Why modular construction could be a game changer, but only with help
Modular construction has hit the headlines in recent weeks, largely due to the announcement that BokLok (the construction partnership between Ikea and Skanska) has appointed the UK modular construction company, TopHat, to help deliver 2-3 bedroom modular homes in the UK. With this in mind, we look at how modular construction could be a game changer for the property development sector, but only with some help.
What is modular construction?
Modular construction, also known as volumetric construction, is where components of a building are made off-site, in a factory setting, and then transported to the site to be linked together and form the building. Modules are transported to site typically with doors, windows, plumbing, electricity, heating and some internal finishings already completed. Not only will rooms be included in modules, but parts of corridors and some external finishings.
Modular construction is an example of Modern Methods of Construction (MMC). Whilst not specifically defined, these are construction methods that are sought to improve business efficiency, customer satisfaction, sustainability and environmental performance.
A brief history of modular construction
Whilst modular construction is sited as an example of MMC, there is actually nothing new about the method of construction. The first modular construction was made in the 1830's where John Manning, a British carpenter, made parts of a building and then shipped them to Australia. In 1855, during the Crimean War, the legendary engineer, Isambard Kingdom Brunel, was commissioned to build a modular hospital following a complaint by Florence Nightingale regarding conditions.
During the Second World War, the military commonly used modular construction as a means to provide shelter for troops. Following the war, the method was adopted to construct affordable housing as a solution to the housing crisis as a result of six years of fighting.
From the 1950's onwards there were continued attempts in the UK, by the government, to adopt modular construction using both steel and timber frames, but mass production never materialised. Quality and sustainability were seen as a common problem, and suspicion from the public as to such methods, exacerbated by events such as Ronan Point in 1968, and an expose by the 'World in Action' TV programme, in 1983, have consistently prevented modular construction achieving public acceptance.
As recently as 2017-2018, Forbes reported that only 7.5% of all new homes being built were by modular construction. By comparison Germany reportedly sit at 20% and Sweden at a whopping 84%. To say that our adoption of the construction method is under-utilised is perhaps an understatement.
What makes modular construction appealing?
In terms of the history so far, it hardly appears to be a compelling argument for modular construction, and that it can be a game changer for the UK. However, hear me out! The key themes are as follows:
It is reported that modular construction can save overall development times by up to 50%. How can this be possible?
A factory setting means that there can be a 24/7 operation. Traditional construction methods are constrained by noise restrictions, the needs of local residents and the weather.
The off-site setting means that operations are easier to standardise and monitor. Snagging and defects can be picked up in the factory and resolved prior to arrival at site.
There is a need for fewer construction workers, with a more streamlined workforce compared to traditional construction methods.
These increases in efficiencies bring down the overall build cost of schemes. This is an important factor when engaging with private developers. Whilst this applies to all asset classes that modular can cater for, this is extremely pertinent when looking at affordable housing. Private developers are not currently engaged in this agenda, and will need to be enticed with a the potential of a decent return on their investment.
The use of technological advances
With artificial intelligence (AI) and virtual reality (VR) technologies, various part of the process, whether design, engineering or manufacturing are positively affected. Designs can now be made to order with clients able to visualise in great detail what the end product will look like. Execution of the scheme, through advanced technology is delivered more quickly, accurately and cost effectively.
Economies of scale
Whilst the technological advances described above mean that more bespoke and made to order offerings have become available, modular construction remains well suited to large repetitive developments such as hotels, hospitals, apartment blocks and student accommodation. Investors and developers, through a cost effective approach, can create greater profit margins on schemes.
The UK Green Building Council have reported that 10% of the UK's carbon dioxide emissions come from the construction industry. Off-site construction reduces the need for heavy, on-site machinery. The use of Computer Numerical Control (CNC) machinery means greater accuracy in manufacturing leading to a reduction in waste, which can then be recycled. The Waste Resource Action Programme (WRAP), detailed in a case study how there could be as much as a 90% reduction in waste as a result of modular construction
In addition to the manufacturing being more environmentally friendly, the end product can also be a greener alternative. Bristol council announced recently, that Legal and General had been granted planning to build an initial 190 modular homes. All the homes built will achieve the highest EPC rating for energy efficiency, placing them in the top 1% of all new homes in the country.
Flexibility in location
Off-site production means that production can literally be anywhere. Let's face it, if John Manning could do it in 1833, the opportunity remains today. This means that rather than needing to recruit project specific labour in the location of each scheme, a regular, highly trained and loyal workforce can be recruited at the factory, in communities away from the site.
By moving construction to a controlled factory environment, with a requirement for less labour, accidents and injuries can be reduced.
Why could it be a game changer now?
You could be forgiven for feeling that we have been here before, and that for decades this discussion has been happening without anything substantial (in the UK at least) coming to fruition. However, I believe, that there are numerous reasons to believe that modular could take off in a big way:
The pressure to deliver affordable housing
The current need for affordable housing is deemed to be at a critical level. In a 2019 report Shelter, reported there was need for 1.2m new affordable homes in the UK. In 2018, the government committed to building 300,000 new homes every year until the 2020's. However, the government figures for 2019 make pretty grim reading:
Of the total homes built in the UK (217,000), 57,485 were affordable housing
There were 61,056 on-site starts in 2019, of which 62% were for affordable rent and a mere 1,224 were for affordable ownership.
