Home buyers in Australia and New Zealand who are looking at prefab as one solution to the lack of quality affordable homes are finding the road to finance is not always straightforward.
In New Zealand director of preconstruction consultancy Entwine and PrefabNZ board member Leah Singer is co-leading the organisation’s research and advocacy efforts to resolve the barriers potential buyers face to obtain finance.
Due diligence and meeting with the different NZ banks to understand their policies has found no existing standardised approach in lending for a home constructed off-site.
“It depends on the company, the bank and the borrower,” Singer says.
One thing banks hold in common is the need to be able to value the end product when deciding to approve a loan application from a buyer, Singer says. They also need certainty that they will be in a position to secure the asset and on-sell it should the mortgagee default. And that’s not the case with a house that is part way through construction in a factory. In Australia, the picture is mixed for prefab purchasers. A spokesman for ME Bank told The Fifth Estate that the purchase of prefabricated homes is “outside ME’s risk appetite”.
“Prefabrication is a niche market and thus presents resale risks,” he said. “All other lenders would also need to take this risk into consideration.”
Mortgage broker Nicholas Chester from Ethical Homeloans says a lot of banks won’t fund a mortgage for a prefab home because there is nothing on site. The banks would be giving out money before there is something on the ground, where the prefabricator has a six stage progress payment structure. This is common with many prefab firms.
Chester says there is also a question for the banks as to their right to seize a prefab home from the builder’s yard if the loan defaults.
Deborah Richards, a mortgage broker with Inline Home Loans, says to obtain finance, a purchaser would have a few ways to proceed.
They could engage a registered builder, or go to a firm that is a registered builder as well as a prefabricator. Having a registered builder overseeing the project can make a lender more amenable.
They could become an owner builder and obtain a construction loan, and use a prefab firm to deliver the house.
“That is not an easy road,” she says.
Essentially, in the eyes of a bank, a prefab house is “just materials”, Richards says.
“It is not a house until it is finished.”
Finished means all the services are connected, the access to the property sorted out and all council approvals completed.
“What banks will accept as security is a finished house,” Richards says.
“The structure is only about 35 to 50 per cent of the [actual] cost.”
Additional costs buyers may have with some prefab suppliers include transport to site – which can amount to many thousands of dollars, craneage, the site works and services installation. Not every prefab firm includes these in the price of the home.
The litmus test for a prefab proposition in the eyes of banks, Richards says, is whether the end result can be sold on the open market.
Not everyone has problems
Western Australian building firm Gran Designs delivers prefab, modular and hybrid commercial and residential buildings across the state.
Sales and design consultant for the firm, Aaron McNamara, says it has not found that potential buyers are struggling to find finance.
CommBank, he says, is the number one financier in the state for its customers.
McNamara says the willingness of banks to provide finance for projects also comes down to the builder and its payment terms.
In the case of his company, progress payments are only due when the building has arrived onsite.
Strongbuild director Adam Strong says his firm’s clients have also not encountered difficulties with finance.
“Banks would have concerns if the manufacturer is asking for payment before anything comes to site,” Strong says.
“If we ask for upfront payment, we support it with some kind of security such as a performance bond.”
The other reassurance for the banks is the company’s long track record and the detailed level of the plans clients have to show when they ask for finance.
It’s a global trend
The use of prefab to address housing affordability and quality is a global trend, and it has also proved a good model for infill projects in urban areas, as it is less disruptive.
PrefabNZ’s Leah Singer says there is precedence internationally for governments to step in to smooth the finance pathway. The UK government, for example, has just announced measures as part of the “Fixing our broken housing market” white paper released this week.
It promised to support a joint working group with lenders and valuers to ensure mortgages are just as available for prefabricated homes as conventionally built dwellings.
In New Zealand
Part of the issue in NZ is that the prefab industry is still in its early stages. Smaller players in the sector do not have the capital or revenue base to self-finance the build of prefabricated dwellings.
This is why many companies require staged payments for each part of the prefab construction process.
Singer says that this is different to the usual way a consumer purchases a manufactured product, where they pay for the finished item, like a phone, not each of the parts in stages.
Another variable is whether the dwelling is a mass-produced design, or a bespoke design. Where someone is buying off-the-plan – whether it is prefab or a traditional on-site build – the costs are known from the builder’s perspective.
“There is always a question of time and also risk with anything bespoke” Singer says.
Hybrid approaches, where the company builds prefabricated elements and then assembles on site may have an advantage compared to fully modular construction in terms of the financing perspective, if the buyer is paying the majority of the cost on completion.
“There could also be an advantage with logistics and dealing with site conditions with hybrid approaches,” Singer says.
“Hybrid often works better for difficult sites where you can’t get house-moving trucks or large cranes in.”
From a finance perspective, the hybrid approach is essentially no different to buying land and building a conventional home, Singer says.
Insurance is another aspect. The organisation is looking at working with the insurance sector to see if it is possible to develop a form of built-in insurance for prefab companies.
Singer says the banks in general don’t seem to be familiar with the processes around a prefabricated build, which may be because not enough people are asking for mortgages to purchase prefabricated homes.
“It’s a bit of a chicken and egg situation. What comes first, the banks change their policy, or more people start asking them for finance?
“Maybe the banks need a minimum number of people asking.”
There is also the question of possible government intervention to smooth the way and reduce risk.
“Should it provide grants or insurance to enable companies to bankroll the pre-fabricated build until it reaches site?” Singer says.
There would be a benefit for the government, she says, in having an improved corporate social responsibility approach in terms of affordable, sustainable housing.
For the prefab industry, the need is for a solution that will allow it to achieve volumes and the subsequent economies of scale. Currently it is competing with conventional builders that are generally small companies with low overheads.
Singer says “everyone will benefit” if the right solution is found – the banks will profit from lending to buyers of prefab homes, the prefab companies will grow and NZ’s current lack of quality housing can be addressed.
However, many local authorities in NZ have not yet built up their own internal IP around the prefab approach.
“It needs a few successful projects.
“Until it is mainstream, local authorities will have a degree of fear.”