The specialist bridging and development finance broker identifies the underwriting points raised as residential developers turn to offsite construction
Tiger Financial, a UK broker of bridging loans and development finance with more than twenty years in the specialist finance market, has today set out its view on how lenders underwrite residential schemes built using modular and other offsite construction methods. Tiger Financial explains why more small and medium-sized developers are looking at factory-built delivery. It expects lenders to test three areas when these schemes come forward for funding: the build-cost case, factory and supply-chain exposure, and the saleability of the completed units.
Why developers are changing the delivery model
Tiger Financial notes that residential development has traditionally followed a cost model that splits a scheme’s value between land, build and profit. Under that model, a main contractor delivers the works for a margin on cost. Input costs have risen, land values have been slow to correct and planning timelines remain long. In Tiger Financial’s view, these pressures have compressed the margin many schemes can generate under the traditional model, and this has changed how lenders assess development finance applications.
Tiger Financial has seen two developer responses. The first is vertical integration. Developers take more of the build process in-house, sometimes including component manufacture, and act as contractor-developer instead of subcontracting each package. The second is the landowner joint venture. The landowner takes a share of profit in place of a full land payment on day one. Tiger Financial regards offsite construction as an extension of the same logic, reducing build cost and programme length. Offsite construction means producing the core elements of a home in a factory, up to fully volumetric modules, and assembling them on site.
“A move to offsite construction alters what a lender has to test, particularly on build cost, factory output and completion risk,” said Matthew Dailly, Managing Director of Tiger Financial. “Our objective is to lay those points out clearly for the developers and lenders evaluating this delivery route.”
Three areas lenders are testing
1. The build-cost case where the developer delivers the works itself
The first area concerns build cost on schemes with no main contractor. Self-delivery takes the contractor’s margin out of the developer’s budget. Tiger Financial points out, however, that a lender has to consider a different scenario. If the lender enforces its security, it would complete the scheme with a replacement contractor, because the developer’s own workforce would not be available. For this reason, lenders typically test build costs against BCIS build cost averages rather than the developer’s own figure, and the two numbers can diverge.
Tiger Financial highlights the gap between a developer’s projected construction costs and the higher contingency or replacement costs a lender may apply in underwriting. Tiger Financial’s development finance calculator is one tool used to model both figures before an application is submitted.
2. Factory output and supply-chain exposure
The second area is the release of funds. Modules are built off site, so a lender may be asked to advance money to a manufacturer before any physical work exists on the ground. Tiger Financial notes that this inverts the normal sequence of development finance, where drawdowns follow work in place that a monitoring surveyor has certified. Lenders operating in this space control the risk by setting out whom they will pay and when. Typical conditions include requiring UK manufacture and assembly where advance payments are made, taking security over works held in the factory, and linking each release to a verifiable milestone.
Tiger Financial also emphasises the manufacturer’s resilience as a counterparty. Several UK volumetric manufacturers have closed in recent years. Tiger Financial observes that underwriting now places significant weight on three things: the manufacturer’s delivery record, the availability of a parent-company guarantee, and a balance sheet showing sustained profitability. An agreed alternative construction method, to be used if the factory route stalls, is a common condition of finance.
“On a modular scheme, the factory is underwritten as closely as the site,” Mr Dailly said. “Lenders now scrutinise a manufacturer’s accounts and accreditations as closely as the developer’s, and they expect to see an agreed fallback in place.”
3. Saleability and mortgageability of the completed homes
The third area is the exit. Tiger Financial states that a modular home works as security for developer and lender only if buyers can mortgage and insure it on standard terms. The following factors can therefore influence a lender’s assessment of a modular scheme:
- accreditation
- build warranties
- insurance
- mortgageability
- confirmation that a valuer will not mark down the scheme’s marketability because of how it was built
Outlook
Tiger Financial expects lenders to see more modular and offsite proposals as developers test alternative delivery models. It notes that short-term, fast approval bridging finance is sometimes used to secure a site or a joint venture before a development facility is put in place. Tiger Financial has set out these considerations for developers, lenders and intermediaries – with further insight into this available on request.
About Tiger Financial
Tiger Financial is a leading UK broker of bridging loans and development finance, arranging short-term bridging and development finance facilities for property developers and investors.
