Application of vertical joint ventures in real estate development : a Swedish study from the perspective of property managers and property developers

University essay from KTH/Ledning och organisering i byggande och förvaltning; KTH/Fastighetsföretagande och finansiella system

Abstract: Projects in real estate development are commonly associated with failures in attaining clients’ expectations in terms of time, cost and quality. At the same time, the real estate and construction industry in Sweden is recognized as traditional and sometimes characterized by few and dominant actors leading to low competitiveness. The project based environment often results in temporary business agreements creating exposure for opportunistic behavior between actors. Also, growing complexity and occurring economic uncertainty make the capital intensive property development sector exposed to high risk. These challenges create a demand for new business strategies and deeper collaborations among actors. Further, research has suggested joint ventures as a strategy to enhance project performance and solve adversarial relationships. The thesis aims to give an amended knowledge of vertical joint ventures application in the real estate and construction industry in Sweden. This includes examining the current use, identifying motives and analyzing the potential application to explore organizational and market implications of joint ventures. Therefore, the research utilized a qualitative method where different actors from various perspectives was interviewed. Results show that a typical vertical joint venture formation is a separated equity entity, consisting of two parent firms, often between a property manager and a property developer, with equal ownership and decision making. The study indicates that the most common motives to form a vertical joint venture are risk sharing, financial purposes and accessing competencies and resources. Findings implicate that financial purposes are usually associated with property developers and complementary competencies are often the primary motive for property managers. However, for a vertical joint venture to be successful, mutual trust and joint primary goals between joint venture parents are decisive. In addition, a suitable vertical joint venture project has to be of large scope in terms of risk, complexity, size, duration or cost, to compensate for administrative costs the structure induces. Further, findings show that vertical joint ventures can be an efficient business formation to align incentives and decrease opportunism as well as it can enable firms to undertake projects beyond their financial capacity and competencies.

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