Joint venture agreements have become an increasingly popular way to develop real estate in Africa. This is especially true in prime cities such as Abuja, Accra, Johannesburg, Lagos and Nairobi, .
Due to limited funds, land owners seeking to develop their properties may look for partners to finance development. These partners may be financial institutions, private investors or real estate development companies.
In this article we will discuss how joint ventures work in the real estate industry, using Nigeria as an example. Despite this, the basic principles of a joint venture (JV) remain the same throughout the world.
What is a joint venture in property development?
A joint venture involves a process whereby two or more persons form a partnership where they jointly undertake a project and see it through to completion. By forming such a joint venture, the parties involved hope to mutually benefit and profit from the resulting transactions.
Joint ventures are not just limited to real estate but can be undertaken in various other industry verticals, where companies stand to benefit.
For example, in real estate, one party may have land but doesn’t have the technical expertise or experience to see it being developed. Hence the land owner may seek a partnership with a party that can bring in that expertise to see that property built.
Other examples of joint ventures include:
- A mother with capital and a son with real estate experience: partnering together
- A builder, an architect, an interior designer and a financier: collaborating
- Two people with similar skills and resources: co-founding a company
Joint ventures are not always as simple as the examples highlighted above. They can get very complex with multiple parties involved, each bringing something to the table.
How real estate joint ventures work
In Nigeria, joint ventures are focused on land owners and real estate developers.
The key aspect of the joint venture model in property development is that, a land owner contributes his land towards a project, while the developer’s responsibility lies in getting approvals, actual construction and marketing.
Developing a property in Nigeria is an expensive process, so outsourcing these costs to a seasoned developer is advantageous to the land owner as the owner is able to potentially profit more than if he had sold the land undeveloped.
The money that can be expected to be returned to the land owner can come in a variety of ways and is often a combination of such. Depending on how the deal is structured, the land owner may receive an upfront payment, a share of revenue accumulated or a share of the developed properties.
The property developer profits as they would not have had to put money down to purchase the said land for development, before eventual sale. In essence, initial costs for the developer are significantly reduced and the building process can be quickened. Thus making it a win-win situation for all.
The basis of the partnership is formed on a mutual agreement between the land owner and the property developer to develop a plot into some form of defined real estate: apartments, houses, malls, offices etc. Where the two parties are to share the developed properties, land owners often get between 20-50% of the built up area while the builder is entitled to the rest.
The land owner must give the developer permission to develop his lands by given them a power of attorney. Furthermore, Lawyers must be hired to acquire all the appropriate approvals from the government.
How the profits from a joint venture are calculated and shared
Factors that dictate profit sharing agreements include: land cost, location, how much of the land can actually be built on (floor area ratio), approval costs, land clearance costs, interest rates and proposed project time frames.
The bigger the plot the higher the land valuation, land with good road access together with those located on corners also means higher prices.
Construction and land clearance costs are those to be incurred by the developer. While the potential value of the properties to be developed are calculated using current market rates and trends.
With regards to the cost of approval, this includes any fees related to building permits and providing infrastructure such as water or electricity.
Further, plot owners must factor in any loss of rental income. For example, some plot owners rent out raw land to mechanic workshops.
Once all these factors are taken into consideration a calculation can be made and an appropriate profit sharing agreement can be agreed between the owner and developer.
How to find joint venture deals
The main methods of finding joint venture partners include:
- Friends or family
- Real estate professionals
- Work colleagues
- Your extended network
- Real estate listings
It is important to note that joint ventures are fundamentally built on relationships. The stronger your relationship with a prospective partner the easier it will be to strike a deal.
When it comes to real estate joint ventures, working with an estate agent is perhaps the easiest and least stressful way of finding a deal. This is true whether you are a land owner looking for a developer or a developer looking for a land owner. Real estate agents have the necessary expertise and contacts to broker a deal that leave both parties happy.
Joint ventures are a great way of funding property development in Africa. It is usually a win-win situation for both parties involved: the land owner and the developer. The most important thing is to have a good knowledge of what these deals actually involve and how agreements are structured.
While joint venture can be profitable, if your knowledge is lacking or you rush into things without being fully informed of all the variables, you can potentially lose money.
For a developer, the alternative to a JV is buying land outright and then developing it from scratch.
Are you a developer or an investor seeking land in Abuja for joint venture? Or are you a land owner looking for someone to help finance development of your property? Either way, you can contact Villa Afrika to help you broker a deal: +234 708 500 8039.
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