Game of Loans: The changing face of construction - what does this mean for lenders?
One of the main skill sets for development funders today should be an ability to understand various construction methods. Whether it's a traditional brick and block structure, SIPS or a pre-fabricated Huf Haus it's vital for a lender to understand the nuances behind each type of building process. For some reason, in this country we seem very stuck in our ways and averse to modern building techniques. Some of these are much embraced and considered the norm in mainland Europe and beyond. At Regentsmead a lot of our more "old school" clients swear by traditional construction methods. But if we are going to get close to meeting the huge demand for new homes in this country, we are going to need several prongs to our approach.
Brick and block
I was recently given an in-depth lecture by a long-standing Regentsmead client who told me why he wouldn't touch timber frame construction with a barge pole. It started with the well-known parable about the man who built his house on sand and was somehow linked back to the effect of weather on timber frame products. I may have briefly switched-off mid lecture, but his point was extremely valid. When borrowing funds for a development project, he would rather have an even spread of funds across his agreed draw-down stages so that he wouldn’t pay for a large amount of the loan to be on site from the first few months. Traditional construction has many benefits; bricks are a great load bearing material, better for sound proofing, fire resistant and can stand the test of time. My developer client also pointed out that other construction methods were "taking the skill out of construction" - but that’s a whole different debate.
Timber frame is another very popular method of construction and is more common outside the UK. However, during the last 10 years there seems to be more and more timber frame providers operating in the UK. That’s because it’s extremely quick to put up which reduces labour costs for the developer and allows the trades to get on site quickly too. A timber frame for a medium-sized, semi-detached house can easily be put up within a week compared with several weeks using bricks. This is obviously pertinent to those who are using development finance and are looking to build and sell or refinance as quickly as possible. Timber frame construction is well recognised by warranty providers too, so it shouldn’t cause any issues with getting a mortgage. On the other hand, timber frames are susceptible to defects and can also fall foul to the weather, especially if the timber is exposed to moisture for too long. It also doesn’t sit too well with the good folks that assist with fire prevention as timber is a combustible material.
It's essential that lenders understand how a timber frame build works. It’s likely that the costs will be more front loaded for the developer, so a good development lender should be able to work to tranches that can accommodate this. Likewise, even on a traditional build, sometimes the usual building stages need to be flexible in order to accommodate any unexpected changes to the build programme or costs.
Construction methods are rapidly improving to become quicker and more efficient, so it's extremely important for lenders to keep up with the times and help reduce the lack of housing stock in the UK. I find that the smaller developers funded by Regentsmead take genuine pride in what they build and the end product they produce - a sentiment echoed in our approach to funding their projects.