Prefab housing could help to solve Australia's housing crisis, but before that can be done, the funding model needs to change.
Both Google and Facebook are turning to this as an economically viable alternative in their efforts to assist their workforce with its housing needs.
The production line process has efficiencies over in situ construction for a number of obvious reasons.
For standard modules, the CAD – CAM control minimises waste and reduces production time. The dimensional control is highly prescribed and the unit can be produced without interruption due to inclement weather.
The end (and most desirable) outcome for this is that cost is reduced and quality can be assured at a greater degree of certainty than in situ build, which, all other things being equal translates to competitive advantage.
There are, however, some issues to overcome for any party seeking to procure such units. Before borrowing money for such builds, the current banking and private equity (PE) finance houses’ current approach to funding needs to be examined
Since the introduction of the NZ Reserve Bank rules in mid-2016, where the Auckland Loan to value ratio (LVR) has now been imposed on the rest of NZ, securing funding for projects has become significantly more difficult.
A 60 per cent LVR with the concomitant imposition that any new lending requires existing borrowing to meet that parameter makes funding projects a possibility only for those with substantial cash or equity. With the PE houses willing to relax those parameters to a degree, the flight for capital toward them means they can afford to cherry pick the best deals…and they do!
No housing development scheme – unless it’s cash-funded – can now proceed without at least pre-sales equal to the value of the debt. I have come across requirements for all of the units to be pre-sold off plan or 150 per cent debt coverage sought, for the deposits to be a minimum 10 per cent with wholly unconditional sales, and no single purchaser to buy more than one unit.
There is a belief that the acceptance of the product in the marketplace of the product is measured by the ability to achieve pre-sales, a notion that seems somewhat blinkered. Not everyone buys off plan. It is a prospective reality that many cannot picture nor wish to embrace. It is not necessarily reflective of the product.
To insist, then, on sometimes 100 per cent of stock being pre-sold and downgrading the scheme because that can’t happen is not understanding the reality of the housing market.
Loan to value loans are now almost non-existent despite what many say; most loans are geared to around 70 per cent of cost. To build and hold for investment purposes on an interest-only loan is now no longer a viable option; lenders are looking for loans to be on a P&I basis, which don’t stack up in the face of yields which are unlikely to exceed five per cent. This is just another barrier preventing much needed stock from reaching the market place.
As ever, developers taking on debt as limited companies will not get the benefit of limited liability protection as they will be required to provide personal guarantees so the risk-reward ratio is skewed and wafer thin margins are no longer viable.
Couple that with valuers’ typically pessimistic assessments of resales/value which become a self-fulfilling prophecy, securing project funding has become a major hurdle, even when armed with substantial equity.
It is wholly ludicrous that these circumstances are allowed to prevail in a country that has a fully acknowledged (across all political parties) housing crisis. The government has created this regime and all it does it is make its biggest problem worse and then sits idly by and allows it to continue.
So we have the funding hurdle to overcome. Once that is done, work progresses on site by virtue of basic contract and property law: what is constructed passes into the ownership of the party that pays for it.
That however, is not the case for a typical prefabrication procurement.
I’ve yet to meet a supplier who won’t insist upon almost 100 per cent of payment on completion of the module before it leaves the factory. Should that company fold, a party will be left in a position where it has paid out almost all of the value of the asset but has nothing tangible owned.
There is a of course a contractual right to the assets paid for, but should the company become bankrupt or enter receivership, those assets are up for grabs by all creditors. There are some protective measures that can be taken but there no guarantees of ever recovering what has been paid for in such circumstance.
Not unreasonably, funders are concerned and are now seeking to view companies’ balance sheets, which for private entities is not a wholly palatable scenario.
Prudent banks will be opting for the same degree of scrutiny and assurance, whether it’s a multi-unit project or a mortgage for a family home. If suppliers of modular housing wish to grow their business, they may need to consider reviewing their payment processes.
Following discussions with funders, a retention of circa 20 per cent until delivery, or ex-factory gate, would be something they may see as an acceptable mitigation.
This leaves the supplier with 80 per cent of its income secured; the purchaser owns 80 per cent of the asset and the 20 per cent is in transit with the whole covered by insurance until affixed to the site.
This may seem improbable, but once one supplier accepts this, others will follow and banks and other funders will be more willing to loosen their purse strings.
The final outcome will be that in order to compete, traditional contractors will have to cut costs to complete with the modular suppliers, that or lose business.
As ever when there is real competition in the market place, the consumer gets the benefit, but there are a few hurdles to get over before that comes to pass.