The recent announcement that Vistry has agreed a bid for Countryside throws into focus the importance of partnerships businesses to both Registered Providers and private developers alike.
These businesses focus on joint ventures between RPs and private developers under which the RPs acquire affordable homes and share in the profits of private sales.
Vistry – the product of the earlier link-up of Bovis and Galliford Try’s partnerships businesses has enjoyed great success despite Covid and is looking to add to that with its bid for Countryside, which has big relationships with RPs.
But what makes for a successful joint venture between an RP and a private developer?
Why a joint venture?
RPs and private developers like to work together because of the synergies created:
- Private developers bring design and construction expertise, land, development management and the ability to maximise value.
- RPs bring housing and community expertise, a ready portfolio of property, access to grant and lower cost funding, buy the affordable component and have the knowledge and resource to manage the new estate going forward.
- Importantly, RPs and private developers share the risk on the sale of private units and are prepared to take a long view on the development of large sites.
Do they work?
JVs work if planned properly. It is important to understand:
- what each party is bringing to the table – land, a skillset, funding
- each party’s expectations and motivations and their interests should be broadly aligned
- all parties must understand the deal they have actually negotiated;
- there should be a good rapport between individuals – there will be bumps in the road in the coming years (but see the final comments below);
- the structure must work – early tax and accounting advice is essential – procurement may also be an issue;
- the project must be bankable and most importantly, viable;
Things will go wrong where any of these factors is out of line.
If you don’t have control, what are the safeguards?
Doing a JV can mean losing overall control.
But the respective roles of the parties will give each a level of control – one party could be managing construction aspects, the other the financial management or the sales and marketing.
Key commercial issues are agreed at the beginning and will be in the initial business plan.
The business plan covers all aspects of the project including:
- land appraisal
- scheme profit or loss
- timetable
- costs and funding obligations
- unit specification, mix and marketing strategy
Parties protect key interests by including reserved matters that require unanimous consent such as:
- planning application
- the business plan – which will evolve over time
- borrowing beyond what is committed by the parties at the outset;
Additionally, the JV terms may provide:
- for project boards or teams, staffed by equal numbers of appointees from each party with equal voting rights,
- for managing conflicts between the JV and a party
- a deadlock mechanism for resolving differences on key issues that could stall the JV
- for open-ended JVs with multiple phases, a party may want to be able to walk away once it has completed the phases it committed to
- default provisions to allow a non-defaulting party to take action against a defaulting party.
- for an Employer’s Agent to supervise the work of the party responsible for construction
- where the land is contributed by one party, provisions that ensure that the land will revert to that party if the JV terminates (by ensuring the RP can acquire the JV interest of the other party)
If the scheme could become unviable how do you manage the risks?
This is probably the biggest question at this point in the economic cycle with strong headwinds predicted. The viability test gives some room for manoeuvre where there are long planning lead times before the decision to break ground is made.
A viability test might include:
- an acceptable planning permission
- getting third-party funding
- achieving minimum KPIs set out in the business plan
Viability test not satisfied before construction starts and mitigation strategies don’t work
If both parties have funded the planning costs but one party owns the land, there will need to be options for recouping these costs for the non-land owner to prevent the landowner getting a potential windfall value increase in the future if the site is developed.
After the project has commenced
Once the Project has commenced slow or poor sales, or rising costs make the project unviable.
The parties can look at mitigation strategies which may include:
- ability to standstill the project until viability improves (and ensure that the construction agreements and funding arrangements allow this)
- varying the planning permission, increasing the affordable component and seeking grant
- the RP agreeing to a bulk sale arrangement to acquire unsold private units at a pre-agreed price
- accept lower margins in order to keep the cash flowing and avoid defaults with senior lenders
These are just a few of the key basic elements.
Every deal will be different. As with most businesses, personal relationships, a history of working together and trust will be paramount. However, where the transaction requires the RP to go through a procurement process, these can be ignored as a factor in that process (to avoid favouring incumbents) so private developers should be aware of that risk: procurement can lead to unexpected results.