There is considerable enthusiasm in some quarters of the construction industry around the widescale adoption of so-called modern methods of construction (MMC) and offsite manufacturing generally. In the housing sector in particular, the government has thrown considerable support behind the adoption of these methods in order to help deliver the 300,000+ new homes per annum that it considers the UK will need to deliver over the next five years to address the chronic housing shortage.
However, while a number of industry heavyweights, such as Berkeley Group, Swan Housing and L&G, have already invested large amounts into developing their own offsite solutions, for those who are at the start of their journey into this type of procurement (or for those who have only just started to consider it as an option) one of the obstacles that remains is the availability of external development funding and, going forward, the mortgageability of the completed MMC units.
Is the lending market becoming more familiar with offsite manufacture?
As with any new product, there is a period of scepticism and an understandable reluctance to accept anything that could be seen as inferior to an existing product. Offsite manufactured products, in particular, suffer from historic misconceptions about how they compare with traditional methods, and some funders and their advisers will always be starting from this position. However, the lessons learned from other sectors, such as student accommodation, leisure and education, where banks have been far more comfortable lending to modular schemes, are filtering through to the housing sector, at least on a technical level.
Are issues around quality and design life being addressed by manufacturers?
One of the reasons that banks have traditionally been comfortable funding MMC projects in the student accommodation, leisure and education sectors is that many do not see a student's bedroom or a classroom as an asset that needs to retain its value or quality long-term, unlike in residential valuations where it is assumed that an asset will hold its value for the entire life of the mortgage. However, it is a fallacy to assume that traditionally built houses have a considerably longer design life than an MMC product. For example, while the NHBC, the UK's leading home warranty provider, will accredit a product based on a 60-year minimum design life assumption, this is always caveated by the fact that the product and, ultimately, the unit will require maintenance and on-going repair, whether traditional or MMC. The quality of products now coming onto the market, in particular those that have made use of digital design and precision manufacturing, is arguably superior to the majority of traditionally built homes, where defects are by no means a thing of the past. What is not in doubt is that funders, lenders and their valuers are, just like the rest of us, lacking data on issues such as depreciation, defects and maintenance which would lend empirical evidence to whether these assets perform as well as traditional buildings.
What sort of security are lenders requiring?
As well as the traditional development finance package of collateral warranties, retentions, performance bonds and guarantees, offsite manufacture has its own risks that banks want to see addressed when funding such projects. The offsite and logistics element of the build means that vesting certificates and on-demand bonds for advance payments become even more critical, but consideration should also be given to adjusting the payment profile so that monies are drawn down against milestones achieved in the factory. Instead of traditional step-in rights, lenders might consider measures to enforce their security directly against the factory if it encounters financial difficulties; for example putting in place arrangements to take security over the goods and materials rather than the right of step-in to supply contracts.
Is there an accreditation scheme for MCC products?
As mentioned above, a large piece of the puzzle in getting lenders comfortable with MMC is the establishment of an industry-agreed accreditation scheme. The government is not sitting on its hands in regard to looking into this; a working group has been set up with the big players in the latent defects insurance market looking to try to come up with an accreditation scheme that saves time in getting MMC approved by those players, which in turn may help provide some comfort to lenders. There should be news on that towards the end of the year, which may lead to some sea change in the lenders' approach.
