Modular Construction Finance: Funding Off-Site Building Methods

Modular and off-site construction — collectively known as modern methods of construction (MMC) — have moved from the margins to the mainstream of UK housebuilding. The method involves manufacturing building components or entire volumetric modules in a factory environment, then transporting and assembling them on site. The appeal is compelling: faster build programmes (typically 30-50% quicker than traditional construction), reduced waste, improved quality control, lower carbon emissions, and the potential to address the UK's chronic housing shortage at scale.

The UK Government has been a vocal advocate of MMC, including it as a key pillar of its housing delivery strategy. Several major housebuilders have invested in off-site manufacturing facilities, and a growing number of specialist modular manufacturers serve the private development market. Modular construction is particularly well suited to multi-unit residential schemes (apartments and houses), student accommodation, hotel developments, and healthcare facilities — projects where repetition of design allows factory efficiencies to be maximised.

Yet despite the clear advantages, financing modular construction has historically been challenging. Traditional development finance models are built around the assumption of on-site construction, with phased drawdowns linked to physical progress visible on the ground. Modular construction upends this model by shifting a significant proportion of the build cost to the factory, where the value is being created off site and is not secured by the lender's charge over the development land. This fundamental mismatch has been the primary obstacle to mainstream financing of MMC projects.

To understand the financing challenges, it helps to understand how conventional development finance drawdowns work. In a traditional build, the lender advances funds in stages as construction milestones are achieved on site — foundations, superstructure, first fix, second fix, practical completion. At each stage, the monitoring surveyor confirms that value has been added to the property, and the lender's security (the site and the partially completed building) increases in line with the amounts advanced.

In a modular construction project, a significant proportion of the total build cost — often 40-60% — is spent in the factory before anything is delivered to site. The modules themselves, while being manufactured, are not on the developer's land and are therefore not covered by the lender's security. If the developer defaults or the manufacturer becomes insolvent during this period, the lender could be exposed to a situation where substantial sums have been advanced but the security on site (potentially just foundations and a cleared plot) does not cover the outstanding debt.

This risk has made many lenders cautious about modular construction. Some have declined to fund modular projects entirely, while others have imposed restrictive terms — lower leverage, higher rates, or requirements for the developer to fund the factory stage entirely from equity. However, as the modular construction sector has matured and lenders have gained experience, more sophisticated financing solutions have emerged. In our experience, the number of lenders willing to consider modular projects has roughly doubled over the past two years, and the terms available have improved meaningfully.

The key to unlocking finance for modular construction is understanding the specific risks and demonstrating to lenders that those risks have been mitigated. This requires a different approach to structuring the application and presenting the project compared to a conventional build.

Successful financing of a modular construction project requires careful structuring that addresses lender concerns around off-site risk. The most widely accepted approach involves a modified drawdown schedule that aligns with the modular manufacturing and delivery programme. Rather than the conventional milestone-based drawdown, modular projects typically use a schedule that includes: an initial advance for site acquisition, a series of factory-stage payments (which may be advanced against specific milestones in the manufacturing process, such as chassis completion, fit-out, and factory inspection), and site-stage payments for foundations, module installation, and external works.

The critical risk mitigation for factory-stage drawdowns is ensuring that the modules being manufactured are either insured against manufacturer insolvency, held under a vesting certificate that transfers ownership to the developer, or subject to a direct agreement between the lender and the manufacturer. Several specialist insurers now offer off-site manufacturing insurance products that cover the value of modules in production, providing lenders with the comfort they need to fund the factory stage.

We have arranged modular construction finance for schemes ranging from £1,500,000 to £15,000,000 and have found that the most successful applications share common characteristics: a reputable manufacturer with a proven track record and audited financial statements, comprehensive insurance covering modules in transit and in the factory, a clear delivery programme with defined milestones, and an experienced developer or project manager who can coordinate the interface between factory production and site preparation. With these elements in place, terms approaching those available for conventional construction are achievable — typically a premium of 0.5-1.0% on rate and 5% lower leverage compared to an equivalent traditional build.

Valuation is another area where modular construction creates challenges for the financing process. RICS-registered valuers assessing modular schemes need to consider the residual value of the modules if the development does not complete. Unlike traditional brickwork and blockwork construction, which has well-understood residual value, modular units that have been installed but not completed may have limited alternative use. This has historically led valuers to adopt conservative assumptions, reducing the reported site value and consequently the amount a lender will advance.

However, the valuation profession is adapting. RICS has published guidance on the valuation of properties constructed using MMC, and valuers with experience of modular projects are becoming more common. A key factor in achieving a favourable valuation is the mortgageability of the completed units. Several major mortgage lenders now accept modular construction for mortgage purposes, provided the manufacturer holds a recognised warranty (such as NHBC, LABC, or Premier Guarantee) and the building meets relevant building regulations. The expanding pool of mortgage lenders willing to lend on modular homes directly supports higher development valuations.

For developers planning modular schemes, we recommend appointing a valuer with specific modular construction experience at an early stage — ideally during the pre-application phase. This allows any valuation concerns to be identified and addressed before they become obstacles. We also recommend engaging with warranty providers early, as securing a recognised warranty is essential for both development finance and end-buyer mortgages. If you are considering a modular scheme and want to understand the finance available, our deal room can connect you with lenders experienced in this sector.

To illustrate how modular construction finance works in practice, consider a recent example from our portfolio. A developer sought to build 30 modular timber-frame houses on a site in Berkshire, with a GDV of £9,000,000 and total development costs of £6,300,000. The modular component (wall panels, roof cassettes, and floor cassettes manufactured off site) represented approximately £2,800,000 of the total build cost, with the remainder covering land acquisition, site preparation, foundations, module installation, external works, and professional fees.

We approached eight lenders on the developer's behalf. Three declined to consider the project due to the modular element, two offered terms with significant restrictions (maximum 55% LTGDV and 10%+ rates), and three provided competitive proposals. The successful lender offered 63% LTGDV (a facility of £5,670,000), a rate of 7.75%, and a modified drawdown schedule that included factory-stage payments secured by a vesting certificate and an off-site manufacturing insurance policy. The arrangement fee was 1.5% and there was no exit fee.

The factory-stage drawdowns were structured around four milestones: commencement of manufacture (20% of factory-stage cost), frame completion (30%), fit-out completion (30%), and delivery to site (20%). The lender's monitoring surveyor visited the factory at each milestone, as well as conducting conventional site inspections. The project completed on time — two months ahead of the programme that would have been required for traditional construction — and all 30 units sold within six months of practical completion. The developer's effective return on equity was 38%, significantly enhanced by the faster programme that modular construction allowed.

The trajectory of modular construction finance is clearly positive. As more lenders gain experience with MMC projects, and as the insurance, warranty, and valuation frameworks continue to mature, we expect the financing terms available for modular construction to converge with those for traditional methods. Several lenders have told us that they see MMC as a strategic growth area and are actively developing products tailored to the sector.

Government policy is also supportive. The inclusion of MMC requirements in Homes England funding programmes, the emphasis on innovation in planning policy, and the recognition that the UK needs to build 300,000+ homes per year all point toward a growing role for off-site construction. For developers willing to invest in understanding the method and building relationships with quality manufacturers, modular construction offers a genuine competitive advantage — faster programmes, more predictable costs, and increasingly, access to green sustainable development finance products that recognise the environmental benefits of factory-based construction.

In our experience, the key to success in modular construction finance is preparation and expertise. Developers who can demonstrate a clear understanding of the method, a robust procurement strategy, and a reputable manufacturing partner will find a receptive and growing pool of lenders willing to support their projects. The era of modular construction being unfundable is firmly behind us.