The tide is changing around finance directors’ perception of MMC

Many people believe the risk profile for offsite construction is too high for it to ever become mainstream in social housing.

Problems around manufacturer stability, payment structures, quality assurance, mortgageability and lender confidence have all dogged the image of factory-built homes. As a result it’s assumed that modern methods of construction are still filed under ‘R&D’ in the minds of social housing finance directors.

But the tide is changing. A few months ago I was involved in a workshop with nine FDs from different housing associations and local authorities. Sitting around our virtual table, they told me that the risks around modular homes are now no greater than those associated with traditional construction.

Take mortgageability for example. In the past, it’s been difficult to secure a mortgage on a home manufactured in a factory, mainly due to the lack of long-term data on durability. This means that housing providers selling modular properties for shared ownership or to the private market are often limited to cash buyers, narrowing both their customer-base and asking price.

More recently though, this risk has reduced as several MMC inspection and accreditation schemes have launched, all rigorously testing whether or not a manufacturer’s products meet certain building standards. Offsite components that pass these audits will be assured for a significant 60 – 100 years and can then be used in homes covered by standard building warranties.

This quality assurance and certification process is giving reassurance, not just to mortgage companies but also to investors, some of whom were previously put off by what they saw as an unfamiliar, nascent marketplace.

I’ve heard stories of lenders only securing up to 10% of a housing association’s portfolio and of providers struggling to achieve market value – subject to tenancy (MV-STT) valuations against MMC homes. But with new assessment and warranty products dedicated to the offsite market, confidence amongst lenders is growing. Indeed, five out of the 16 high street lenders to the social housing market have now developed specific MMC investment policies.

Another reason for this sea change is increased security and certainty around payment terms. Paying for offsite has always been different to bricks and mortar where finance and development directors can see, right away, what they are getting for their money. MMC homes are produced on factory assembly lines and there’s a perceived risk in handing over 50% of a build price without viewing any progress. What if a manufacturer goes bust during production? Will half-built modular homes be liquidated?

Staged payments and vesting certificates have provided reassurance in this area. The former strikes a balance for all parties: supporting manufacturers’ cash flow whilst giving housing providers confidence they are getting something at each phase of the project. The latter gives evidence that ownership of products will pass to the housing organisation that has procured them, even if homes have not yet been delivered to site.

For the past 18 months, I’ve been involved in an alliance of 29 housing associations and local authorities, supported by the National Housing Federation, that is trying to increase the use of MMC in social housing. We’ve spent a lot of time with finance directors – and their asset management and development colleagues – asking about concerns around factory-built homes and what they see as the biggest barriers.

These insights informed the tender process for Building Better’s first framework which launched in July. We developed a checklist of red lines around product quality and mortgageability, space standards, fire safety, thermal performance, accessibility and gas usage. Any manufacturers who didn’t conform, couldn’t bid.

Running these minimum requirements through the backbone of the framework was a significant step but we were also conscious of another risk that finance directors spoke of. The complexity and price uncertainty of procuring offsite homes from a long list of manufacturers put many people off.

Direct award is one way to address this. By evaluating the MMC sector, narrowing the field and signing up a smaller selection of manufacturers, with prices already in place, much of the due diligence, commercial negotiation and other heavy lifting can be done up front.

This framework approach gives housing providers a speedy route to a readymade marketplace, without the need to go through any additional competitive process. Direct award also enables housing associations and councils to start conversations early with suppliers, building the understanding and trust that is so key to making offsite work.

Ultimately, housing providers need to take a well-considered leap of faith with MMC. Rigorous procurement can manage out much of the risk but it’s the practical application of building homes in factories, at scale, that will prove the benefits and dispel the myths.

By Jake Snell strategic asset and land manager at Abri and part of the core team at Building Better

This article was first published in Social Housing on 12 August 2021

Membership of Building Better is open to any housing association or local authority housing provider in England and Wales.