In our issue of Thinking Real Estate a year ago, we looked at some of the issues and challenges surrounding modular construction; the current byword for describing ‘off-site construction’ and ‘modern methods of construction’.
In the housing sector, modular methods have since been given a boost. First, it was announced that the Department for Transport, the Department of Health, the Department for Education, the Ministry of Justice, and the Ministry of Defence would be adopting a presumption in favour of offsite construction by 2019 across suitable capital programmes, where it represents best value for money. Then, in April 2018, the Government announced £1 billion worth of investment for housing projects using modular through the Home Building Fund.
The support was welcome and will no doubt encourage companies that would not otherwise have the resources or the finance to consider deploying modular techniques; following the likes of Berkeley Group and L&G, who are already invested heavily in their own production lines.
“Mostly the success stories for modular have been the large developers who want to be vertically integrated so that they aren’t dependent on a third party supplier,” says Paul Bartter, Real Estate Partner at Trowers & Hamlins. “Their approach is organic and steady; you find a suitable location for your first factory and make sure that your process is sufficiently replicable so that you can set up another factory in another region when you have the demand.”
There has also been real appetite in the institutional private rented sector (PRS), attracting interest from both the traditional private developers and housing associations with a commercial arm who are looking to diversify into PRS. “With PRS they have had much better take up than in the private for sale market,” says Bartter.
"It’s about the repeating nature of the units and the ability of the developer to pay for modules up front with institutional backing.”
In fact, some housing associations, notably Swan, have already established factories of their own in a commitment to innovation that has put some private developers to shame. This model for housing associations however is unfortunately less common, especially outside of the South East; the reality for most is that they lack the funds to do so especially when acting alone.
“We’ve been having various conversations with housing associations in Manchester and the wider North West and they simply don’t have the money to invest up front, especially when acting alone,” says David Cordery, Senior Associate in the Real Estate team at Trowers & Hamlins. “Some of them are hanging back a bit to learn the lessons from the private developers, but there is a clear enthusiasm to explore the opportunism that modular brings and to work collaboratively both with other housing associations and the private sector to pool resources.”
Some of this collaboration has begun already. “A group of housing associations in the North West has petitioned Homes England saying if they received additional grant funding of £15,000 more per unit then they would do it on a modular basis,” says Katie Saunders, Real Estate Partner at Trowers & Hamlins. “It will cost the Government more at this point in time, but they would get a better quality, sustainable product in the long term.”
Another success story is Accord Group, based in the West Midlands, which has made the step of setting up LoCal Homes, and producing low-carbon sustainable units from a purpose-built factory in Walsall. This was not as much of a leap as it may seem; Accord built up experience by working with other modular providers on several schemes, developing its own expertise, before making the investment. LoCal now supplies Accord as well as other housing associations and developers. Digby Morgan, a Real Estate Partner in Birmingham, said “It seems to really work for them. It reduces their reliance on third parties, and has attracted a lot of political interest, locally, regionally and nationally, with Homes England and the West Midland Combined Authority both seeing modular as one way of achieving the really radical increase in delivery that’s needed.”
These operators seem to be winning the battle to produce modular homes that people want to live in. The fear for a long time was that in order for modular factories to be viable, they would need to essentially churn out the same product, resulting in identikit units. However, it is clear that the product has moved on significantly, offering much a wider choice than previously.
“Effectively the floorplate will be standardised, but then within those buildings you can configure them in different ways,” says Cordery. “So, you can have different room sizes but also, for example, have the kitchen on the top floor and the bedrooms on the ground floor. If you’re talking about towers, you can choose a range of cladding solutions, so from the outside you can still give each building a unique character.” Bartter agrees. “With some of the completed buildings we’ve seen recently you wouldn’t be able to guess that they’re modular,” he says.
"Modular construction has moved on a lot, even in the last five years, with the end-product now indistinguishable from a traditional build.”
“A lot of people do have that fear of everything looking the same, so they want to personalise their units and with today’s technology that is possible. Swan has a service where residents can choose different elements and configurations online.”
The perception of modular from lenders, however, is still fairly cautious; partly as a result of having large amount of risk sitting with a single supplier.”
The issue of securing the approval of lenders is key to the success of modular, especially for small and medium-sized businesses – both in terms of development finance at one end of the process, and mortgage lending at the other. “There has been reluctance to sign off the funding for modular products, mainly because of the perceived quality issues, and sometimes this is because they or their advisers (including lawyers) don’t understand the product,” says Bartter.
Mortgage lenders have been similarly cautious but are increasingly understanding the product and adapting. “The mortgage lenders’ have typically viewed modular as a ‘special construction method’ which puts the development into a higher risk category,” says Cordery. “If your mortgage lender is making an issue of the method of construction, many people would simply prefer to buy a house that has been built using traditional methods, so as to avoid any difficulties. This should change over time, as the lenders start to understand the product a bit more. Some developers and RPs have established good working relationships with their lenders and we are optimistic that the industry as a whole will soon start to reap the benefits.”