Cracking the Modern Methods of Construction conundrum
|THIS MONTH’S WISE OWL|
|Mark Farmer authored the Farmer Review, an influential 2016 independent government review of the UK’s construction labour model entitled ‘Modernise or Die’. He is a member of the Construction Innovation Hub Industry Board, the Construction Leadership Council Advisory Group and chairs the MHCLG joint industry working group tasked with enabling greater use of Modern Methods of Construction in the residential sector.|
At the beginning of 2018, I agreed terms of reference with the then Housing Minister, Alok Sharma, to chair a cross industry working group that was tasked with delivering on a commitment made in the Housing White Paper to help build confidence in the use of Modern Methods of Construction (MMC) across industry, specifically amongst mortgage lenders, insurers and valuers – UK Finance, the Association of British Insurers (ABI) and the RICS. It is also well understood, by government and myself, that progress here is likely to also benefit the development and asset investment finance communities.
Recent strategic announcements related to modular housing by the likes of Top Hat/Goldman Sachs, Urban Splash/Sekisui House, Places for People/Ilke Homes and Homes England all show that we appear to be entering an unprecedented period of homebuilding modernisation and manufacturing investment, spurred on by increasing failure in traditional delivery. The recent publication by the Commons Select Committee of their inquiry report into MMC has only further raised the prospect of long term change, showing clear cross party agreement that we need to start changing the way we build – and quickly!
However, it is also clear that many still see risk in change itself. One of the areas of concern has been a sense that different warranty providers / assurers have been asking for different things from manufacturers and there is confusion as to what is right or wrong and what true implications are for longevity and repairability. Good, collaborative progress has been made in this highly complex area and I am hoping to report separately on our outputs later this year.
In early April 2019, the government published the first formal output from the working group which is the new Modern Methods of Construction Definition Framework.
What many lenders may not realise is that the majority of their schemes probably already have at least one of the 7 categories of MMC being used! Their focus tends to be solely on Category 1 and 2, ‘modular’ or ‘flat pack’ building systems.
The RICS have also just confirmed, as part of the working group’s activities, that they will be incorporating improved guidance on MMC as part of its new valuation practice notes and its new Homes Survey Standard.
A clear concern I hear from development (as opposed to domestic mortgage) financiers is that of how to securitise lending when more of a building is being manufactured ahead of delivery to site. How do you get comfortable with advance payments? How do you guard against manufacturer insolvency that leaves an incomplete project with a unique building system? Many of these issues are capable of being overcome with appropriate supply chain due diligence, design interoperability and more innovative contract drafting. All too often though, it’s a case sometimes driven, I have to say, by the lender or their advisor, of ‘let’s just do what we’ve always done before’. I’m afraid that’s going to have to change if we are to have a sustainable construction sector going forward.
The increasing risk of traditional contractor supply chain insolvencies under what are supposed to be ‘risk transfer’ lump sum contract arrangements only reinforce the fact that traditional delivery can now be more of a risk than innovating a different approach using MMC. Much more intelligent developer led proposals and funder led diligence and monitoring is going to be needed though to unlock the potential of MMC.