The concept of joint ventures in construction of houses is relatively new in the country. This method is however gaining popularity and works well for properties designed for sale. For a land owner, developing it adds more value than selling the land undeveloped. In a joint venture, the land owner enters into an agreement with a developer, contributing land while the latter finances the project.
The profits are then shared on a pre-agreed ratio with the land owner usually getting over 50 per cent of the net profits. Architects and project managers can also agree to contribute their professional services as part of the joint venture and get paid at the end of the project when the profits are being split up.
Locally, most land owners and property developers are used to traditional methods of financing construction projects which involve raising capital by either selling part of the land or borrowing a loan from a bank or both. With the entry of the joint venture concept, land owners are now able to finance their construction projects more easily and affordably. This concept has numerous advantages for a land owner.
First, the land owner reduces the risk associated with bank loan repayments such as sudden increase in interest payments which result to project cost escalation.
Secondly, the land owner can easily access funds for construction since he/she will not have to undergo the rigorous bank loan application appraisal process.
Thirdly, the owner is able to tap resources and obtain services from consultants such as architects, engineers, quantity surveyors without having to pay initial consultancy fees since the consultants can offer their services as part of the joint venture contribution.
The method however has its drawbacks. Once the construction process starts, land in the general area of the project increases in value. This increase in value is supposed to be well-captured in the joint venture contract so that the increase can be well-spread to all partners including the owner, financier and consultants. This will avoid tussles such as those recently witnessed at Suraya and one of the land owners.
Financing a JV
In Kenya, Shelter Afrique Bank finances joint venture projects. For the projects to be eligible for financing, a feasibility study carried out by a registered architect, quantity surveyor or valuer must be availed. The feasibility study should show critical minimums such as return on investment, target market and land value ratio to the total project cost. These critical features will be used to check if the project is viable for the joint venture. One such projects being financed by Shelter Afrique is Everest Park along Mombasa Road, consisting 380 units. The project cost is Sh1 billion.
Arch. Gichuhi can be reached at www.a4architect.com
