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Why hasn’t modular housing taken off yet?

Modular has long been hailed as a solution to a housing crisis that has left workers in England and Wales needing to fork out eight times their annual income to buy a house, according to ONS data published in 2018.

The homes are quick to assemble and are cost-efficient, they are built to last and they leave a much smaller carbon footprint than traditional housing. Off-site construction also means fewer builders are required, which solves another problem facing the industry – a shortage of skilled workers.

Last week Birmingham City Council proudly announced that they were to build the city’s first council-built modular home, yet in other countries, modular houses already make up a significant proportion of homes, with around 84% of homes prefabricated in Sweden using timber elements.

So why aren’t modular homes more popular in the UK?

Past misconceptions

Three million new social homes must be built in England over the next two decades to solve the crisis, according to a January report by the charity Shelter. At least 1.2 million homes are needed for younger families, who can’t afford to buy and face a lifetime in expensive – and insecure – private renting.

One of the key issues is that when we hear the term module housing, we often think of the prefabricated homes that were erected to address the post-Second World War housing shortage.

From spring 1946, more than 156,000 pre-fab houses were erected across the UK in record time as a temporary solution envisaged to last no longer than ten years. The houses were typically bungalows and while much-loved by residents, were built in a style which gained a bad reputation for being low quality and unsightly.

Although a few are still standing – a testament to their construction – the homes are poorly constructed by today’s standards.

‘As for the “pre-fab” image, modular homes have very little in common with the inter-war “homes for heroes”‘ says Jessie Wilde, relationships & projects manager at the Bristol Housing Festival.

‘Today’s modular homes are precision-manufactured, energy-efficient homes with high levels of quality control,’ he adds. ‘Their construction methods are more sustainable than traditional methods and modern factories can offer better working environments than building sites.’

Luke Barnes, CEO at Ideal Modular Homes, adds: ‘Some people may have a misconception of modular from post-war homes. However, since the 1940’s there have been major advancements in technology and building materials.

‘Here at Ideal Modular homes, all our properties surpass building regs standards, are precision built in just 5 days and to an unmatched level of quality,’ he says.

Although modern modular homes look nothing like their previous incarnations, some people fear factory-built housing would leave families living in tiny, “identikit” homes. Traditionally, too, homes in the UK have been built with brick or stone rather than wood, which is often used to construct modular housing.

Tackling the ‘change averse’ planning system

There are also challenges when it comes to off-site construction. More money is required upfront to invest in the factories required to build homes, which can deter developers, and they are also costly to run. Factories that create modular housing require economies of scale, but the industry is relatively small (compared to Sweden, for example). There is also a more general fear of change when it comes to replacing the more “traditional” system of house-building.

‘Like anything made on a production line, the modules can be made quickly in high volume and to a quality standard at a low cost,’ says Nick Fulford, CEO of modular housing brand nHouse. ‘As a result many people, including the UK government, see volume modular housing as the solution to supplying enough housing in the UK and improving quality levels.

‘Until recently the modular housing industry was held back by a lack of innovative house designs, inexperience in how to make factories work, an unsupportive mortgage and lending sector and negativity from local planners,’ he adds.

Most local planners are very conservative and ‘change averse’, Fulford says, adding they thought modular homes would be of poor quality and design.

‘Until recently companies have struggled because the experience wasn’t there, the designs were not right, the mortgages were not available and the amount of capital investment to set up a factory is substantial,’ he adds.

Wheels slowly turning

Things are now changing, albeit slowly. Last year, Berkeley Homes announced their aim to build 1,000 modular homes a year out of their new factory in Ebbsfleet, Kent. The insurance giant Legal & General opened their factory in Leeds in 2016, with the aim of producing 4,000 modular homes a year.

Modular homes have been planned for Bristol too, Wilde adds. ‘Modular build is used on constrained and unconventional sites because units can be lowered in by crane. For example, ZEDpod modular homes, exhibited at the Bristol Housing Festival launch, are designed for land outside the development plan such as existing car parks and hard standings.

‘Last October, Bristol City Council committed to investing in six rapid-build, modular homes from ZED Pods. The ZEDpods will be offered to people in housing crisis later this year, subject to planning.’

‘New companies like nHouse have joined the industry offering high-quality homes. There are now around 20 factories up and running and the industry is gaining in experience, the BOPAS accreditation scheme means that main lenders like Natwest and Santander are offering mortgages and the UK government has really got behind ‘modern methods of construction’ like modular.’

The Buildoffsite Property Assurance scheme (BOPAS) is a risk-based evaluation which demonstrates to funders, lenders, valuers and purchasers that homes built from non-traditional methods and materials will stand the test of time for at least 60 years.

