We’re talking about modular construction, everything from kind of volumetric very digital products to kind of houses built in the dry on some kind of production line, there’s a huge range of stuff in there. But with that, with the kind of legal head on, what questions are investors asking around what protections they want to see?

Most of these things are built off-site so number one, developers/investors don’t have visibility of what’s going on so a lot of the times what you have to do is ensure you’re monitoring what’s happening off-site. You can’t just wait for it to all turn up on the date it’s supposed to be delivered and hopefully everything will be okay. The door’s in the wrong place. [Laugh] So a lot of investors and a lot of funders are sending their monitoring surveyors out to monitor the modular construction that’s taking place off-site. Now sometimes, as you know Alex, some of that’s not happening in the UK, it’s overseas. So the monitoring costs can rack up as people are making trips abroad, they’re sending their teams abroad to check what’s happening. Secondly, some of the modular products are very specific to the delivery of the building, so it’s not just a question of if one of your modular providers goes insolvent you can easily get another replacement to simply slot in, so you have to really be careful in relation to the covenant strength of your supplier, the track record that they have.

And finally we’re looking at funding it. Traditionally lenders have been very reluctant to lend on things they can’t see and tick off on-site so we are seeing some lenders limit the amount of money they will allow to lend on off-site construction.  That means that a developer like yourselves or investor would have to put more money in themselves and then lenders will perhaps only put a proportion of that money in. So they’re willing to test it but only so far. Absolutely.

If we’re looking to scale up many, many, many units and we want a particular type of kitchen, a particular type of flooring and we can’t necessarily access that in the long term, what are the implications for that, sort of, legally?

A lot of what we’re seeing in modular construction, people are very much looking at the delivery of that unit, not thinking about future issues. Sometimes these modular units are very much imbedded into the existing design and sometimes any changes to the design can be very difficult to accommodate. Generally with modular construction the design needs to be agreed quite early upfront because they’re not very flexible when you need to change design in the future. And also, after delivery, for an operator such as yourself, whilst the modular aspect of the construction is built in, what happens if you need to change the use slightly?  What happens if you need to kind of change the kitchens and the finishes to meet the market going forward in a few years’ time? How flexible is that modular construction that has been inputted going to be in relation to future design change issues? And again we’re seeing people looking at that a lot more.

The way that that kind of that modular end of the industry is going to get really mainstream is if we can implement some kind of standardisation, some kind of compatibility so if the worst does happen and one particular provider is not there anymore you’re not having to start from ground zero again, you can go actually and you can transfer because at the moment really you’re investing in one particular supplier’s style, aren’t you?

Yes. Alex, you’re absolutely right and if you nail that the industry would move a lot faster forward. At the moment one of the concerns of modular is that a particular supplier of modular is linked to a particular contractor and therefore that modular element of construction is input in the design of all other aspects of that build and if that modular supplier fails then the rest of the build is really at risk.  Whereas if you had a bit more flexibility and bit more standardisation where if a modular supplier fails or didn’t perform then you could easily get another replacement in just as quickly without impacting massively on the rest of the design, so that the industry could move a lot quicker.

Build to Rent: Managing risk in modular construction

What modular construction risks and market trends do Build to Rent investors and developers need to know about?

In this final instalment of their interview, Nazir Dewji, Head of UK Real Estate at BCLP, and Alex Notay, Build to Rent Fund Director at PfP Capital discuss another elephant in the room.

Market insights include:

  1. What to consider when you monitor off-site construction
  2. The lending trends we’re seeing
  3. Building in flexibility for future design changes
  4. The scope for standardisation across suppliers

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