Handelsblatt Investment
von: Christoph Scherbaum

Date: 29.07.2022

Project developers are increasingly looking for alternative models to finance their construction projects. Experts therefore expect more joint ventures to emerge in the future to close capital gaps.

Construction and financing costs have been rising steadily for months. The first project developers are coming under margin and consolidation pressure. At the beginning of May, for example, Terragon asked its creditors for a temporary deferral of interest payments due to an unforeseen liquidity bottleneck. In the meantime, the project developer specializing in senior living is in insolvency proceedings. It is looking for potential investors so that the Group can be preserved as a whole.

However, Terragon is unlikely to be the only project developer that will have to cope with liquidity bottlenecks in the coming quarters due to the sharp rise in construction and financing costs. The situation is not made any easier by the fact that interest in forward deals, for example, in which investors take a stake in a project at an early stage and thus provide liquidity, is declining. "2021 was a record year for forward deals," says Michael Peter, founder of investor P&P Group. Those times are unlikely to return anytime soon in the current market environment, with high inflation, supply shortages and soaring construction and financing costs. This is because they are making it increasingly difficult to reliably calculate project developments. As a result, banks are also becoming "increasingly restrictive in granting loans," reports Peter. That's why alternative models are moving into the spotlight to finance projects. One option is joint ventures.

For Nicholas Brinckmann, spokesman for the management board of investor Hansainvest Real Assets, this merger of project partners is a good option, and not just in the current situation: "Joint ventures have been one of our preferred instruments for gaining access to attractive land and project developments for years," says Brinckmann. They could become even more interesting for investors, as their negotiating position vis-à-vis project developers is more advantageous today than it was a few months ago. At that time, there were many investors with a lot of capital on the market, "while the top projects and properties in particular could not be reproduced at will, of course. In some cases, this led to unbalanced contracts at the expense of investors," explains Brinckmann. In the now changing market environment, he notices as an investor "a return to the original idea - the fair sharing of costs and opportunities."

P&P Group founder Peter sees joint ventures as an alternative to forward deals - if "both partners complement each other, otherwise there is no strategic added value. For example, it wouldn't be a good deal if both sides brought capital but no technical expertise. "Corporate cultures also have to complement each other, otherwise the collaboration also goes wrong." He himself has had good experiences with joint ventures, for example by cooperating with a partner based in a different region than his own company. One benefits from the partner's network and product knowledge, he said: "If we, as people unfamiliar with the area, want to buy products, we're always confronted with higher prices." In another joint venture, Peter says, P&P Group provides the capital, and the partner in turn works on the product and takes care of technical and construction and tenancy law issues. "That way, there's always added value."

The Empira Group also sees the advantages of joint ventures. Enrico Flath, Managing Director of the company, manages a fund that specifically enters into joint ventures with project developers. "We have been offering developers both mezzanine capital and equity investments via joint ventures as part of our loan funds since 2016." According to Flath, this combination offers investors a predictable ongoing return on the one hand and an attractive value-added component upon project completion on the other. According to him, the target investments are often mixed-use neighborhood developments with a project volume of 150 million euros or more. "The expense of comprehensive due diligence and subsequent ongoing monitoring only make economic sense above a critical project size," adds the fund manager, who is currently noticing a further increase in demand for joint ventures.

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Benjamin Spieler, Managing Director of the asset manager SIM Group, points out another aspect in this context: "It is often overlooked that the financing challenges in project development also apply in a similar form to existing properties." Especially away from metropolitan areas or in rural areas, modernization projects or even purchases are being financed in an increasingly restrictive manner. "Joint ventures or other entrepreneurial investments, for example in the form of mezzanine financing with profit sharing, can solve this financing squeeze."

Enrico Flath and Michael Peter assume that the joint venture business will continue to gain in importance. "In part, certainly also in cases where classic bank financing or forward funding is no longer possible at conditions as they still are in 2021," says Peter. In his opinion, investment managers with in-house development expertise have an advantage more than ever.

Flath takes a similar view: "Caution is advised when inexperienced investors without in-house expertise want to enter joint venture models. There needs to be stringent due diligence based on relevant and years of experience in the development business." Professional risk management - especially in the current uncertain market situation - is crucial, he adds. Accordingly, Empira likes to "work with developers who have a long and successful track record and whose professionalism we can ideally judge well from previous projects."