In the past five years, Kenya’s real estate sector has flourished, achieving returns above 19.0% per annum for investment-grade properties. This robust performance has piqued the interest of landowners and investors alike. Key ways to invest in real estate include (i) development and exit through selling or renting properties, (ii) buying real estate assets to realize capital gains and rental yields, and (iii) investing in real estate-backed structured products such as project notes and Real Estate Investment Trusts (REITs).
Landowners are increasingly keen on real estate development but often face constraints related to (i) financial capability, (ii) development expertise, and (iii) time. Joint venture arrangements with reputable developers offer a prudent solution to leverage real estate opportunities. We demystify real estate joint ventures and highlight their benefits.
What is a Joint Venture?
A joint venture (JV) refers to a business arrangement where two or more parties collaborate on a project by pooling their resources. In real estate, joint ventures typically combine the developer’s expertise and financing capabilities with the landowner’s contribution of land.
The Joint Venture Process
The following steps outline the JV process:
- Project Appraisal: The developer begins with a site visit to assess location, accessibility, infrastructure, soil type, and other factors affecting development. A feasibility study is conducted to determine the best use of the property, project costs, revenues, and potential returns.
- Project Proposal: The developer presents a proposal to the landowner, detailing the concept, budget, revenues, and profit-sharing arrangement.
- Legal Due Diligence: Upon acceptance, the landowner provides the title deed and deed plans for verification. The developer’s advocate conducts a search to confirm the authenticity of the title deed, ownership, and absence of encumbrances. A surveyor verifies the beacons and acreage.
- Signing of Agreements: A Joint Venture Agreement (JVA) is drafted and reviewed. This agreement outlines the capital obligations, management structure, rights and responsibilities, exit and transfer rights, downside protection for the landowner, and profit-sharing mechanism.
- Formation of a Special Purpose Vehicle (SPV): An SPV is created to fulfill the JVA’s objectives, registered as a private Limited Liability Company (LLC) or Limited Liability Partnership (LLP).
- Transfer of Land to the SPV: The landowner transfers the land ownership to the SPV.
- Project Commencement: The developer assembles the project team, including architects, project managers, engineers, and consultants, and oversees the project until completion.
- Project Completion: Profits are shared according to the JVA, either as cash or units (e.g., houses or apartments).
Benefits of a Joint Venture
When executed correctly, joint ventures offer financial fulfillment for both parties. Benefits include:
- Increased Capital Base: Partners contribute land and/or cash, which is vital for capital-intensive real estate development. This seed capital enhances access to debt capital due to higher bargaining power.
- Development Expertise: Developers bring concept development, design, and project management skills, ensuring professional workmanship and relieving the landowner of daily supervision.
- Market Access: Reputable real estate firms have established distribution channels, ensuring faster exits through renting or selling properties and realizing returns sooner.
- Partial Liquidity for Landowners: Landowners can achieve partial liquidity without selling their entire land, maintaining an interest in the development.
- Preferred Returns: Landowners should secure preferred or guaranteed minimum returns to protect land value in case the project does not materialize.
- Shared Risks and Gains: JVs distribute economic and market risks, ensuring high returns for both partners.
