In an hour-long debate, Sillence Hurn’s managing director, Alex Hurn, and BDM, Luke Masters, were joined by Peter Howarth, risk manager at Mint Property Finance; David van der Lande, strategic sales director at Go Modular; and David Ayre, director at ACG Architects.
The panel discussed the key barriers to this type of construction and ways to mitigate them, how the material and skills shortages are impacting the growth of this sector, and the manner in which the design and quality control process differs on MMC projects compared to traditional builds.
Kicking off the conversation on the funding element of modular developments, Peter said that finance options were “getting better”.
He explained that lenders will need to look to whether the end mortgage provider would fund this sort of property, and if it could get latent defects insurance on it.
“To me, it’s [about] the longevity of the product,” he queried, due to it not having been analysed over an extensive period.
“Will there be a demand for that product [in 10-20 years’ time]? I think that’s the test for me as a lender,” he added, along with the challenges around cash flow and how it works with the contracts that developers sign up to with the manufacturers.
In terms of durability, Van der Lande argued that modular developments are likely to be stronger than traditionally built buildings — mainly because they need to be transported.
“The materials are self-evident; they have to meet the appropriate criteria in terms of construction and joint strengths to secure the warranties and building regulation passes that underwrite that quality in objective terms.”
He explained that the hurdle is whether funders are prepared to make the effort to understand the changes around new building methods and technologies. “One of the issues that we deal with when it comes to traditional high-street bank lenders is that they don’t have the systems to enable them to understand and evaluate the risk profiles of modular — or in fact anything else.”
When a developer from the audience criticised that the mortgageability point was moot if a development finance lender can’t facilitate the build in the first place and asked how they can get a lender to support drawdown payments that aren’t secured against something on site, but in a factory elsewhere that the financier doesn’t own or have a legal charge over, Peter pointed to bonds, warranties and vesting certificates.
“It then depends on the scale of the development,” he added, where lenders could be more flexible to help with cash flow on a smaller project compared to a larger build.
Alex suggested that off-site materials and advance payments were typically “big-risk items” with the lenders they work with.
“There’s always the insurance and ownership issue with vesting certificates for any off-site materials; if they’re being stored, are they being stored securely? Are the premises insured? Has the lender got rights on the insurance?”
“It obviously generates more liability for consultants and lenders,” he stated, highlighting that it always goes back to education.
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On the design process of MMC projects, Ayre described that, much like the funding side, everything needs to be factored in from the start, with consultants required to be brought on board earlier than with traditional builds.
“One of the things we have experienced over the last four years, is increasing numbers of clients that have come to us with planning consent for a traditional build design for residential use, and then [they ask], ‘Can we look to do this within a modular solution?’” He said that trying to shoehorn this into a unique and bespoke design is very challenging and often ends up compromised.
“The MMC conversation has to start right at the beginning of a project, at that RIBA work stage,” he urged, in order to cover the basics, such as lorry and crane access for volumetric and panelised materials.
“All of this links into more investment and cost to developers upfront, and we all know that pre-planning is where the risk lies on projects, and finance starts to unlock a bit post-planning.”
While the current shortages of materials and skills are widely impacting the growth of the overall construction sector and exacerbating the risks to development lenders, Luke emphasised that the modular market employs its own workforce, which is far more manageable, consistent, and accountable.
From a materials perspective, he believes that SME developers — which often have limited purchasing power due to being a small fish in a big pond — going to a modular construction company with lots of different clients offers them an advantage. “Essentially, they sit higher up the rank of [accessing] these materials.”
The full roundtable can be viewed below.
The audience had numerous questions for the panellists during the live event and, while some were answered within the hour, a few of the panellists have kindly answered those that we couldn’t get to:
With developers using modular, is it easier to work out overall costing as nearly all is predetermined?
Alex: In short, yes. It should be a much more straightforward process to gain cost accuracy for a modular construction project as the engagement of all consultants and contractors should happen earlier on in the process of a development than traditional construction. There are also less unknowns and potential risks as most of the construction process is undertaken in a controlled environment with less exposure to external factors, such as weather and security etc. Therefore, project contingencies should be more accurate and reliable.
Luke: The upfront costs are larger due to increased certainty and input being required at the outset. This being said, the cost accuracy is much greater, and this reduces contingency requirements and gives a more precise delivery timeline which will enable greater certainty around finance costs to allocate.
Given that major barriers are the scale to make MMC efficient, fear of system interoperability/commonality, and quality assurances, do you think it would be a powerful message if, for example, Greater London Authority said, ‘We will order 20,000 units/modules’ so that each local housing association could have more confidence in buying?
Alex: In my opinion, the proof of concept has to be undertaken by large private housebuilders in order for MMC/modular to become the forefront of housing supply. This will need to be driven by central government to encourage this and allow for the national housebuilders to have the confidence to invest and develop these schemes.
Luke: This is starting to gain traction with Berkeley, Barratt, and Legal & General all moving towards MMC. The more this is reported and championed, the quicker it will be widely adopted.
Peter: I think that, against the backdrop of the ongoing housing shortage and rising labour and material costs, it is inevitable that we will see a shift towards new construction methods and techniques. Traditional, national housebuilders have been relatively slow to consider MMC and, once this pace picks up, I think that we will see more consumer confidence.