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Ruby GiblinRuby has specialised in social housing finance and charging for over 30 years. She acts for both funders and borrowers to effectively ...more
How registered providers and councils can help kick-start the modular building era
The government remains keen on pushing modern methods of construction to tackle the housing crisis. Landlords and local authorities can play their part, writes Ruby Giblin
Lenders will finance housing projects where there is a proven return and high likelihood of lasting success.
At present, modular building has widely recognised advantages but not enough examples and data to prove itself as investible – that’s an issue. Happily, it’s one we can resolve.
The benefits of modular construction are many. Efficiency is a primary one: having units come from a factory can slash building times and onsite waste can be reduced by 90%.
Flexibility and quality are also key – they can fit into small urban areas and also of superior quality compared to traditional builds.
And there’s more. Recently, Mark Farmer, the government’s champion for modern methods of construction (MMC), spoke of how offsite will allow industry to meet targets on building safety, design and decarbonisation.
For the housing sector, and registered providers, there is much to like.
Funders aren’t queueing up to back MMC, though.
Modular building accounts for just a small percentage of completed housing projects and some believe it unproven in the long run.
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Funders need visibility on long-term repair and maintenance obligations. Given the impact it could have on resale value and longevity, developers must be able to articulate longer-term modular maintenance costs before more private funding is widely available. At the moment valuers don’t have enough data for the accurate evaluations they need, as there’s too little completed stock.
Having investigated attitudes to lifespan risk and maintenance obligations among a variety of social housing funders, from traditional bank lending through to the derivative markets and investors, the consensus seems to be: “see what happens when the first funder dips their toe in the market”. This requires someone to be the first funder. If none emerge, we’re no further forward.
Private sector funding is problematic, but we can move things on. Focusing on public sector finance opportunities can help the housing sector deliver more.
Local authorities can access public sector funding, and some in the housing industry are looking to councils to boost MMC.
Public Works Loan Board (PWLB) funds are the main source. The advantage is that local authorities can only typically borrow privately on an unsecured basis, and therefore with less favourable terms.
Through public loans, councils can borrow for modular projects without needing to convince banks of their performance – an avenue not open to housing developers in isolation.
Although PWLB interest rates rose last year by 1%, allowing the £350m UK Municipal Bond transaction through, the Budget reversed that decision and there are many positive reasons why local authorities would pursue this option.
“Through public loans, councils can borrow for modular projects without needing to convince banks of their performance”
The housing borrowing cap has been scrapped for local authorities, PWLB funds can be delivered in days and terms are flexible.
Social benefit also comes into play. Private funders typically avoid local authorities with weak credit histories, but PWLB can look beyond that at the social impact loans can make. It can also provide the basis on which registered providers, for example through joint ventures, can partner with councils to deliver new housing schemes.
Things won’t change overnight. However, over time PWLB borrowing will help deliver more product, which in turn provides more data, evidence and assurances of the kind which private lenders need. Through altering the long-term view on MMC risk from banks and lenders, the situation can change.
It’s all about reaching a tipping point where modular is proven in practice, at scale.
February’s government reshuffle saw another new housing minister arrive, Christopher Pincher. He has yet to make any major comment on modular building, but there are no signs that his approach will be any different to that of predecessor Esther McVey.
“It’s all about reaching a tipping point where modular is proven in practice, at scale”
In January, she ventured that “in the long term, MMC can be a large-scale solution for every tenure: social housing, homeownership, build to rent and market sale”.
Policymakers are in favour of modular, as are the housing, construction and local authority sectors. There’s every reason to believe funders will be too, if they can receive the evidence and assurances to persuade them to loan.
Let registered providers, developers and local authorities come together to create a real uplift in modular building projects and spark a new era. Without doing so, it will become ever more difficult to deliver our country’s ambitious housing programme.
Ruby Giblin, partner, Winckworth Sherwood