Moreover, people who want to own their own homes – and who have been priced out of the property market – are less interested in how their houses are built. It’s more about whether they will last and suit their needs and tastes.

‘With billions now being invested the UK government would like our industry to supply around 60,000 homes a year within a decade,’ Fulford says. ‘So it’s going to be much more common to see all sorts of modular homes around Britain.’

Source: Environment Journal

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New opportunities and risks in evolving market

It is widely accepted that we have reached a late stage of the property cycle. Some even argue that a downturn has already set in. However, our view is that while values feel pretty full, we certainly aren’t in bubble territory. It is reassuring to note that UK commercial property values have increased half as much as they did during the last cycle and the industry as a whole is nothing like as highly geared as it was in the run-up to the financial crisis a decade ago.

However, as lenders and investors, we can’t afford to be complacent. We remain alert to the risks of lending late in the cycle which today are as much, if not more, of a concern as structural changes in the market. Against this background, we have still been able to find value and we have invested more than £800m over the past 12 months, including our largest transactions to date in both our senior debt and partnership capital strategies, while we have been able to back some very interesting residential development opportunities in London and the South East.

The most obvious risk in today’s market is posed by changes to shopping habits. The inexorable rise of online shopping has already started to bite hard into the retail property market and undoubtedly, values and rents will continue to come under more pressure. We have therefore been reducing our exposure against retail property for some time but we are not turning our backs on the market completely.

”As lenders and investors, we can’t afford to be complacent. We remain alert to late-cycle risks”

While there is clearly trouble ahead for department stores and the centres they anchor, many retail centres will continue to attract shoppers, particularly those in densely populated areas that are focused on convenience shopping. We’ll continue to back borrowers and partners with deep retail experience in this part of the market.

The industrial market presents very different challenges for us. The rise of ecommerce is driving growing occupier demand but this means competition between investors to buy assets and between lenders to fund them is high. We have been active in the industrial market for many years but, with investment yields contracting to record levels, we see better relative value in development than investment and have funded two speculative warehouse schemes in the South East in recent months. Having said that, one of our biggest loans this year, and the largest loan to date in the senior debt programme, was the £125m refinance of an industrial portfolio, predominantly located in the West Midlands.

‘Live-work-play’ situation

The office market is also going through a period of rapid change with TMT tenants driving demand in many parts of the country, not just London, which are often followed by co-working operators, with most looking for that millennial-friendly ‘live-work-play’ situation. We are keen to support borrowers targeting this market, as evidenced by our loan earlier this year to support FORE Partnership’s £51m acquisition of Tower Bridge Court on the South Bank. It was our first office deal in London since 2015 and we are on the lookout for others as pricing for value-add investments in the capital is looking increasingly attractive.

evolving market

Tower Bridge Court £51m acquisition and refurbishment whole loan

We also continue to target the other major UK cities, confident that despite the uncertainty around Brexit, there are good lending opportunities available. The fundamentals of the office market in large UK cities remain healthy. Demand for space is robust; this has been driven by strong employment growth; supply remains tight due to a lack of new development and a similar lack of conversion of secondary office space to residential under development law.

Alternatives also look more attractive than ever. In an environment where Brexit brings an uncertain economic outlook, it clearly makes sense to be lending and investing in sectors where demand isn’t tied to the economic cycle. One such example is data centres; demand for data is set to grow exponentially but there are a very limited number of locations that can meet data centres’ specific requirements for connectivity or power. As well as backing student accommodation and hotels, which have been our alternatives bread and butter since 2011, we have been providing finance for data centres as well as a number of other non-traditional assets this year.

Indeed, we made our biggest-ever loan across the business this year in the alternatives sector – a £200m whole loan to Royale, an operator of permanent park homes aimed at the over-50s. The loan was backed by 27 individual parks and 3,500 plots, providing a good level of granularity. We also like the fact that the number of over-50s is set to grow at twice the rate of the whole population.

This year, ICG-Longbow expanded its direct investment activities with the launch of our build-to-rent business, through the Wise Living joint venture with SDL Group, and a pan-European sale-and-leaseback strategy. Growing both will be a key focus for us in 2019. Increasing demand for private rented housing gives us confidence in the outlook for build-to-rent, particularly as our focus is on family housing, which is an undersupplied part of the market. The sale-and-leaseback business is also an exciting venture for us that brings together ICG-Longbow’s property expertise with ICG Group’s 29-year track record of investing in European corporate credit deals.

