Atelier devises framework to solve ‘pinch points’ of financing modular construction

Guidelines will lower the risks of building modular homes for both lenders and borrowers, says the company’s joint chief executive.

Specialist lender Atelier Capital Partners, has launched a lending framework designed to establish criteria for financing small-to-medium-sized developers as they build homes with modular offsite construction methods.

Chris Gardner, joint chief executive officer at the London-based firm, which launched in 2019 with backing from manager M&G Investments, said Atelier wanted to create a systematic lending approach to what he described as a “compelling” but “underserved” area of the development lending market.

Modular construction, whereby whole buildings or sections of buildings are manufactured offsite and connected together onsite, is gaining in popularity with residential developers such as Barratt Developments, due to it being a quicker, more efficient build process.

But Gardner says small- to medium-sized enterprises seeking to build homes using modular construction methods have found it challenging to obtain finance due to “pinch points in the process”.

In contrast to traditional methods of residential construction, where borrowers can draw down loans in stages over the course of the development process, upfront financing is typically required for offsite and modular construction, as manufacturers require developers’ payments ahead of construction and payment in full before site delivery.

Gardner explained: “That creates a challenge for a lender because you’re being asked to lend against assets which you have no security over. Larger manufacturers that are producing residential units at scale are able to provide insurance in case anything goes wrong but for smaller factories that is very difficult to obtain as they might have limited track record and be seen as higher risk.”

He added: “Compared to conventional construction techniques which use widely available materials, MMC [modern methods of construction] supply chains are still maturing and not all lenders, from development lenders to high street mortgage lenders, are comfortable or adept at funding non-traditional schemes.”

Atelier’s framework, the result of a six-month consultation with would-be borrowers and trade bodies such as the UK’s National House Building Council and Buildoffsite Property Assurance Scheme, is aimed at mitigating these risks.

One way in which it has done this is to adopt pre-existing accreditations from BOPAS or the NHBC, which show that a developer is building to their required standard and then allows them to obtain warranties. The lending criteria also requires evidence of a manufacturer’s financial resilience and track record of delivery.

Atelier, which has £275 million (€313 million) of assets under management, will also require that other units built the same way have previously obtained mortgages by the homeowner, which ensures the quality and sustainable credentials of the product.

Atelier has also adopted seven categories of offsite construction – from the UK Government’s MMC Definition Framework, developed by the Ministry of Housing, Communities & Local Government (MHCLG) Joint Industry Working Group on MMC. The framework has a set of practical eligibility criteria for each one, enabling the advancing of development finance to be tailored to the type of offsite construction being used.

Gardner said: “The drive marks the first time a major lender has addressed the challenges that SME developers face in financing modular and offsite construction. This hasn’t been done until now because it is difficult to do and the rewards are uncertain.”

The framework provides a lending approach that reduces the risk of modular construction for both developers and lenders, he added. “It helps developers make good procurement decisions but also as well protects us as a lender because we know that they will be putting up a good product to a good specification from an accredited body. The product we are lending against can get a warranty, insurance and the consumer will buy it knowing that they’ve got property which is mortgageable well-constructed.”

With the framework in place, Atelier expects to begin funding SME developers immediately, offering loans of between £5 million and £40 million at a maximum loan-to-cost of 90 percent. The day-one net loan-to-value maximum is 70 percent, and gross loan-to-gross development value is also 70 percent.

Gardner says Atelier’s strategy is built around promoting change in the area of financing modular construction: “We’ve produced this framework to help deliver solutions and to help developers identify viable opportunities. That offers capability and a way for MMC to flourish. Finance is the last thing to change when new technology comes along but we want to change that.”