Feedback from PrefabNZ Members reveals difficulties with financing larger 'chunks' or complete 'transportable' buildings due to traditional mortgage structures.
PrefabNZ hosted two workshops in October 2016 with Members and financial representatives to discuss better finance of offsite construction, to enable the prebuilt construction sector to provide more affordable housing through:
Identifying a path for banks to finance transportable homes for first-time buyers
Unlocking finance for larger prebuilt chunks (panels, pods, etc) that manufacturers and developers use to deliver affordable medium-density housing
For more information on the background to this issue, download and read the PrefabNZ Find Finance Summary here.
The following six action points were summarised from representatives of banking, finance, insurance, mortgage, brokering, construction and design which PrefabNZ will follow up on.
Clarification of bank risk so that housing manufacturers (ie. panels, pods, or transportables) have consistent industry funding guidelines to meet bank requirements (eg. an industry developed checklist).
Action point - PrefabNZ to follow-up with ANZ + BNZ about meeting with Risk team ASAP
Education piece to banks about prebuilt manufacture (ie. panels, pods, transportables) and value of lifecycle assessment (ie. lifetime costs vs cost up-front).
Action point – PrefabNZ to investigate channels for bank education
Insurance or guarantee mechanism
Action point – PrefabNZ to follow-up with Built-in Insurance on options
Action point – PrefabNZ to follow-up with Surety on options
Industry standard contract
Action point – PrefabNZ to investigate process and funding to develop
Quality assurance programme by independent industry body, such as PrefabNZ
Action point – PrefabNZ to investigate process and funding to develop.
The following issues context was derived from housing manufacturers and builders involved with building panels, pods and transportable homes. NB: The conversation is initially focused on financing a transportable house.
Land purchase occurs first. Housing manufacturer / builder needs confirmation that the buyer has first mortgage bank lending for both house and land.
It is possible that the buyer might use all their equity on the land purchase, leaving none for the progress payments on the house. In that case, they will need to prove that they have access to financing before the house can be procured.
The required works at the house site include utility connections, stairs, landscaping, gaining Council consents etc. can be coordinated by a single reliable party – usually this is the housing manufacturer / builder. Single oversight is ideally needed to have a clear path to the Code Compliance Certificate (CCC). For local sites, own
builders are sent to complete work. For sites further afield, a local builder is subcontracted to the main builder.
The lender is concerned about what happens if the builder goes into receivership. The lender needs to be able to have the house (and materials) as security. Although a General Security Agreement (GSA) exists, it is acknowledged that this is not a hassle-free option. Small companies give an unconditional personal guarantee against builder failure – but this is of more comfort to the buyer, than the bank.
DISCUSSION POINT: What other instruments can enable a bank to claim the work completed to date when the work is completed away from the final building site?
If the house is partially completed offsite, a third-party can gain access to complete it for the bank (including access to plans and consents etc.). This is a practical solution as the emphasis is on meeting Building Code (BC) compliance towards CCC which is the assurance that the bank is looking for.
The bank’s establishment of the builder’s experience should be the same, whether the house is constructed at site of offsite.
The bank should be conducting a ‘check-box’ exercise to determine that the relevant construction contract is in place and that BC is being met towards CCC being achieved.
The value of the part or the house before delivery if it had to be sold to a third-party to repay the debt would be the value of works completed to date, eg. 40% if it is for panels, and 100% if it is a transportable house. It will be the percentage relative to the entire project’s value.
NOTE: The lowest risk option for the bank is to complete the job offsite, attach it to the land, and reclaim the project value that way. Fundamentally, the house-plus-land package is worth more together, than separately.
There are no recorded issues with a potential buyer not accepting a house. If there is any dispute, then the dispute resolution process is the same regardless of whether the house is constructed at site or offsite.
Granting and payment of Building Consent Authority (BCA) costs and permits are transparent, and the same regardless of on site or offsite construction. Just BC and CCC is needed to be issued. Most cases of transportable housing do not require a Resource Consent (RC) but this needs to be confirmed with local BCA.
Council approvals take the statutory amount of time, excluding any Requests for Information (RFI) which can extend the process – same for on site or off site.
NOTE: There is general consensus that the BCA should nominate a single point-of-contact for each building project.
If the bank had to repossess the house and sell it after delivery, then the bank would have access to all required documentation through the BCA. The bank is the first security, while manufacturers are second.
Costs associated with repossessing and transporting the house would be approximately $12,000 (and up to $30,000). There is very little chance that the house-in-a-yard doesn’t sell – “everything sells, for a price”.
If the buyer’s situation changes before delivery eg. they lose their job, then the builder will negotiate an appropriate exit from the contract on a case-by-case basis.
If a buyer requests variations that reduce specification and or increase cost, then these are issued as variations to the contract – the same process whether the build is on site or off.
The builder may consider a lower level of total progress payments before delivery if they can secure requisite finance to manufacture the building. Normally, up to 90% is needed before handover / delivery.
If the bank puts in place mortgages for buyers with low equity to increase builder house sales, it is possible that the builder could take the first loss if things go wrong, eg. put the first 25% of progress payments in themselves to be repaid on final payment.
NOTE: This arrangement would need to be discussed with the banks, and only possible if bank secured lending was in place.
This is the start of our journey to unlock finance for offsite construction following previous workshops, meetings and report (see FindFinance Summary below). PrefabNZ will follow-up on the above action points. If you are interested in working with us, please get in touch - we would love to hear about your experiences and ideas.
PrefabNZ Find Finance Summary
PrefabNZ Finance Workshop Summary