We also plan to expand our partnership capital lending and investing activity into continental Europe in due course. For us, it’s a natural progression for the business and doesn’t mean we’re any less interested in the UK. Although the UK market faces challenges, not least Brexit, we are still firm believers that there are plenty of good opportunities out there.

Healthy sign for the market

Looking at the supply of capital to the market, we see that banks remain cautious and have lowered their LTVs. However, we see this as a healthy sign for the market as a whole and they at least remain active. From our perspective, the fact they have pulled back somewhat is helpful for obvious reasons. When it comes to our senior lending, we used to compete with the banks mainly on our flexibility and speed, whereas now there is usually substantial clear water between our terms and the banks on leverage, while in the higher LTV whole loan market there are only a handful of lenders equipped to underwrite more complex property strategies, including value-add and development.

Finally, in the residential construction market, we have seen more activity from other non-bank lenders, but in our opinion this has been more than offset by a couple of UK banks pulling back from the market, while the volume of debt capital available still remains low relative to financing requirements.

With positive occupational fundamentals in all but retail, we look ahead to 2019 with confidence that there will be plenty of attractive lending opportunities, despite (or even potentially resulting from) the ongoing political uncertainty. Having raised nearly £900m across our senior debt, partnership capital and residential development strategies this year and with fundraising efforts still ongoing, we have plenty of firepower coming into the new year and we look forward to continuing to support our customers with our flexible capital and partnership approach going forward.

Source: Property Week

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Landlords rely on brokers for better deals

Landlords rely on brokers to guide their financial choices because they feel intermediaries have access to better deals, according to research by a bridging lender.

In a survey of 2,000 adults who own three or more residential properties, 35 per cent agreed they rely on brokers to inform choices made when securing finance for a property purchase.

The research, conducted by bridging lender Market Financial Solutions, found 41 per cent of the landlords who relied on brokers felt they could access better rates than a borrower going direct with the lender.

Paresh Raja, chief executive of Market Financial Solutions, said: “Whether it is someone purchasing their first house or their 50th, this research shows how instrumental brokers are in guiding property buyers through the financial options available to them.”

Recent figures released by fintech firm Mortgage Brain found a significant difference between the cost of comparable buy-to-let mortgages and mainstream residential products.

As of November 1, the cost of a five-year fixed buy-to-let mortgage at 80 per cent loan-to-value (LTV) was 24 per cent more than the same product type for a residential mortgage.

A two-year fixed buy-to-let mortgage at 80 per cent LTV cost 20 per cent more than its residential equivalent.

The survey of landlords with a portfolio of three or more properties also found a preference to explore financing outside of traditional mortgage products, with 41 per cent expressing a want for a better understanding of the options available to them.

Mr Raja said: “Importantly, beyond the historically dominant mortgage providers, there are now many forms of alternative finance that buyers can call upon.

“And property investors are clearly keen to explore options outside of mortgages that might be better suited to their particular circumstance.”

Mr Raja said with more than a third of landlords relying on brokers, it is vital intermediaries have in-depth knowledge of all financing options and not just different rates for the same product.

Steve Olejnik, managing director at Mortgages for Business, said he thought the number of respondent landlords using brokers to guide financial decisions in the survey was surprisingly low.

He said: “In my experience nearly all buy-to-let mortgage business is done via intermediary channels.

“But there will be landlords who purchase in cash and therefore don’t require finance – I would think therefore that those not going to a broker are predominately cash buyers.”

Mr Olejnik said brokers are becoming increasingly important in filling the advice gap.

He said: “In a buy-to-let environment more complex than ever, landlords really do need broker advice to find the right product.”

Source: FT Adviser

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Over half of mortgage applicants rejected for reasons like being self-employed

Over half (54%) of mortgage applicants who’d fallen out of the application process were denied a home loan for reasons that could be considered ‘normal’ by most people, such as being self-employed or contract workers, Together has found.

Other factors once believed to be ‘non-standard’ include taking a dividend, or the type of property they were looking to buy, including conversions or high-rise flats.

Pete Ball, personal finance, chief executive at Together, said that many mainstream lenders needed to keep pace with the demands of these types of borrowers.

He said: “The world has changed. People’s pay, working patterns and pensions have altered beyond all recognition from 30 or 40 years ago.

“Even where they live, who they chose to live with, or the type of property they want to buy is vastly different from a generation earlier.

“What was previously thought to be ‘normal’ simply doesn’t exist anymore.”

Together’s study, which was conducted by market researchers YouGov, builds on earlier research by the Intermediary Mortgage Lenders’ Association, (IMLA) which revealed a significant proportion of the UK population fail to secure a home loan between an initial enquiry and the time they would receive a mortgage offer.

