As the coronavirus pandemic continues to impact the economy, especially the real estate sector, experts are advocating the use of joint venture to bridge the housing gap in the country.
They believe that such schemes provide a programme that will be of practical assistance to the industry and decision-makers, reinforce the need for cost-reducing approaches to planning and engineering practices for property developments.
While some schemes have yielded positive outcomes in high-end locations of Lagos like Lekki, Ikoyi, Abuja, and Port Harcourt, many others have failed to see the light of the day in other locations due to contentions between parties.
The Guardian gathered that in such schemes, chances are that one party will do a lot more than the other in contributing more than 50 per cent of the effort. It was learnt that the ‘win-win’ approach and fee split formula before the start of projects has become the bane of joint venture schemes.
An estate surveyor and valuer, Omuojine Emmanuel Obiajulu who is also a lawyer, explained that the major challenge is the cost of capital, stating that capital attraction is always an issue and parties must, therefore, think deeply, carry out a feasibility study on what will attract people for the viability of projects they tend to embark on.
He alluded that in Nigeria’s environment, the cost of acquiring the Certificate-of-Occupancy tends to build up the cost of development thus, serving as a disincentive to some investors.
“When it comes to JV, you think about who can bring in developers and investors that will bring in an equity fund and don’t really need to borrow.
They also have to think about the opportunity cost of the project. If the return for example in the money market is about 22 per cent and return for a joint venture is not that profitable, it might not be attractive to investors. If the return is yearly, more often than not, it can’t even take care of interest on some borrowed capital and so partners might not want to go into such project.”
According to him, outright disposal or sale of housing units in most properties developed through joint venture may be difficult due to the current economic environment, and so projection might be skewed and failure to sale property may linger.
He also said with current realities, the challenge of CoVID-19 could pose further strain to the model, as those who have capital will be very careful with their fund.
Omuojine particularly said the joint venture would be difficult for luxury commercial and residential developments investors will have to think outside the box of such structures to build low, and middle-income housing that is affordable.
“Medium income development is an area that will be viable any day and that is an area where JV can thrive effectively. There could be an attraction for tourism real estate within the country although capital intensive, joint venture will work effectively in such a model is properly designed.
Another practitioner who is also vast in real estate law, Mr Francis Okpaleke said generally, a typical issue for joint venture schemes is a failure to adhere to the sanctity of contract, whereby people entered into agreements with water-tight terms and conditions but one party tries not to fulfil what they have put down in writing.
“There are some fundamental things partners to projects usually do before moving into the arrangement like valuing the land, agreeing on the cost and a lot of financial things. JV is all about projections and so other issues can be beyond parties”, he stated.
“When the economy is volatile like the CoVID-19 era. People entered into the year with a lot of plans but nobody factored CoVID-19 into contracts and projects even though lockdown has been relaxed but activities are not yet picking up. So imagine three months has gone out of some projections and arrangement some people have. There is a lot of business disagreement and issue of force majeure and if it is not projected in the contract, there can be an issue. In an ideal society even if there are disagreements, enforcement shouldn’t be a problem.”
He advised that there should be an improvement in the ability of the legal system of the country to discharge justice and make ease of doing business further possible, stressing that disagreement relating to housing development shouldn’t be allowed to linger long in the court.
Okpaleke further said that parties in contracts should deploy the modern trend of including alternative dispute resolution mechanisms in construction contracts to shield contracts from issues that could adversely impact it.
The Director at EchoStone Nigeria, Mr Sammy Adigun, explained that the biggest challenge is when the expectation of either party in the scheme is hardly met because of market forces, social factors and the volatility of the country’s economy.
According to him, for a successful joint venture arrangement, there must sincerity of purpose and parties to such initiatives must do an open book in such a way that there is nothing hidden and the necessity to show all the costs for the partnership to work.
“For example, you are going into a joint venture to build a two-bedroom for N5 Million but at the end, you end up spending N7 million because prices have gone up. So the other partners to the project may feel at a loss. Yes, quality is one thing but the biggest issue is to have an open book system”.
He observed that the dearth of joint venture schemes in Nigeria housing sector relates to the absence of straight forward businesses in the environment stressing that majority don’t often want to state the truth all the time.
“It is either somebody wants to hidden something or doesn’t want to be open. Maybe as time goes on, the other party gets to know that certain information was hidden, it leads to distrust and distrust leads to the collapse of the relationship”, he said.