Amy Shaw, partner at law firm Trowers & Hamlins, explores how partnerships between housing associations and private developers can benefit both parties.
Housing associations are increasingly looking at joint ventures to maximise their financial return and meet the funding gaps arising from welfare reform, subsidy cuts and increasing build and land costs. We are also seeing renewed interest in these models from private developers and housebuilders looking for development partners from other parts of the residential sector.
SHARING RISKS AND RETURNS
- Profits are shared, and so are the risks; for example, if the project does not progress as planned, perhaps because build costs rise or sales values do not achieve projections. However, more is shared than just the risks and returns:
- Skills: Many housing associations are relative novices when it comes to building for sale. Working in joint venture with a developer is a good way to obtain the necessary skills and other expertise.
- Sound investment policy: For charitable housing associations, building for sale usually needs to be funded from investment reserves, and needs to be a proper and sound investment. Risk sharing with a developer means that a scheme may become a sensible investment opportunity in accordance with their investment policy.
- Better access to sites and frameworks: Often housing associations can smooth the planning journey for housebuilders and developers as a result of their strong links with local authorities, even potentially providing opportunities for the delivery of any affordable housing ‘off-site’ – magic words to many private developers.
- Money saver: Developers may want to get schemes off their balance sheets for their own funding and gearing reasons; a joint venture with a housing association can be a relatively easy way of doing so; for small sacrifice in profit share, an accommodating and perhaps even silent partner can be sourced.
Traditionally it has been the case that joint venture meant some form of corporate vehicle. For tax transparency reasons, housing associations often have a preference towards Limited Liability Partnerships (LLPs) over companies, but the basics are the same: two (or more) parties setting up a new vehicle to acquire, develop and sell a real estate project and sharing the rewards and proceeds.
But is there a need for a new corporate vehicle? If one partner already owns the land, it may be more tax efficient to avoid land transfers and so a contractual joint venture, with the original owner retaining the land asset, may be preferable. In this instance, the parties rely on a joint venture or development agreement to document the terms and principals agreed between them, including the sharing of costs and profits; this offers much more flexibility.
Where we are also seeing change is in the nature of partnerships that are coming together. There is much more involvement now from local authorities with both housing associations and developers. Local authorities, for their part, want to be involved actively in the project and see the delivery of homes in their area. In some cases, these are affordable homes but in other instances, local authorities are purely looking for financial returns.
Access to land and cheap finance can present challenges. The involvement of a local authority may mean the project takes longer to put together and it could be subject to greater scrutiny, some of that political. State aid and procurement rules will need to be considered but these hurdles are usually surmountable with the right advisers and the desire to move the project forwards.
So while, doubling your money may not be a realistic prospect, joint ventures offer potential opportunities and rewards which would be unpalatable for one party alone.
The full version of this article is available in the April 2016 issue of Show House