The latest survey discovered that, of those rejected, 12% were denied because of their employment type, while 3% had insufficient employment history. This could be despite potential borrowers being in a good position to repay their mortgages.

One in 10 (10%) were denied because the property they wanted to buy was considered ‘non-standard’, which could mean anything from a converted barn to a high-rise apartment.

Self-employed workers are also being “locked out” of the mortgage market by some lenders, Mr Ball said. Labour market data shows the population of people who are working for themselves has soared by a quarter in the past decade to 4.8 million, making them a cornerstone of the UK economy.

Millennials – those aged between 18 and 34 – were worst hit overall – with two thirds (66%) who took part in the survey failing to get on the housing ladder because of the way they live and work nowadays, which may mean they do not meet some mainstream lenders’ criteria

A total of 46% of over 55s were denied home loans, some because they were too near retirement age.

Ball though this could pose a growing problem in the future, as the age of the UK population rises, with the number of people aged 65 and over in England and Wales projected to increase by 65% to more than 16.4 million in 2033.

Andrew Montlake, of mortgage broker Coreco, said: “Across the country, people are living and working longer and have varying ideas of what their perfect home will be at different stages throughout their lives.

“Unfortunately, much of the mainstream mortgage market has been slow in catering for these potential borrowers, who make up a wide section of society. The market needs to continue to adapt to make sure it remains fit for purpose.”

Additionally, Together found nearly one in five (18%) people were turned down because they had a low credit score or a lack of credit history.

Surprisingly, fewer than one in 10 (9%) of said they’d been turned down because their deposit was too small and 16% said they were not earning enough to afford repayments on their home loan.

Over a quarter (27%) of rejected applicants who did not obtain a subsequent mortgage were put off ever going through the process again – shelving their dream of owning their own property – rising to 32% for over-55s.

Some one in 10 (10%) of those who withdrew a mortgage application/enquiry the last occasion they were unsuccessful pulled out before receiving an offer as they found the process too complicated, and 7% said there were too many stages.

A disappointing 28% who were originally unsuccessful have not secured a mortgage.

Ball said: “As a lender, we’ve been providing flexible, common sense lending for over 44 years, so we recognise that was once considered unusual or specialist is now becoming more normal, and the mainstream needs to be able to adapt to the changing world.”

Source: Mortgage Introducer

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Highest standard of fire safety extended to all homes

Fire and smoke alarm regulations will be changed to ensure all homes have the highest level of protection following the Grenfell Tower tragedy.

Legislation will be amended to extend the “existing high standard” required in private rented housing to all homes in Scotland, the Scottish Government said.

This will mean that private homes must have at least one smoke alarm installed in the room most frequently used, at least one smoke alarm in spaces such as hallways and landings and at least one heat alarm in every kitchen.

A carbon monoxide detector will also be required in all homes and there will be a 10-year age limit for alarms.

The changes have been announced following a consultation on fire and smoke alarms which was launched after the Grenfell Tower disaster last June in which 71 people died when a fire ravaged the London high-rise.

Housing Minister Kevin Stewart said: “Fires and fatalities from fires are decreasing but even one death is one too many.

“Scotland already has rigorous standards for smoke and fire alarms developed over time, with the highest standard currently applied to new-build and private rented housing.

Now everyone will benefit from the same level of protection, whether you own your home, or rent from a social or private landlord.

Housing Minister Kevin Stewart

“The tragic events at Grenfell Tower last year emphasised how important building and fire safety is, which is why we brought forward our consultation on this issue.

“Now everyone will benefit from the same level of protection, whether you own your home, or rent from a social or private landlord.”

The Housing (Scotland) Act 1987 will be amended to reflect the new requirements.

All alarms will have to be ceiling-mounted, and should be interlinked.

Assistant Chief Officer David McGown, Scottish Fire and Rescue Service (SFRS) Director of Prevention and Protection, said: “The presence of working smoke and heat detectors have been proven to significantly reduce casualties and fatalities occurring as a result of fires within the home.

“SFRS therefore welcome and support the next steps from this consultation which will undoubtedly improve home safety for all residents, regardless of tenure.”

Source: BT.com

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Rogue landlords making millions out of housing benefits

Highly organised gangs of rogue landlords are making millions every year out of the housing benefit system by enticing desperate local authorities to place single homeless people in micro-flats in shoddily converted and dangerous former family homes.

Three-bed houses, where the maximum weekly housing benefit for flat-sharers is under £100 a person, are being converted into as many as six tiny self-contained studios – as little as 10 sq m in size. Each then qualifies for housing benefit of £181 a week, enabling a landlord to squeeze £56,000 a year in rent from a property on London’s fringes, all paid from public funds. The £56,000 compares with the typical £6,200 annual rent on a three-bed council house.

