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Topical considerations for lenders: A construction perspective?

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By Hannah Day

2 Mar 2022 | 3 minute read

As has always been the case, lenders have a significant role in setting market trends. In light of this as well as noting that the pandemic has been the focus of a number of business initiatives and market trends over the past two years, there are a number of other items gaining traction. We've highlighted those that we consider lenders should be aware of from a construction perspective and/or those considerations which are likely to shape industry behaviours (including that of lenders) over the coming months.

Net Zero

Following on from COP26 towards the end of 2021, it is clear that there is a great focus from stakeholders in the construction industry on how the industry can work towards to reducing its carbon output. This follows on from reports, such as the Construction Leadership Council’s “Good progress but not fast enough”, which have sought to establish where the industry is in achieving targets to reduce carbon emissions and to address the hurdles which the industry continues to face.

Although it may feel like ‘Net Zero’ has become somewhat of a buzzword for 2022, lenders will want to consider how they want to approach this, not only from their own perspective as a business but also what they would also require from their customers and subsequently, their customers’ development supply chain.

Lenders should also be aware of changes coming into play which seek to address the reduction in carbon and will have an impact on the building industry. For example, the changes to the Building Regulations are set to come in from June 2022, which are intended to help reduce the emissions from new build homes by nearly a third. As a result, lenders, particularly those whose customers are developing predominantly residential builds, will want their technical teams / project monitors to be aware of these changes when considering any proposals produced by customers’ development teams.

Further, lenders may want to consider where they have specific requirements which they will want to pass down to their customer. For example, along with their standard construction requirements, is there an opportunity for lenders to incorporate substantial initiatives into their lending and or the developments they procure an interest in. Lenders may also want to give some thought to those projects which are likely to be favourable in the long term for reasons of being Net Zero. In addition, what is the risk to the lenders interest if they are tied to projects which are not favourable, due to either their lack of Net Zero credentials or their failure to achieve such credentials.

Alternative forms of construction

Along with Net Zero, as we move into 2022 there will still be a continued effort by the construction industry to try and use modern methods of construction (MMC) including modular and off-site construction methods (such as precast concrete or the use of steel frames). The use of MMC is one of the key points promoted in the UK Government's Construction Playbook. As part of the Playbook, the UK Government predicts that using MMC will promote both productivity and efficiency.

However, due to some of these methods still being considered as in their infancy, it is sometimes viewed by parties using (or trying to use) these methods that they face a real struggle to get buy in from stakeholders, such as lenders. This may not be surprising given that some of the methods are relatively new (or potentially unknown) to lenders and lenders must ensure that their interest is not going to suffer due to the method / materials used. However, given that it has been nearly two years since four of the UK's home warranty providers signed up to a memorandum of understanding to introduce a standardised approach for assessing MMC, this hopefully provides reassurance to lenders where previously there was perhaps understandable caution.

Safety Features (Cladding / Fire Safety)

This will continue to be a subject of note in the construction industry for 2022 and which will be a point of concern for lenders.

At the beginning of January 2022, the Housing Secretary set out the Government’s plans on how building safety was going to be addressed whilst also warning developers they would be expected to take steps to address the issues arising from the post-Grenfell cladding crisis (and to remove the burden on leaseholders).

What this could actually mean for lenders is still not quite clear. For example, the need for EWS1 forms have been questioned in light of the Government’s comments in which they insisted, they wanted to seek to “restore common sense to the market”[1]. As part of this restoration there is an indication they may look to move away from the need for such surveys and lenders were “encouraged to continue to minimise their usage in medium and lower rise blocks”[2]. This approach from the Government may have an impact on lenders’ approach to dealing with developments with cladding but given there are still a lot of unanswered questions, we may not see the impact of this until later in 2022. The impact may also be dependent on the progress of the Building Safety Bill which is still subject to change following the Government announcement that they were submitting a number of amendments to the Bill in February 2022.

[1] Government sets out new plan to protect leaseholders and make industry pay for the cladding crisis – GOV.UK (www.gov.uk)

[2] Ibid.

Insolvency of Parties

Although this may not be seen as a new theme for 2022, we are still seeing the impact of the COVID-19 pandemic on the construction industry and this (alongside other factors including labour and material shortages) is leading to contractors entering into insolvency proceedings.

As we continue through 2022, it is likely that we will see more insolvencies and, with that in mind, lenders will need to ensure that they keep them themselves fully informed of the procurement route which their customer has chosen (whether this is a traditional Design & Build route or whether the customer has chosen an alternative such as a traditional procurement model or construction management approach) and ensure that they are afforded the necessary protections in the event of a contractor entering into an insolvency process (i.e. what form of security is the lender being given, does this include a full package of collateral warranties from the respective consultants / sub contractors working on the development).

Conclusion

With the last two years having been a real period of change for everyone, as we move further into 2022, lenders will want to ensure that they are continually assessing how they are dealing with just some of the items listed above.

This could include lenders evaluating their approach to the use of MMC and how they can work with customers on these projects. Further, where lenders may have started looking at the impact of Net Zero within their own business, have they considered what they are looking for from their customers from a development perspective. If so, how can they implement such practices and will this mean lenders' views on certain assets change (particularly if their interest is in assets which do not promote green initiatives, will these become less attractive to buyers / purchasers / tenants and could this have a negative impact on their return).

Finally, with the impact of COVID 19 seemingly still playing out, are lenders carefully considering how they are protected in the event of a contractor becoming insolvent on their customers developments.

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