Could modular construction be the key to achieving house-building targets?

By Bridging Loan Directory 13th February 2020

Richard Payne, pictured, Director of Development at specialist lender Oblix Capital looks at the pros and cons of modular housing from a property lender’s perspective.

The Government has pledged in its manifesto to build one million homes during the course of the current Parliament. This may sound like an ambitious target, but one million houses by the end of a five-year parliament would constitute a reduction, on average, on the 241,130 built in 2018/19 Nevertheless, a concerted effort will need to be made by planners, developers, construction firms and lenders to help achieve this ambition.

Modular construction has been around for decades. Long-gone are the days of ‘pre-fabs’, with today’s modern modular construction methods providing a credible and, in many ways, preferable alternative to traditional construction. Off-site construction is generally faster, modules can be constructed whilst groundworks are still ongoing, construction isn’t impacted by on-site environmental conditions, build quality is improved due to the factory-based construction methods, and the number of deliveries to construction sites, and waste, is reduced.

Modular construction does have its disadvantages though. The benefits that are brought about by standardising unit and module build also limit the design options that are available, meaning that customisation is normally restricted to internal fixtures and fittings. The build is often more suited to projects where standardised layouts are suited, such as student accommodation or social build-to-rent housing. Nevertheless, build costs have also been shown to be up to 40% cheaper using modular construction when compared to traditional methods.

The potential for modular construction is already accepted

The Government appears to be supportive of modular housing as a way of helping to achieve its house building targets, as demonstrated by a £30m investment in Ilke Homes’ modular housing factory in Yorkshire, funded from the £3bn Home Building Fund. The Housing Minister at the time, Esther McVey, said: “The North of England has the potential to lead the world in the modern methods of construction that are transforming homebuilding, an industry that when matured would be worth £40bn a year and provide up to 80,000 jobs. We need to fully embrace this.”

Compared with other parts of the world, the UK has been remarkably slow in adopting the construction method – in Japan 15% of houses are built using prefabricated elements, in Germany the figure is 20% and in Sweden the figure is a remarkable 84%. In 2017, it was estimated that c15,000 modular homes are constructed in the UK each year (which is less than 10% of all dwellings completed during 2017.

Some notable examples of current modular construction projects include 546 flats over two 38 and 44 story housing towers in Croydon, and Creekside Wharf in Greenwich, with 249 flats again being spread over two towers. A joint venture between furnishing giant IKEA and construction firm Skanska is building 162 affordable homes in West Sussex. Crescent Point in Plymouth, and The Maltings in Colchester are examples of modular construction in the student housing industry.

There have been some significant investments in modular construction facilities in the UK in recent years; these should help unlock restrictions caused by capacity in the UK, and are a sign of how much potential the UK market is seen to have. Laing O’Rourke announced plans in 2015 to invest £104m in a facility in Worksop, Derbyshire, which will be capable of delivering 10,000 homes a year when fully operational. In 2016, Legal & General announced plans for a £55m factory in Leeds. Modular unit builders TopHat secured £75m in backing from Goldman Sachs in April 2019.

What’s stopping modular construction from becoming mainstream?

Despite all the positive mood music, lenders are often reluctant to lend to fund such projects or, if they are willing to lend, additional requirements are put in place. The prime consideration for lenders who are considering funding student housing projects relates to ownership of the modules whilst they are being built offsite; whilst developers will need to make staged payments in advance to the modular housing contractors as the units are being built, ownership does not transfer to the developer until the units are complete and a certificate of vesting has been issued, or the units are delivered to the site. Should anything happen that prevents the delivery of those modules, the lender will have no collateral against which to reclaim the loan they have made to the developer. By contrast, when construction is happening onsite, the charge the lenders have on that site includes all materials held there.

As well as the issues of ownership of the asset whilst it is being built, housing projects carry additional risks. Lenders need to make sure that the units are mortgageable, understand the strength of the re-sale market for modular-built properties, and how maintenance, repair and insurance costs will stack up.

The Buildoffsite Property Assurance Scheme (BOPAS) has been set up to provide additional confidence in the technology, and to each party that needs to be involved in the various stages of the process. This scheme will not in isolation, however, provide lenders with the confidence they need but efforts to formalise and certify the construction method should provide them with greater certainty. Lenders, their industry bodies, constructors, developers and the Government will need to work closely together to help unlock the potential that modular construction could bring in helping meet the UK’s housing requirements.