A previously unpublished government report into a £700,000 project to tackle the scam, released this week under freedom of information laws, shows that councils are struggling to contain the spread of the “lockdown” model, which has taken hold in at least 12 London boroughs since 2015.

It warns of “well organised but unscrupulous landlords” profiting despite some councils – including Hackney, Bexley and Greenwich – launching prosecutions, raids and prohibition orders.

“Given available resources and the potential number of ‘rogue landlord’ properties, regulatory activity on its own would not solve the problem as long as the market was so heavily weighted to favour the supplier and the housing benefit rules allowed for high payments on such small conversions,” says the report. “Investors typically buy a three-bedroom house and convert it into six rooms, each with basic cooking facilities, in order to claim the maximum housing benefit rate.

“The lettings model was also being actively promoted as an investment opportunity amongst both existing landlords and, possibly, more widely. This has contributed to the strong growth of conversions using the model,” it says.

The report – obtained by local housing campaigner, Jon Knowles, after he appealed to the Information Commissioner – reveals “lockdown landlords” are exploiting planning loopholes created by the Conservative-led government in 2010.

“The basic premise […] was to convert houses into a large number of very small ‘self-contained’ units, each containing basic cooking facilities, but to also have a shared kitchen so as to be able to claim, for planning permission purposes, that the house was a house in multiple occupation and fell within permitted development rules,” it says.

Councils can apply to place restrictions on these rights but the report says only one councils in the project has managed to do so.

The converted flats, frequently approved by the landlord’s own private building control firms and electricians, are offered to homelessness services across the capital in need of rentals.

“The landlords often target local authority services which are looking for units when they accept either a full, or interim, homelessness duty for an individual. The landlords are aware that such individuals will be entitled to housing benefit, and are also aware how difficult it is for such services to locate suitable units,” it states.

Services from different areas regularly compete for the same properties, which can lead to “uncoordinated placements and clashes between the residents”. One incident resulted in a stabbing, and a woman living in one of these flats has been assaulted by other tenants. Checks by planning and environmental health officers are rarely carried out because homeless services are under such pressure to find rooms immediately.

“It was recognised that, with the shortage of units and the frequent emergency need for placements, the priority would often be to just get a person into some accommodation for the night.”

Housing inspectors found the micro-flats were often in very poor condition with inadequate fire safety provision and dangerously overloaded electrics and plumbing systems.

Neighbours complained of anti-social behaviour and feeling unsafe when there were influxes of often single men, with substance abuse and mental health problems .

Councils are reluctant to take a hard line because they fear it could make people homeless: “There were clear concerns about the model becoming too widespread and it was felt that changes did need to be made in order to contain its growth. However, it was accepted that these could not be wholly retrospective otherwise it would create a spike in homelessness.”

Lambeth council, whose officers coordinated the research project, says landlords using the model were still operating in the capital and that family houses were being divided up into micro-flats all the time.

“They are always being created to meet the demand for the lack of social and affordable housing,” it says.

Knowles fought to get the report released after he discovered a string of “lockdown properties” in his neighbourhood of Hanworth, west London. “I simply could not believe that you would be allowed to cram six bedsits into a former two-bed home,” he says.

Retired builder Gary Warren found himself sofa-surfing because he could not afford a deposit on a flat in west London. He thought his luck had changed when he found a letting company that accepted people over 35 and claiming benefits.

“I stayed with a few friends and then I found out about this company that rents flats out without a deposit if you are on benefits,” he says.

A letting agent showed him what they called a flat in Hanworth but it was actually a tiny room measuring just 10 sq m, including the toilet. He took it because he “had no deposit to put down on a private flat”.

Gary, who is 63, pays £980 for his room, which is mostly covered by his housing benefit.

The people in the four other flats are charged the same, which potentially earns the company £3,920 a month in rent.

“The length of my bed is the width of the room. I’ve got a wardrobe and fridge. So I have about 10ft by 3ft of space – it’s a corridor,” he says. “There’s no room for a chair, so I lay down all day. I don’t see anyone, so I don’t get any stimulation – I’m just stuck in this room.”

Water pours down the walls when it rains because the flat roof above him leaks. It got so bad over Christmas that the council moved him to a B&B as the room was uninhabitable. But Gary – who has had a stroke and is in the early stages of dementia – has carried on paying the rent because he needs somewhere to live. “It is robbery,” he says. “They are ripping off the council. Why are they letting it go on?”

Source: The Guardian