Modern methods of construction: Funding challenges for smaller developers

How are modern methods of construction changing funding for developments?

Modern methods of construction (MMC) cover a broad spectrum of revolutionary, and some not-so-revolutionary methods being adopted to build new homes.

Their intention is to speed up the building process and address the ever-growing shortage of traditional building skills, with solutions designed to deliver a greener industry, harnessing the benefits of sustainable technology, and improving the environmental performance of the end-product.

MMC largely involves manufacturing elements of the build off-site, ranging from timber frames to whole modular units, pre-cast foundations, floor and roof panels, and even pre-formed wiring looms.

These elements are mass produced in factories and delivered to site where they can be assembled in a fraction of the time compared with traditional building methods.

Some might say that there is nothing new here and recall that in the post-war years the industry also turned to prefabricated construction methods to address the housing and skills shortage.

But these homes were low quality, single skin builds, intended to have a very short life span. We should not confuse MMC off site manufacturing, with these post war examples.

MMC is built for the longer term, compliant with modern building regulations and the latest energy efficiency standards. This is an important feature given the UK Government’s intention to increase the minimum acceptable energy performance rating for residential properties to C by 2027 as part of its 2050 targets for net zero emissions.

There have been obstacles to overcome such as regulatory changes, skills shortages, and not least a dearth of UK based manufacturers. MMC is becoming more commonly used by the larger house building names that develop hundreds of houses of a similar design on a single site and who have the cash flow to support it. But if the smaller developers are to survive, they too will have to embrace MMC, but how will they fund it?

How can funders help smaller developers adapt to MMC?

MMC seems perfect for the larger housing estate developers, but what does this mean for the smaller site developers and crucially, their funding lines?

With MMC and off-site construction, manufacturers will often seek payments upfront, possibly as much as 50% of the invoice value before even starting the job, with the final payment on delivery.

Smaller contractors will not have the cash flow to settle the invoice pre-payment and will look to the developer who will likely turn to the funder. As the goods will not be on site, they will not be caught by the 1st legal mortgage – so how can the funder meet these cash flow needs? Vesting certificates could offer a solution, but in their current form are they up to the job? The consensus appears to be that they are not. How does the funder have control over the goods if they are off site, what happens if the manufacturer fails? What if the product is not fit for purpose when delivered? These are just a few of the questions which spring to mind.

In March 2021, the UK Government announced the setting up of a taskforce designed to stimulate MMC house building, so it is inevitable that soon we will see requests to support schemes involving increasing significant elements of off-site manufacturing.

As a relationship-led bank, driven by helping our clients find solutions, please get in touch if you would like to find out more about MMC and how the industry is working to provide an acceptable solution to this problem.

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