The latest news on Modular homes and everything you need to know about how to finance one.
At the time of writing, homes are generally built ‘onsite’ in the same fashion as they have been for centuries. As each brick is added the asset grows, as does the bank’s collateral. Eventually, it is sealed water-tight, fitted out internally and some happy family moves in. But things are changing. There are now reputable manufactures in the UK that can complete the majority of this process in the factory, with the finished item ready for transport. The advantages are clear; cheaper, quicker and more eco-friendly than traditional methods. It’s for those kinds of reasons that Ester Mcvey, minister of state for housing and planning, said she wanted to make the UK the ‘world leader in modular building’.
In 2020 Banks, Developers and Builders are very curious about modular. Some have dipped their toe, but most remain cautious. We see more and more innovative startups start to play with different ideas and angles on what could be the face of housing. For example, Project Etopia recently constructed a two-bedroom affordable house in Nambia, it cost £25k and took three hours to build.
So, with all this in mind, where do we stand? I would argue we are on the brink of a sea change. There are fundamental advantages to modular, and there are risks that have historically put Lenders off. These risks are starting to feel a little less scary, and the balance is tipping.
A Timelaspe of Project Etopia’s build method, their ‘shanty replacement’ in Nambia took 3 hours to construct and cost £25k.
Firstly, I should start with some definitions. Lots of terms are used for Modular, it’s easy to get lost in the jargon:
‘House’ by Urban Splash is a multi-award winning modular home.
Next, let's get on to the advantages driving this modular movement.
There are several different materials and manufacturing techniques used, so there is some variation here. But generally speaking, I would expect a 25%-50% decrease in build time. This means less interest paid to the bank, more projects built per year, and less time you are exposed to market (the odds of a recession in the next 3 months are lower than the odds in the next 6).
These homes are being designed and built to scale in factories by businesses that are relatively newly established. This means they can adapt to the times and use the more Eco-friendy, carbon neutral, healthy materials. Thankfully, all modular homes that I’ve seen are pretty Eco. They generally arrive on the back of the lorry with a level of energy efficiency that would be expensive to achieve on a brick-build. Not only that but some construction methods actually reduced the amount of carbon in the atmosphere by sequestering it into their walls. In other words; if you use lots of wood from replanted forests your home stores the carbon that would otherwise in in the air. On this point, id see ‘Cross Laminated Timber’ or the wonderful ‘Nur Holz’ by Brightforest which uses nothing but wood.
This will vary between manufacturers, but generally, you’re looking at fewer deliveries, fewer tradesmen, reduction or elimination of wet trades (plastering, painting), reduced plumbing needs and so on. All of these equal fewer headaches. As anybody who has been involved in development knows, these are the things that can give you migraines a few months in.
The standard of engineering is very high for modular homes, it’s a new industry and it has a reputation to forge. Thankfully, there are tried and tested techniques we can cut-and-paste from Mainland Europe. Walking around a modular home you can feel the advantages of a having a standardised, quality-controlled process.
Again, there are a number of different things we could mean by ‘modular, but generally speaking, we’re seeing the cost come in close to brick build. However, it’s important to consider the contingencies you’re not having to pay for. With traditional build there’s more plates to keep spinning, with manually constructed homes there’s arguably more potential for mishaps. As economies of scale start to take hold, I expect modular to be cheaper than the alternatives.
Nur Holz (“Only Wood”), an eco-friendly solid-wood modular construction by Brightforest
Now we come to big question, can we Lend on it? Until recently the answer to this was ‘not really’. Lenders were sitting warily on the sidelines. With the turn of the new year I can feel there is an ever greater appetite for the market. High street Mortgage Lenders are now lending on ‘Modern Methods of Construction’ and Development Finance Lenders are starting to take exposure. With all these advantages it can seem like a simple easy-win scenario for a Bank, but as you might expect it’s not that simple.
Firstly, there’s the unknown. Financial institutions hate the unknown. For a long time Modular had the feeling of being a black box, unchartered territory with ‘here be dragons’ written across it. Now there have been a number of successful Modular developments in the UK this feeling is fading, though there are still echos of it.
Secondly, there are modular-specific risks that you wouldn’t need to worry about with traditional builds. What happens if the unit arrives and isn’t the right shape? What if it’s damaged in transit? Then there are the cashflows. A manufacturer will need a large deposit to start their process. If they’re building with wood, that’s a lot of trees to chop down. Deposits can be 20%-90% of the unit cost. The problem is, a Development Finance Lender generally wouldn’t be happy to send large amounts of cash to a manufacturer. If there’s an issue with the project they wouldn’t have much collateral. The lender would have a charge of a development plot, and then potentially (if the lawyers agree) a half built house in a warehouse. This sort of scenario makes them uneasy. At time of writing it is standard practice for the Developer to front their own cash for a Modular build’s deposit. However, I think that’s ready to change.
How to get finance on Modular Construction
As more modular developments have been built in the UK we have become increasingly aware of which specific risks we need to mitigate in this type of build. If we can mitigate each one of these risks, in turn, we can access the vast advantages of offsite construction. Other areas of finance have mechanisms in place to deal with these issues. International trade, aircraft construction and the like have helpfully laid down blueprints. Throughout the year Uplift intends to have a role in translating these to property.
As we stand in January, modular developments can and are being financed. High Street Mortgage Lenders will lend on them. Reputable Development Finance Lenders have backed more than the odd project. It’s new, but not too new.
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The guidance and/or advice contained within this website is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK. Not all products and services mentioned are regulated by the Financial Conduct Authority. Your home may be repossessed if you not keep up repayments on your mortgage or secured debt