Can banks ‘bank on’ the prefab industry?
This week in our Prefab series we look at one of the industry’s most challenging hurdles – availability of lending to home buyers for the purchase of pre-fabricated houses.
Builders and home buyers need access to finance, but the proposition is not attractive to either party. The risks:
- Builders: It costs a lot to start the business and builders don’t know who their buyers will be – i.e. uncertain or uneven demand, and capital intensive fixed cost; and
- Buyers: Buyers have to pay the builder, but if the builder goes under, buyers are left with little security – i.e. high risk/low value security.
The result is a higher risk proposition and competing security requirements.
On the one hand, this is a commercial issue – any risk can be priced. But, if the prefab industry requires a certain level of critical mass to offer the time, cost and quality improvement that some predict, is it really an answer to leave financing to the margins of the finance sector, or purchasing to only those buyers that don’t need to spread the cost of their purchase across time?
Can the law help?
Offsite manufacturing, of which prefab homes are a subset, is not a novel concept to construction and banking lawyers. The issue of competing security interests over building components manufactured offsite can be addressed with specific contractual clauses and by using the mechanisms codified in the Personal Property Securities Act 1999 (PPSA). For example, the use of a purchase money security interest or PMSI when a factory is pre-fabricating joinery or framing.
But those mechanisms won’t solve the presence of competing security interests in large-scale prefab manufacturing. The lender to a builder will want security over the homes, and so will the lender to the buyer.
Move in the Right Direction
Banks are aware of the financing hurdle faced by prefab consumers and several are working to find effective solutions to overcome it.
One option is in the form of direct agreement, where the bank finances the builder (and the homebuyer). Direct agreements are a long standing option in building development, where the finance company has the power to fund the builder direct, and finish the project if the developer goes under. Applied to prefab construction, the finance company can own and complete the prefab home in-factory, if the builder goes under.
Arrangements for funding prefabs will evolve, if the market matures and the risks level out. The prefab residential lending market may become more accustomed to the lending models familiar to those in project financing.
An alternative future? Prefab homes, financed and manufactured at scale, offshore – and imported, like automobiles.
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