Housing associations are embracing modern methods of construction – but what are the main considerations for housing associations?

Andrew Dudley, 19 August 2020

The government is keen to promote modern methods of construction as the answer to the housing crisis, and Homes England is encouraging housing associations to get involved – and they are. 

Homes England has invested in Ilke Homes, one of the leading modern methods of construction (MMC) developers, and Stonewater has just announced that it is signed up to a 120-unit scheme with Ilke and other housing associations are also getting involved.

The government has also appointed Mark Farmer of Cast Consultancy as its independent champion of MMC and as the word ‘champion’ suggests, it is keen to push this approach forward as key in increasing the delivery of new homes. 

The chances are that the approach of MMC will ease the potential supply chain and labour shortages that might arise as a result of Brexit, coronavirus and potential major infrastructure projects.

And it certainly looks as though MMC will have a significant role to play in providing housing across the UK. However, it is still relatively new in this country, and it is bound to take a while for everyone to get used to the approach and work through and analyse the risks potentially involved. 

In my experience, MMC developers are by their very nature, people who want to move quickly (much like their product), and are driven and focused. They see modern methods of construction as similar to building a car and not a house. 

Many housing associations are ambitious in terms of building new homes. While some are already embracing MMC, others may need some time to work through the novel ways of approaching the project and analyse the risk-benefit factors. 

Therefore, I have outlined below some useful pointers to consider for housing associations thinking about embarking on a first MMC project:

1. Funding

MMC developers seem keen to receive significant funds from the housing association upfront to enable them to order the goods to construct the units. This means you are, in effect, relying only on their contractual commitment to build them, and you may have concerns about their covenant strength. Please be aware – you could lose it all if they go bust.

While the developers will no doubt push and encourage you to ‘share the risk’, I advise that you resist. A number have now moved and are prepared to work within a housing association-type of funding model. Alternatively there may be some scope for parental guarantees, bank bonds, performance bonds or perhaps some government guarantee or support. Another option available to you would be pressing for a land and build package where you own the land at golden brick or PC.

Golden brick

If you have a land and build package, it is potentially cost-effective to use golden brick to reduce the VAT liability. However, this needs to be looked at on a project by project basis – for example, just laying the foundation slabs would not be enough because MMC is so vastly different from traditional construction that you would need an entirely different benchmark.

To be valid, there needs to be a structure that is clearly going to be a dwelling, so things like working services would be advantageous. We advise our clients to put the particular facts of their case to HMRC, which can be signed off for the individual project.  

2. Quality control

It's crucial to ensure that you can have the right to inspect the units as they are being constructed in the factory. You want to ensure that you can recheck the quality of the units when they arrive on-site to make sure they have not been damaged in transit.  

3. Cash flow

Understandably, the developer will want to be paid quickly but bear in mind that they can churn out buildings quickly which may affect your cash flow. You must think through the cashflow and agree specific payment terms in the contract to protect yourself from any issues. 

4. Guarantees

The National House Builders Council is giving guarantees on the MMC of buildings, but strictly only on a specification basis, so you need to ensure that the particular specification agreed complies with their requirements. It is also worth noting they have not yet signed off on flats. 

5. Valuations

Residential development using MMC at this scale is new to the UK and this has raised some issues in terms of valuation and long-term maintenance which lenders are reticent about. There is a working party (valuers, lenders, manufacturers, the NHF, MHCLG and Homes England) looking into it and no doubt it will be resolved but this is still in progress, and this might at the moment cause some uncertainty.

Modern methods of construction projects are an inspiring solution to the housing crisis. In my view, for them to be successful for housing associations, you need to work out your strategy and appetite for risk before engaging with a contractor and be honest about what you will or will not accept from day one.  

Once you give the green light, you will be on a very fast-moving roller coaster, which of course is what it is all about.