Using Joint ventures and Property developers to build – Is it Right for you? – A Nigerian Scenario
1 year ago
Joint ventures, popularly termed JVs, can be applied to bare land or built up properties. If you want to know when it is best to adopt a joint venture approach for the acquisition of land or construction/renovation of a building then keep reading.
For now, let's look at the type of resources and skills that would apply to joint ventures within the context of real estate in Nigeria. Partners to a JV may contribute any of the following resources:-
Marketing and Sales skills
Other resources could be contributed, but within the context of the Nigerian real estate sector, the top three resources are Land, Finance and Construction expertise.
If you want to invest or execute a real estate project and don't have one or more of these resources, or maybe the resources you have are not sufficient to complete the project, then you could consider a joint venture partnership.
There are other alternatives to Joint Ventures which you could consider, but an analysis of their advantages and disadvantages would determine what’s best for you. I will take a deeper dive into these other options in another article.
However, for now, let's paint a very common scenario. Mr. 'A' either inherits or saves up money to acquire a plot of land, with a small bungalow built on it. His plan is to demolish the bungalow and build a block of flats on the property. He gets an estimate that puts the project completion cost at N55 million.
Unfortunately, this is way more than he can afford in the present or foreseeable future. Mr. 'A' approaches a couple of Nigerian Banks and mortgage institutions. Most of them are willing to give him a loan at 21 – 25% if he can contribute 20 - 30% of the N55 million. Unfortunately, Mr. A can't meet the requirements, and the interest to be charged amounts to twice the project cost!
Mr. A has the odds stacked against him
One day he runs into an old friend, they get talking and he shares his problem. It turns out his friend had a similar problem but solved it by getting into a JV with a property developer. They built a block of flats and shared the units.
Mr. A’s friend was able to achieve his objective by pulling the resources he had (in this case land) into a JV. In a case like this, a JV is a good choice especially if the property developer is offering a reasonable share of the property to the landowner.
I can come up with a couple of other scenarios but, I believe this one helps paint the general Idea of when to use a Joint venture.
Joint Ventures definitely do have their own challenges, particularly in our environment where levels of mistrust are high. Getting into the wrong joint venture can result in losses. Getting a proper education is vital.
Check out our checklist - ‘Due diligence to perform before signing a joint venture’ for landowners and developers. A checklist is a powerful tool and will help guide you on things to watch out for.