There are 4 steps to learning about how to invest in property in the UK. This may sound...
The property market has more development opportunities than ever before. But how do you raise development finance for a property when you don’t have enough cash lying about?
Developers are looking for innovative ways - on the back of PropTech technological innovations - to fund projects. One way to do this is through joint venture finance. But what is joint venture finance, how does it work, and how can you find a provider?
Whether you’re a first-time investor, a surveyor, or an experienced developer, you will find the answers to your questions in this guide.
What is Joint Venture (JV) finance and how does it work?
Put simply, joint venture finance is a method of funding property development without needing to put any of your own cash in.
“A joint venture provider supplies all of the funds you will need for both site acquisition and construction costs for a share of the profits. Essentially, it works in a similar way as a standard loan, but you don’t need to put down any deposit.”
Businesses that are willing to offer joint venture development usually expect a 40-50% share of profits. Plus, they will most likely want to oversee the construction process closely.
Most JV providers will set up a Special Purchase Vehicle (SPV) in which both parties agree to cover the ownership of the completed property and hold the liability. The SPV is usually a private limited company created for one purpose. This could be a housing development, a series of developments, or the conversion of a commercial building into apartments.
Finally, the JV provider usually portions out the construction funding in staged drawdowns, and would normally carry out a site inspection before each instalment is released.
Now that we understand what it is, let’s explore the benefits of this approach.
The benefits of joint venture finance
The main benefit of JV finance is that you don’t need a deposit. This can help to get a project off the ground very quickly.
Other benefits include:
Sharing of risks and costs: The JV provider will also usually pay any stamp duty and if any unforeseen risks occur, they can provide support or capital to smooth those over.
Access to new knowledge and expertise: Most JV providers are experienced property investors and will have a wealth of knowledge and expertise from previous developments that they can share with you.
Access to greater resources: Aside from capital, JV providers often have a strong network of tradespeople, legal teams, and other experts you can leverage.
Flexibility: Joint venture finance is usually hyper-specialised within a limited lifespan (usually 24 months) - so you don’t need to worry about extensive commitment.
Synergistic: Great partnerships can bring out the best for both businesses, and can allow you to take on more projects with all the synergy and profit benefits.
Now that we understand the benefits, let’s delve into any challenges and risks of joint venture finance.
The challenges and risks of joint venture finance
As much as it sounds like the perfect partnership, there are some downsides to consider
Shared profits: The major drawback is that while the risk is shared, the revenue uplift will, of course, be shared too. JV providers usually expect 40-50% of profits, which is a significant amount.
Can be time-consuming: It takes time to think through all of the possible issues and agree on how they will be dealt with as a joint venture.
Detailed coordination is required: You’ll need to be clear on your respective responsibilities and obligations to each other and the project as a whole.
Can be an involved process: It’s really important to clearly define the sharing mechanisms of both costs and revenue. This can be a fairly involved process to get right.
Specific requirements: Some (not all) JV providers will only work with developers with over 10 years' experience and require full planning permission to be in place already.
Now that we know the challenges, how do you actually find joint venture finance experts?
How to find joint venture finance experts
Since your choice of joint venture finance providers will be fewer compared to a bank loan, the best way to find the JV providers is through a property data tool.
As a case in point, as well as providing you with rigorous due diligence insights, Nimbus Maps, also supports you with identifying people to approach to fund their projects through the commercial comparables and planning export.
Using the planning export feature, you can find active developers/investors for the specific type of development similar to your project. Checking the recent comparables will provide a similar list of active developers/investors in the area too.
Alternatively, connecting with active agents in the area (with the commercial availability) will provide an opportunity to get recommendations for investors that have invested in other schemes dealt with by the agent.
How to build credibility with a JV investor
Most joint venture agreements are decided on a case-by-case basis. That’s why having strong credibility is key.
To help build credibility, you can follow these simple strategies:
1. Do your due diligence
This is crucial. Without this, investors won’t be happy that their money is in safe hands. This can take a long time and can look subjective without clear evidence supporting what they are saying - this comes from comprehensive software from a provider like Nimbus.
2. Provide clear evidence of exit value
Through the comparables tool, you can provide similar property surrounding your opportunity with links to Rightmove to generate comprehensive evidence packs.
3. Secure a strong sit
Where possible, buy at the right price, improve and extend and essentially add value - explore planning permissions and permitted development rights. Change the use if required. And ultimately, increase the value.
4. Have a good exit strategy
In essence, this means you need to plan the post-development value after the sale of the development.
5. Get planning permission in place
Most JV providers are unwilling to take planning risks, so having outline planning permission in place is often a requirement.
6. Prepare profitability forecasts
JV investors will expect to see a solid business plan with profitability forecasts, ideally with at least 25-30% profit margins. Note that some providers will want the development’s value to be at least £1 million.
In summary, partnering with another business can be complex. It takes time and effort to build the right business relationship and, even then, it can be difficult to avoid all the issues. That’s why having the right insight and due diligence at your fingertips is so important.
The key principle here is that you should be spending half of your time on finding great projects (utilising data property tools) and then the other half of your time working on finding and building credibility with investors. This means that you have access to the funds to buy the opportunities that you find.
In a nutshell: Great sites and excellent due diligence will attract plenty of finance. Find out more about our commercial comps and planning export solution here.