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Funding for modular construction – the latest trend in the ever-pressurised UK housebuilding sector?

A series of high profile investments in modular construction methods may indicate a favourable change for this once spurned form of cheap, quick construction. 

One of the latest trends in the UK housebuilding market is the availability of financing for real estate disruptor companies who plan to use modular construction to make gains in the UK housebuilding market. 

What is modular construction?

Modular construction falls within what is frequently termed modern methods of construction (MMC). In the 2017 Housing White Paper, the UK Government recommended MMC as one of the solutions to the core issues of UK Housing; namely unit supply levels and affordability.

Modular construction essentially refers to a method of building where separate units are constructed off-site in line production fashion and then assembled on site into the wider development. An example would be a block of purpose build student accommodation. Individual studio rooms, flats and shared common parts would be constructed separately from one another off site, then transported to the development location and pieced together floor by floor until the building is structurally complete. 

The core feature of modular construction is uniformity. The construction method is favourable for unitised developments where the design mostly includes repeated rooms, apartments or sections. This limited typology means that, according to comments made by Hugh Taylor, head of housing at HSBC, to EG Magazine in September 2017 modular construction has been primarily used for student accommodation, hotels and hospitals. 

What are the advantages to modular construction?

The primary advantage to modular construction is speed. The construction sector as a whole relies on deliverability in order to gain credit approval of projects. For example, according to Adina David of Greystar speaking at the recent Economic Breakfast Briefing in January here at the Howard Kennedy offices, modular constructed housing has the potential to be completed in half the time of traditional masonry housebuilding.

What are the obstacles to gaining funding for modular projects? 

UK housebuilders and their funders have been wary of heavily utilising modular construction due a combination of industry habit, asset security and relevant expertise. 

The sector has continued to be very profitable off the back of traditional housebuilding methods where there are established networks of subcontractors, funders and design professionals who are not keen to disturb a highly successful model. Lenders and their solicitors have grown used to identifying the risks in brick and mortar assets and so have developed a high level of expertise. The comparative lack of modular construction means that as an asset it is not as well researched or known about by lenders and their professionals, thus any further due diligence required in order to gain a full understanding of the asset would likely incur further cost at the outset.

In addition, the start-up costs associated with modular funding are considerable, particularly with the construction and establishment of the offsite factories. Funders are cautious to lend against assets that are being constructed away from the building sites over which they have security. Project monitors do not generally have the same level of experience with modular construction projects as they do with traditional methods, meaning that funders would have to advance considerable sums of money towards an off-site and unsecured project that cannot be as closely controlled in the customary way as they are used to. Considering the success of traditional building methods and the risk of financing MMC sites, it is no surprise that funding for modular developments has been limited. 

Recent trends 

A recent channelling of property funding into companies and joint ventures that utilise modular funding may however show a shift in the attitude towards the construction method. SoftBank, the primary funder behind WeWork's meteoric rise in the 2010s, announced in January 2019 a $700m funding round of financing for Katerra, a construction tech-start up that is in the process of building a number of modular construction factories that are aimed at targeting the student accommodation and senior living sectors.  

In May 2019, Japan's largest housebuilder Sekisui House took up a £90m partnership with Urban Splash's modular housing division, taking a 35% stake in the business, according to the May 2019 issue of EG Magazine. 

Reasons for this trend include the cost friendly scope of modular building and the desire to disrupt the traditional market. Due to the line production nature of modular construction, the uniformity between the modules involved means that costs are easier to scale from the outset. This helps define project timelines more clearly. Most debt facilities are structured around this timeline so any certainty, from the Lender's perspective, would be seen as positive. 

Like many other sectors, the arrival of technology has meant that new market entrants have the opportunity to utilise rapid production modular housing to increase the speed of construction whilst minimising costs. Mark Reynolds, chief executive of global construction firm Mace, stated in comments to PBC Magazine in December 2019 that a combination of digital technology and offsite modular assembly will help 'deliver housing faster with less waste and reduce carbon emissions'. Coupled with the ever increasing demand on social housing, signified by the fact that house prices have risen 160% since the mid – 90's, it's easy to see why an alternative approach to housebuilding may be an attractive prospect for funders.

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