint ventures cashflow until receipts start coming in, as the build cost payments do not include the usual contractor margins.
Even within the more mainstream, there are alternative partners to the traditional housebuilder and housing association partnership models. As we have previously discussed, the public sector is increasingly looking to explore partnership models – both on a procured and non-procured basis. Local authorities are looking more and more at partnerships and joint ventures as a delivery model and Homes England have not been shy to talk about their commitment to, and indeed have participated in a numbers of joint ventures.
But consider, also, partnering with:
- another housing association; who may bring development capacity, funding, land or geographical insight;
- an investment fund or a for-profit RP; you don’t have to look far for funds that want to investment in housing, particularly BTR and affordable housing. For example Coastline Housing in Cornwall have recently partnered with Legal & General Affordable Homes to increase affordable housing supply in the county.
So do partnerships and joint ventures remain a tenable delivery structure? Our view is a definite “yes”, but those looking for potential partnerships and joint ventures, in the current economic environment, need to think outside the traditional box.