The present figures show that the targets are not being met and just as importantly, developers simply are not engaged in building affordable housing. You can therefore expect that a government, conscious of meeting its targets will look to encourage schemes. Through the public body, Homes England, there will be a drive to deliver cost effective outcomes at increased pace.
The impact of COVID-19
The impact of COVID-19 has, of course, been dramatic on the industry. Sites closing down or being reduced to a skeleton workforce has demonstrated the fragility of current methods in the light of such circumstances. In contrast to this, last week, UK modular construction specialist, Premier Modular, reported that it had managed to keep its factory fully operational throughout the pandemic, and had in fact recruited additional staff to meet a rise in demand.
Of course, a pandemic is not a common occurrence, but with social distancing measures likely to remain in place for some time, a desire to adapt and evolve construction methods should be stronger than at any other time in recent history.
The financial impact of COVID-19, albeit still not entirely clear, will no doubt provide developers with the motivation to look at more cost efficient methods in order to secure a profitable margin in more challenging times.
A move to more environmentally friendly methods
Unlike the immediate shock of COVID-19, the need for companies to be more environmentally responsible in their practices has gained momentum in recent years. The raised consciousness of the public towards this issue, will no doubt prompt the industry to look at how it evolves. As already demonstrated with Bristol Council's house building plans with Legal and General, we can expect this focus to continue to grow, especially once the focus has moved on from COVID-19.
What stands in the way of modular reaching its potential in the UK?
At this point you might be forgiven for thinking, we have a method of construction that is more cost efficient, time efficient, greener, more pandemic resistant, and could solve the affordable housing shortfall, so what is stopping this from happening? The answer is a number of factors:
The alternative name for modular construction is 'prefab'. Whilst those involved in modular construction will tell you that the two are different, the common perception is that they are one and the same. And if I ask you what you associate 'prefab' with, there is every chance old dingy classrooms wont be too far away. Regardless of the technological advances and the current reality of what can be delivered, the history of modular construction remains a big issue, especially when it comes to residential homes, where buyers want to know that their property is at the very least, durable.
It is also worth noting that this doesn't necessarily apply to all asset classes. Whilst a homebuyer will understandably want confidence that their home is going to be of sound structure, I am yet to find a hotel guest that only books their room having evaluated the method by which the hotel was built!
Wider suspicions about new homes
In addition to the challenges facing modular construction specifically, there is also the issue concerning the wider reputation of new homes. A poor standard of finishing and issues with utilities have been commonly reported (as highlighted in a parliamentary paper in 2019) that have led to a preference for prospective buyers to prefer older properties.
Lenders that wont lend
For developers a sizeable problem remains that they simply find it hard to obtain finance. Given the benefits highlighted above, you may be surprised by this stance from lenders. The reasons are obviously specific to each lender, but speaking in general terms, there are a couple of themes that can be drawn upon. One is that they simply haven't funded schemes in the past due to the unreliability and quality issues with modular developments. If there hasn't been any desire to look at recent advancements in the sector, the lenders position has just simply remained unchanged.
The second reason is regarding the way in which funds are released for schemes. With development finance, funds are typically drawn down in stages once a Monitoring Surveyor has inspected works completed. Funds released are aligned to the growth in value of the site as the project progresses. This structure allows a lender to mitigate the risk of a development, rather than putting all the cash in at once. With modular construction, funding is required upfront to complete construction off-site, yet the value of the site does not grow until the completed modules arrive and are assembled.
What help is required?
With the challenges that modular construction faces to reach its potential, help is required. But what does this look like?
A new narrative needs to be written
There are a large number of projects now being completed that completely go against the traditional narrative of poor quality prefab structures. Whether it is AC NoMad, A Marriott hotel in New York with it's 26 stories, or the new environmentally friendly homes in Bristol, the public at large need to see that things have moved on and for the better. As stated at the beginning of this blog, the BokLok venture, that has Ikea's name attached to it, will no doubt draw positive attention to the modular construction industry.
An evolution in the approach from the finance industry
There are of course lenders who are engaged in this form of construction, and support developments. However, if modular construction is to truly take off on a grand scale, there will need to be more participants in the market place. That may mean a step away from traditional funding structures of development finance. This is especially true if lenders are to support UK based modular construction companies, given that their foreign counterparts often have access to financial instruments in their own country prior to modules being shipped to the UK.
Regarding the specific issue of affordable housing, Homes England will have an important role to play in engaging with lenders and supporting the evolution of funding structures. This will, in turn, encourage lending to those developers willing to build affordable housing, something that is not currently happening.
Developers and investors need to see the potential that modular construction provides
This will mean a move away from traditional construction methods, which naturally means a change of approach for developers and investors. As already detailed, the benefits of cost efficiency, mixed with the current market environment gives ample motivation for developers to explore new avenues.
If lenders become more receptive to modular construction methods, there will potentially be an increased appetite from developers to become involved. Affordable housing, could in turn become a more viable opportunity for private developers and investors.
This blog states what could happen, rather than what I believe will happen. There are a lot of variables at play that are intertwined, and will need to combine to see the modular construction industry meet its full potential. Will that potential be realised? We will just have to wait and see.
How can Montpelier Private Finance help?
I am passionate about the potential of modular construction, especially in delivering the mass scale affordable housing that the UK currently needs. We have established relationships with specialist lenders who support modular construction, and continue to engage with lenders about reviewing their product offerings to include modular construction. If you have a specific case you wish to discuss, please get in touch.
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