The panel was chaired by Steve Clinning, head of Banking & Asset Finance at Howard Kennedy. The panel discussion covered topics ranging from current barriers to modular construction to their vision of the future of modular building.
State of affairs and barriers
Each panellist shared their first experiences in modular construction. Emma said that she first came across modular construction when lending to developers building purpose-built student accommodation. Adina confirmed that student builds were also the first area that she came across that used modular construction but she has now seen it being used in a wider range of builds and that Greystar were involved in the building of what was, at the time, the tallest modular constructed building in the world.
Laith explained how Click had decided to vertically integrate its process by being both the developer and modular contractor (by setting up their own factory) because the existing modular contractors in the market were not able to meet their bespoke requirements.
Barriers and issues
The discussion then moved onto the current barriers and issues for developers and lenders respectively. Emma said from a lender's perspective, the relatively new and unfamiliar processes of modular construction can be the biggest issue both in relation to the developer and also the modular contractor. She also highlighted that, at present, there is no standardisation/uniformity between factories and this causes difficulties for security purposes - if a particular modular contractor went insolvent, there is no guarantee that another factory could produce the same order.
Laith agreed that lenders' lack of understanding of the modular build process was a real barrier and that lenders struggle to see the value of the modular build when it is still in the factory. However, he highlighted that actually the quality and speed of modular construction was a real benefit to both the developer and lender.
Benefits and success
Adina was asked about the benefits of modular build compared to traditional methods of build. She highlighted the speed of construction as a modular build can cut construction time by half and that this would be beneficial to lenders who rely upon rental/income generation as security e.g. hotels, student developments and build to rent schemes. As the specification and costs can be agreed up front with the modular contractor, this is an additional benefit, and a matter from which a lender can take comfort. Both Emma and Laith agreed with Adina that the time saving, as well as cost certainty, was a huge benefit of modular construction.
The panel moved on to a discussion about what practical elements a lender should be looking at when reviewing a modular construction scheme.
Laith, from a borrower's perspective, talked about looking at the track record of both the developer and modular contractor. It had been very difficult for Click to obtain funding for their first modular project as they had no track record. But, once the first project was completed, it was easier to obtain funding and it was likely that developers would build a relationship with a single lender going forward.
From a lender's perspective, Emma reiterated that lenders use the same metrics to assess a modular construction scheme as they would with any other development and that deliverability was a key factor. This would include assessing the developer's professional team, including the modular contractor and reviewing their track history (which might include obtaining recommendations from past clients) to ensure that they can deliver.
Emma began with positive lessons that she and Maslow have learned from funding modular construction. One positive was that many developers (using modular constructive methods) which they have funded have returned for funding for a second or third project and that the finished development was always highly satisfactory. A negative that Emma highlighted was that when the negotiation of the building contract had not been completed at the time the funding arrangements were put in place, the modular contractor had not delivered on time which resulted in delay and therefore increased interest payable. Following on from this, Adina highlighted the benefit of building a relationship with their modular contractor. She said that highlighting this successful relationship with their lender has helped them on obtaining funding for modular projects as the lender can take comfort from the relationship.
Looking to the future, Laith highlighted that by educating lenders (e.g. showing them the factories, showing them the processes, setting up round-table discussions) will help progress modular building in the future. Laith also noted a number of companies, including Berkeley Homes, which were entering the modular building market. Adina reiterated the importance of the relationship between the lenders, the developers and the modular contractors as a key to the future as well as the standardisation of modular building. Lastly, Emma suggested that lenders may not understand every part of modular building due to the range of asset classes which are being lent on, but having the correct professionals (e.g. valuers, quantity surveyors) on a lender's panel to assist with managing the development through its lifecycle is key.