Insurance spotlight: Combating contractor insolvency and protecting rental income

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Insurance spotlight: Combating contractor insolvency and protecting rental income

Get Indicative Cost

While the Build-to-Rent (BTR) sector has garnered attention, the purpose-built student accommodation (PBSA) market also stands out as a resilient performer. With student numbers reaching record highs and a persistent demand for beds, the sector anticipates robust rental growth in the short and mid-term.

At J3, the significance of PBSA and its latent defects insurance has evolved from being a “nice to have” to an essential component, as demonstrated by recent industry shifts.  Between January 2023 and August, 4,263 construction firms in the UK ceased operations, marking an 8.3% rise from the previous year and a 34.5% surge from the pre-pandemic period in January 2020. This trend indicates an ongoing challenge for the industry.

In the context of PBSA, developers have traditionally relied on collateral warranties in the event of post-completion claims. However, with contractors no longer available to address issues, this approach poses a risk to the income outlook for asset owners and operators.

In response, we’ve witnessed a triple-digit surge in both enquiries and policies incepted over the past 18 months. Developers are now seeking to safeguard their income streams and enhance the marketability of their assets for potential investors or pension funds. Notably, a key feature appreciated by our clients is the loss of rent coverage, providing income protection for up to three years from practical completion.

For PBSA developers, the key takeaway is clear: investing in latent defects insurance is increasingly becoming standard practice to safeguard and enable future developments.

What makes this policy even more appealing to owners and investors is the inclusion of loss of rent in the event of a latent defect. It’s a compelling narrative to convey that rental income is safeguarded as part of this policy, providing investors with great comfort in knowing that their future revenue is secure. It’s important to emphasise that access to loss of rent coverage is exclusively available through the latent defects policy.

PBSA Developers should seek guidance from experienced insurance advisors to customise coverage according to the unique requirements of their project. If you’re interested in a complimentary, no-obligation review of your insurance program, get in touch with J3 Advisory on 020 3096 0718

 

Get an indication.

Have questions? Call 020 3096 0718

50
£8,000,000
£20,000,000
* This calculation is to be used for indicative quote purposes ONLY and underwriters reserve their rights to amend the Premiums, Terms and Conditions

Frequently Asked Questions

What factors impact the cost of a building warranty?

There are five main elements that will affect the cost of your warranty:

  • Professional teams experience:  Demonstration that the developer, contractor and sub-contractors have carried out similar sized projects and has a clean claims history.
  • The stage of the works:  Developers will always find it most cost effective by arranging the warranty before the works commence.
  • Developers financial standing: The stronger a developers financial footprint the more favourable terms an underwriter will offer.
  • The size, cost and location of your developments.
  • A developers rating with other insurance providers (if available).

What are the key considerations when selecting a warranty provider?

Some of the key considerations that developers need to be aware of:

  • Limit of indemnity: Developers should always confirm in writing that the reinstatement cost and the limit of indemnity on the policy mirror one another.
  • Access to the lending market: Insurers who don’t have A-rated carriers often have more restrictive lender acceptance lists that can become detrimental to sales.
  • A-rated capacity: Check that the insurers’ underwriter has a financial rating from one of the UK’s ratings agencies. While nobody can completely guarantee the solvency of any entity, these ratings evaluate and assess a company’s creditworthiness and offer comfort to their network that they are a reputable business on sound financial footing.
  • Demonstrable experience: Property professionals and developers should understand the insurers’ appetite and experience of similar sized schemes.

How long will it take to get a warranty in place?

Once we have full enquiry details, alongside supporting documents, it is fair to assume a four-week time period from submission to boots on the ground for an inspection. On larger schemes (in excess of £25m), we always advise clients to allow a 6 week lead time.

Should developers only consider A-rated insurers?

While there is no requirement for an insurer to be rated, it provides credibility and comfort to those that they work with. One of the fundamentals that should not be compromised when purchasing a warranty is that the underwriter will be in-situ for the full term of the policy. We purchase insurance in the hope that we don’t have to use it but have the peace of mind that it will protect us if we do.

We understand that there will always be unrated insurers who will look to write a policy at a vastly reduced rate. However, many developers will recall in 2018 when CRL’s un-rated underwriter, Alpha insurance, was declared bankrupt. This was both a time-consuming and costly exercise for developers who had placed their faith in CRL and then had to seek alternative cover.

Our advice is to always always seek a building warranty that is underpinned by A-rated capacity for your developments.

While the Build-to-Rent (BTR) sector has garnered attention, the purpose-built student accommodation (PBSA) market also stands out as a resilient performer. With student numbers reaching record highs and a persistent demand for beds, the sector anticipates robust rental growth in the short and mid-term.

At J3, the significance of PBSA and its latent defects insurance has evolved from being a “nice to have” to an essential component, as demonstrated by recent industry shifts.  Between January 2023 and August, 4,263 construction firms in the UK ceased operations, marking an 8.3% rise from the previous year and a 34.5% surge from the pre-pandemic period in January 2020. This trend indicates an ongoing challenge for the industry.

In the context of PBSA, developers have traditionally relied on collateral warranties in the event of post-completion claims. However, with contractors no longer available to address issues, this approach poses a risk to the income outlook for asset owners and operators.

In response, we’ve witnessed a triple-digit surge in both enquiries and policies incepted over the past 18 months. Developers are now seeking to safeguard their income streams and enhance the marketability of their assets for potential investors or pension funds. Notably, a key feature appreciated by our clients is the loss of rent coverage, providing income protection for up to three years from practical completion.

For PBSA developers, the key takeaway is clear: investing in latent defects insurance is increasingly becoming standard practice to safeguard and enable future developments.

What makes this policy even more appealing to owners and investors is the inclusion of loss of rent in the event of a latent defect. It’s a compelling narrative to convey that rental income is safeguarded as part of this policy, providing investors with great comfort in knowing that their future revenue is secure. It’s important to emphasise that access to loss of rent coverage is exclusively available through the latent defects policy.

PBSA Developers should seek guidance from experienced insurance advisors to customise coverage according to the unique requirements of their project. If you’re interested in a complimentary, no-obligation review of your insurance program, get in touch with J3 Advisory on 020 3096 0718

Get an indication.

Have questions? Call 020 3096 0718

50
£8,000,000
£20,000,000
* This calculation is to be used for indicative quote purposes ONLY and underwriters reserve their rights to amend the Premiums, Terms and Conditions