Offsite and modular must be made to work for SME developers

Reece Lake is head of business operations at property finance firm Atelier

The UK’s housing shortfall urgently requires creative solutions. Offsite construction has long been held up as a way to address it, given its potential to construct schemes efficiently and at speed. However, if it is to play a role, then it needs to work for small and medium-sized enterprises, not just the largest developers. 

Cost is only one of a number of barriers preventing SME developers from seizing the offsite opportunities. As it stands, the business case for them to invest in modular construction remains complex, so how can we make progress? 

“The scale required to make modular and offsite construction financially viable favours larger developers”

The lack of compelling and positive track records among modular firms, against the backdrop of challenging market conditions, has at times made it difficult for lenders to confidently support the advance payments often required by developers to commission offsite manufacturers. As such, modular construction has tended to present a greater level of risk for lenders. 

While the majority of factors affecting adoption are external market forces, more lenders taking the initiative to clearly define their requirements for financing offsite construction schemes would go some way to increasing adoption. In particular, this could help SME developers that may have relatively little previous experience of securing finance for offsite construction schemes, and which would benefit from the guidance.

Right support in the right places

One of the main risks in the business case for offsite and modular SME residential schemes is establishing a robust supply chain with suppliers and manufacturers that are able to honour smaller-scale contracts that are commercially viable. The lack of cost-effective, supportive finance for SME modular projects also presents a major challenge.

However, we have seen in other countries how modular construction can be more commonly adopted by the development sector, as long as it has the right government support. 

A House of Lords inquiry into the sector earlier this year accused the government of “simply throwing money” at the problem, while the housing minister this month kicked his response to the inquiry further into the long grass. 

There is a strong feeling in the industry that targeted financial commitments, including government grants, tax breaks and modular subsidies, could help accelerate modular construction in the UK. But these financial levers must be deployed in tandem with planning policy incentives from the government to fast-track planning permission for modular housing development and help SME developers take advantage of modular schemes. 

The scale required to make modular and offsite construction financially viable favours larger developers. The upfront investment required to design and develop a modular system that can be repeated across schemes is significant, but the business case for doing so is stronger for larger-scale projects, where the design can be applied and deployed repeatedly. In addition, the promise of larger contracts from bigger schemes enables modular manufacturers to secure deeper pipelines of business.

Reaping the benefits

Despite the challenges in adoption for SME developers, at a time when rising labour and material costs have squeezed their margins and when the drive for sustainability is stronger than ever, the key benefits of modular and offsite construction still ring true. It can achieve faster construction (50 per cent quicker than bricks-and-mortar homes) and superior build quality, while incurring lower programme costs.

In fact, according to research from the Royal Institution of Chartered Surveyors, modular manufacturing can be up to 40 per cent more productive than onsite building. 

Additionally, offsite construction schemes may benefit from improved sustainability credentials and safer, more reliable working conditions. Homeowners also benefit – modular homes typically cost 32 per cent less to heat than standard new builds and 55 per cent less than the average UK home.

We have seen first-hand the benefits of modular schemes; at one site in the South West, structural insulated panels enabled their construction, including with roofs on, within three days of being delivered to site. The efficiencies are clear, but more government support is needed if we are to harness the potential of more modular schemes, create robust business cases for SME developers, and think creatively to find fast but effective solutions to the UK’s housing needs. 

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