Why joint ventures are the future of real estate investment in Kenya

Among the key pillars of the Jubilee Government in its second term through the Big Four Agenda is ensuring that more housing units are put up.

Towards this end we have seen private public partnership projects being launched between the government and private developers. Even though this is a trend in the public sector, the trend is likely to take root in the private sector through joint ventures.

Real estate remains attractive due to the relatively high returns when compared to the more traditional investment opportunities like equities (shares) and fixed income (bonds).

In Kenya, the growth of the middle class has led to increased demand for quality and aspirational real estate. The response to this has been the gradual institutionalisation of real estate, making joint ventures popular.

Not only do joint ventures play a significant role in bringing down the cost of funding, together with the benefit of operational efficiencies. They also create a revenue upside through more productive use of assets.

This is because funds which would first have been used to purchase land can be directly deployed into the development of that land.

A joint venture is a partnership, entered into by two or more parties each of whom brings something unique to the table, with the aim of combining resources to achieve an objective.

In real estate, a joint venture is at its most basic symbiotic, having a land owner with land but no access to funds and/or development capability and on the other hand, a financier with funds looking to deliver the best possible returns to their investors but with no land. These two players have something that the other needs and they could work together in a mutually beneficial arrangement.

A joint venture (JV) can either be a contractual or corporate.

The difference between the two is that in a contractual JV, parties agree to work together and document their working relationship while in a corporate JV the parties come together to form a corporate entity, which could be in the form of a Company or a Limited Liability Partnership, to pursue their common interest.

In most real estate JVs, parties prefer a corporate JV as it allows the land to be held in a special purpose vehicle where the JV partners are also shareholders.

Benefits

Joint Ventures are great avenues for combining scarce resources in a manner most beneficial to the parties without either party having to forgo the opportunity to exploit the resources they have at hand. A joint venture will also see the parties share in the risk of the venture in the sense that each party bears the risk attaching to the resource they contribute.

Problem areas

Just like a coin has two sides, there are also drawbacks that joint ventures are susceptible to.

The most obvious one would be the misalignment of purposes.

Like any relationship between two parties, the partners in joint venture need to know and be clear from the beginning about the purpose for which they are getting into the venture.

There may also exist a blur in scope of liability of the parties involved in case of the failure of the venture.

Therefore, the JV agreement has to be well negotiated and drafted providing for decision making, reporting and disclosure requirements whilst at all times ensuring transparency.

Also, one ought to consider such matters as credibility of the potential partner, their track record, standards of professionalism, governance practices and standing where they are a corporate entity among other considerations.