Elephants in the room.
What you need to know about warranties.
On to one of my favourite subjects again – will try not to be too sarcastic.
This is something really crucial again in that set shift that we have where we are looking to become a long-term asset owner, especially in residential. That’s harder still on this kind of scale, so what kind of warranty protection should we, as an investor and developer, be thinking about?
We’re seeing a combination of both new homes warranty protection and also collateral warranties.
Whereas new homes warranty protection is insurance-backed, you don’t have to show that somebody has done something wrong – with collateral warranties, you have to actually show that a contractor has done something wrong – you have to maybe take them to court before he pays out.
With new homes warranty protection, particularly with some of the new providers in the market, which provide a much more tailored solution to build to rent products. We’re finding that developers and investors are really attaching to those products. They are a lot more flexible – they cover buildings and not just individual units, but the building as a whole.
Collateral warranties also provide good protection for investors for the future. Not only does it help that a contractor is sitting behind his product, so if there are defects in the building, we can go back to the person that built the building and ask them to repair it, but also in relation to other things that it covers, that new homes protection doesn’t cover, is things like consequential losses. Generally, new homes protection will cover repairing the damage caused in the building. You can buy add-ons which cover other consequential losses, but generally a collateral warranty package won’t have excluded that and you can pursue contractors for consequential losses as well.
So we talked about track record quite a bit. We are in an era where the kind of the main contractor model is under a lot of pressure and track record has not always been enough to secure kind of a lot of schemes. Can you talk a bit about where you see that going?
We are seeing a lot of people looking at not just a name for construction – they are looking behind the delivery of the supply chain, so it’s no longer people looking at just the first tier of contractor – they are looking at how that contractor is going to deliver.
From the supplier of all its cladding to the supplier of its kitchen equipment – all of it’s important to make sure you’ve got a full visibility in relation to the supply chain. You know, some of these insolvencies aren’t necessarily expected, they just happen very suddenly and with the best will in the world, people can’t always counter that by doing financial due diligence, so we are seeing a lot of people trying to protect themselves with, for example, bonds – providing bonds to secure against, which allows you to claim a pot of money, so it needs to cover the additional cost in construction. It’s not a total solution because it doesn’t deal with the time consequences of the delay, but there are aspects of it which does protect - provide an increased level of protection for a developer. And also doing your due diligence – you know, doing the monitoring, making sure you follow all these procedures and don’t cut cost at that element because it’s just as important as checking on the delivery side.
Watch the latest instalment of our ‘elephant in the Build to Rent room’ interview with Alex Notay, Build to Rent Fund Director, PfP Capital, on construction and stock.
In this 3 minute video, Alex and Nazir Dewji, BCLP’s Head of UK Real Estate discuss how investors and developers can protect themselves as they capitalise on Build to Rent opportunity.
Key market insights include: