Suddenly everyone is talking about modular housing as a way to solve the housing crisis, with experts ranging from Legal & General to Laing O’Rourke and AStudio leading the way.
But what does modular housing mean to the banks that will be lending against modern methods of construction in this brave new world?
First, let’s recap. In property, Legal & General is the most prominent proponent of modular homes, hitting national headlines in February by revealing that it will be opening the world’s largest off-site housing factory in Leeds at a cost of £55m and creating 400 jobs.
Construction giant Laing O’Rourke was featured in the Sunday Times in March as the paper explained that it has staked £125m on its off-site prefabrication factory in Steetley, Nottinghamshire, with a further factory earmarked for modular housing due to be built soon.
The consultants have been getting in on the act, too, with Richard Hyams of architect AStudio calling for modular housing in Estates Gazette (16 January, p42) and construction expert Mark Farmer of Cast also adding his voice to the debate.
According to Farmer productive time takes up 88% of the manufacturing process, whereas in construction only 43% of time spent on site is productive, meaning the majority of time is wasted. He calculates that if construction waste was halved, 75,000 more housing units a year could be built with the same workforce – simply because their time would be put to better use.
But that assumes that banks would fund this development – and the good news is that we would be delighted to.
Why? Because de-risking the construction phase of a development is of material importance for lenders.
If a lender is projecting a 15-month construction programme, then it is also reasonable to project that the borrower will exit over a further nine months by repaying its loan.
However, bank credit committees presented with this two-year scenario will often take a more cautious stance, anticipating that delays in construction could push back the repayment period by six months or more.
This extra risk can lead to banks charging higher interest rates and even asking the developer to fund extra costs, which can then affect the development’s profitability.
Banks can also be put into the difficult situation of injecting more funding into a development, or seeing our loan-to-cost metric thrown out of kilter if construction costs rise.
Student accommodation developers have been among the first to pioneer modular construction because the penalties are potentially more severe for them: finish a student block late and you are likely to have some very angry teens (and parents) on your hands in freshers’ week.
Another benefit of modular construction is keeping the neighbours happy.
Many of the most valuable London residential developments are in areas with influential neighbours and cutting down on time, noise and delays would go some way to appeasing them.
But what about the quality? Would a developer of upmarket homes in a city centre want to deliver a product which could be described as “prefabricated”?
To answer that question I need only point to British Land and Oxford Properties’ development of the Cheesegrater, EC3, which was designed by Rogers Stirk Harbour + Partners, built by Laing O’Rourke and is already considered to be one of the finest tall buildings in the world.
The Cheesegrater was prepared and assembled across Northern Ireland, the North of England and the Midlands using modular construction techniques. Parts were transported to the City of London to be assembled on site and the quality is there for everyone to see.
Banks have yet to embrace modular construction in a big way, while the rest of the property world is embracing it rapidly as a way to speed up development and mitigate risk.
Lenders owe it to the property sector to explore modular techniques deeply, otherwise we risk holding back a revolution now being led by some of real estate’s biggest guns.
Adam Jaffe, originator, Investec
