CoStar: The problem with joint ventures
This article originally appeared in CoStar on 3 June 2020, written by Roger Clarke, Managing Director, IPSX.
Before Henry Ford first experimented with an assembly line in 1913, his factories took 12 hours and 28 minutes to build a chassis at the best of times. By 1914, it took 93 minutes. Ford had, in the space of a relatively short period of time, reimagined how he could meet growing demand for cars across the US – and the key was efficiency.
More than a century later, we need to remind ourselves of that principle in commercial real estate. As an industry, we’re dealing with ever greater complexity. Quantitative easing in the West drives up asset prices and government bond yields are approaching zero (if they haven’t already turned negative), which means real assets sound like a better proposition by the day even if they yield as little as 3%.
What does this have to do with efficiency? In short, massive assets attract club deals. They bring together parties from across various sectors – property companies, sovereign wealth funds, banks, and so on – with a common goal of holding a valuable positive yielding property. The downside is that they are a logistical nightmare: these parties have different time scales and objectives. When one party wants to exit, it faces potentially years of exploring a shallow pool of buyers happy to both make a major investment and enter into complex arrangements with the remaining owners.
Cast your mind back to 2017 when Lendlease was ready to find a buyer for its 25% stake in Bluewater shopping centre. Discussions commenced, interested parties came forward and then pulled out. Three years later, it still owns that stake and another potential sale has been delayed by the coronavirus outbreak.
There are those who enjoy the legal gymnastics of putting together complicated joint ventures and who love to pore over those agreements during a sale. But the reality is this benefits neither the buyer nor the seller. The reality is we need to reimagine how we do business in the same way Ford reimagined how he did his.
That’s one of the goals we had with IPSX. By launching a regulated stock exchange for real estate, we created a platform for owners to float their stakes on an open market, simplifying the process of entering or exiting major real estate assets.
All else being equal, it means somebody’s 30% stake in a £1.5bn asset, for instance, is more valuable than it otherwise would be. By selling shares, the owner now has access to a significantly larger market that isn’t limited to finding someone willing to part with £450m to partner up with somebody they might not know. On the buyers’ side, IPSX opens up the market for more institutions to get into the sector. Investors who would have balked at the thought of getting tied up in JVs can now enter the commercial real estate market and tap into the security and favourable yields it offers.
IPSX cuts the time required to strike a deal even further because transparency is a cornerstone of the exchange. Potential buyers will know what the asset’s earnings profile is and, given that stock markets have a strong track record of accurate valuations, they will have immediate price discovery. Months of lawyers checking every small detail will no longer be necessary. Vendors, meanwhile, can exit or reduce their stake without the risk of the process drawing out for years, during which time their holdings might fall significantly in value.
Before Ford created his assembly line, he saw a market where demand was growing – a market that didn’t have the technology to fully respond to that demand. Real estate has been in the same position, but it doesn’t have to be. We see rising demand around us, and at IPSX we believe we have the tools to respond to it.