If ever a joint venture demonstrated the benefits of diversifying risk and attracting capital, British Land’s Broadgate Estate is it.
The REIT was criticised by some for the £77m, 50% stake in the estate it sold in 2009 to Blackstone with substantial losses, but the injection of capital facilitated the repositioning of British Land’s portfolio and a return to delivering value. Blackstone apparently made £800m from the onward sale of its 50% stake to Singapore’s GIC for £1.7bn, so sharing risk can clearly be rewarding. The value of British Land’s retained interest has also soared. GIC, meanwhile, is able to invest in a trophy scheme to which it otherwise would not have access.
The Broadgate example may give rise to the view that an owner will only sell a stake when in need of investment. Access to new funding streams is important, but it is only one of several considerations for joint venturing. It is not a new trend. Developers have long been used to sharing risk in their schemes. Forward-fundings and development management deals are effectively shortterm, project-specific joint ventures. Given the potential exposure, it is not surprising that the latest arrivals on the London skyline – the Leadenhall Building and 20 Fenchurch Street – are both being delivered through joint ventures: British Land and Oxford Properties at the former, Land Securities and Canary Wharf Group at the latter.
For the capital investor, the need to deploy queued capital into stock or a sector that is otherwise proving inaccessible can be compelling. For regulatory reasons, many sovereign wealth funds will only invest through a joint venture structure. Other investors, such as Oxford, have found their route to market through joint ventures and are building a notable London portfolio they could not have done alone.
Another factor is diversification and sector opportunity. In the residential sector, Berkeley Group, which already has a long-standing partner the Prudential, has just entered into the St Katharine joint venture with the Wellcome Trust; Aldgate Place involves a British Land/ Barratt joint venture; and Brookfield and Concord Pacific Group are to build a tower in Shoreditch. In the industrial sector there are the Norges Bank Investment Management/Prologis and Healthcare of Ontario Pension Plan/Verdion tie-ups. Many large retail schemes, among them the Bullring, Brent Cross, Manchester Arndale and Meadowhall, are joint ventures.
Most regeneration projects are joint ventures to some degree, either with a local authority or other private firms.
Entering into a joint venture also allows investors to access skill sets they don’t have. For example, Norges’ investments, including Meadowhall, demonstrate the need of the more passive investor to access proven asset and development management skills. Local market knowledge and access to stock is also critical in international joint ventures. It is telling that Tesco, for example, after years of going it alone in China, has been in talks with local partner China Resources Enterprise.
There is no uniform choice of joint venture vehicle. Limited partnerships have edged out the trusts for land that were common investment vehicles for shopping centres in particular. The limited partnership is a more understandable concept and, crucially, is tax transparent for tax-exempt investors such as pension funds, in a way that a limited company – and a limited liability partnership – is not.
Offshore vehicles remain common, despite administrative hassles and, in the case of offshore property unit trusts, tax risks at exit and withdrawal of stamp duty land tax seeding relief. Ultimately, the choice of vehicle will depend on the objectives of the joint venture and its participants, the need for transparency, tax efficiency and regulatory suitability.