It has been a big year for modular housing. So often pitched as a solution to the UK’s housing crisis, offsite construction has long failed to live up to the hype.
But this year there has been more than just talk.
Berkeley Group launched its own flexible housing concept, Urban House, which incorporates modular, in Greenwich and Reading. In the north of England, Urban Splash has teamed up with architect ShedKM to launch a customisable factory-built hoUSe product, erecting 43 homes at New Islington in Manchester and another 100 at sites in Tyneside and Salford.
Meanwhile, in the private rented sector (PRS), developer Essential Living has picked modular specialist Elements Europe to deliver its 249-unit Creekside Wharf scheme in south London, which, at 23 storeys, will be one of the tallest modular buildings in the UK, and one of the first build-to-rent schemes to be built using offsite construction.
Even housing associations are getting in on the act: Swan Housing Association is opening its own offsite factory, and Keepmoat is partnering with an offsite manufacturer to develop at least 500 homes per year.
So, as many will no doubt be asking at this year’s RESI Conference in Wales, is modular housing finally moving from the fringes into the mainstream of UK housebuilding?
Going mainstream
Perhaps the most significant move was L&G’s investment in a new offsite construction factory. In Yorkshire, the institutional investor is developing what it says will be the largest modular housing factory in the world, at 550,000 sq ft. The first units are expected to roll off the production line by the end of the year and it plans to scale up production to thousands of homes per year.
However, modular is still some way from the mass delivery stage yet. In fact, a recent National House Building Council report found that the proportion of homes built with an element of offsite construction had actually fallen from 24% in 2008 to 16% last year.
Although these figures do not take into account this year’s pick-up in activity, they do show how far modular has to go before it can be considered mainstream.
For modular housing to become a scale solution to the housing crisis, a number of significant obstacles need to be overcome, says Noble Francis, economic director at the Construction Products Association - not least the business model of volume housebuilders.
“Offsite manufacturing requires a large investment up front and returns over the long term, so you need a stable market,” he says. “Following the financial crisis, housing starts fell 71% but volume housebuilders have a business model that can adjust to that kind of volatility - they can slow down or stop building - but it is much more difficult for large-scale manufacturing to adjust in the same way. If you have a factory, you have to supply it with orders, so for modular to reach scale it will require a stable market.”
Not a cure-all
Mark Farmer, a director at Cast Consultancy, is preparing a report for the government on skills in the construction industry that will include a close look at the part offsite construction can play in solving the housing crisis. He agrees that the economics simply don’t stack up for volume housebuilders and believes modular schemes like Berkeley’s are likely to remain a niche activity.
“I don’t see the innovation starting in the housebuilding sector - there just isn’t any incentive to deliver quickly. They have a rate of sale they have to align to and that effectively dictates their delivery,” he says. “They are not incentivised, and unless something drastic happens, I don’t see housebuilders leading the charge as it just doesn’t suit their business model.”
Farmer contends that it is in the build-to-rent and affordable rented sectors that offsite manufacturing is likely to have the biggest impact. “The rental sector, where investors are looking for products at scale and quickly, is an obvious opportunity to enable investment in offsite,” he says.
“Both affordable and PRS are acyclical, whereas private for sale is completely cyclical and wouldn’t underpin the investment in factories.”
He adds that regardless of the level of interest from industry, government intervention will still be required to bring about the kind of revolution needed to take offsite manufacturing into the mainstream.
“The only way you are going to step-change the construction industry is through some kind of external stimulus,” he argues. “If you just leave the industry to carry on as it is, it’s unlikely that you are going to end up with the bulk of what we do as modular construction. It just hasn’t happened in the past, so why would it happen in the future?”
As revealed by Property Week last month, the government is understood to be preparing a housing stimulus package that will amount to as much as £5bn in investment administered by the Homes and Communities Agency (HCA).
The package is expected to be unveiled in the Autumn Statement, and is likely to offer loans and guarantees to developers across the residential sector, including build to rent. Support will be aimed at smaller developers - and there will also be a focus on boosting modular construction.
Farmer, who will be publishing his review later this month, says that there are a number of things the government could do to stimulate offsite manufacturing, particularly around creating incentives for clients to choose modular over traditional methods.
“The role of clients is critical in this, but you need to ask why clients would all of a sudden change their behaviours to buying manufacturing-led construction rather than traditional, and that’s where perhaps the government has a role to play,” Farmer says.
“That could be about creating the right conditions, the right incentives and the right sort of overall environment that makes clients start to change their mind about modular and think that it’s a good thing and the right way forward - that it’s the future of the industry.”
Government measures could include fiscal incentives in the form of tax reliefs on the start-up costs of factories or ring-fencing an element of the existing R&D tax credit scheme for modular construction, Farmer says.
There could also be incentives through the planning system, with public bodies putting conditions on the development of public land to require modular construction.
Elephant in the room
Farmer adds that the government could go even further and play a direct role by commissioning modular housing through the HCA, the mayor of London or other city region authorities.
“I think there is an opportunity there for the government to say: ‘You know what, we’re going to directly commission factory-built housing.’ That’s the big elephant in the room,” he says.
“If government is serious about modernising construction to increase capacity so it can deliver more homes, then they haven’t got much choice.
What’s clear is if they want to be building 200,000 homes or more per year, then we can’t continue in the way we are now. We’ve got to change the way we build.”
Paul Stanworth, L&G Capital managing director, argues that if the government worked with modular housing providers on public land it could open the door to a major expansion in offsite manufacturing.
“If government could provide some form of guarantees on the income from the affordable homes, then institutions and funds would then buy that income,” he says.
“So the government wouldn’t even need to borrow money to invest in housebuilding; it could just get the money from institutions that buy the income and it doesn’t need to add to the borrowing. It would be a virtuous circle.”
The earliest prototypes from L&G’s factory are expected to roll off the production line in the coming weeks and the first finished units are expected to be completed before the end of the year. Ultimately, the factory will have capacity to produce around 5,000 units per year, although that won’t necessarily translate into 5,000 homes, because some individual homes will contain two or three of the factory-built units.
While L&G will be providing modular housing for both the private sale and the rented market, like Farmer, Stanworth agrees that it is in the latter that the real potential lies. “When you have a business model that is reliant on rental income, the quicker you can build and the more you can standardise the build, the more you can get an economic return from your investment,” he says.
“With traditional build-to-sell housebuilding, the volume is based on the pace of buying and selling going on in a local area. If it slows down you can slow down the build, and if it speeds up you can speed it up. The rental market is very different, and it’s the same for the hotel and student accommodation industry. Once you’ve decided to build it, you want to build it as quickly as possible.”
Ian Killick, director of ShedKM, which is aiming to produce around 200 units per year in partnership with Urban Splash, says the barriers to modular housing are not confined to the economics.
“Certainly it’s the commitment up front that’s the main challenge. There was a lot of upfront investment in hoUSe and quite a few years of R&D, but there are other hurdles as well,” he says.
“We had to get the costs to work, we had to find the right development partner and we had to convince lenders. Because factory build can’t be described in the usual ways that mortgage lenders describe properties, we needed to get lenders around the table and ask if they would be willing to lend on this product - and they said they would.”
Getting council planners on board can also be a challenge, adds Killick. “Some councils are really interested, but others still need convincing,” he explains. “They harbour concerns around the quality and lifespan of the product, which harks back to the days of pre-fab. But our product has a manufacturing guarantee and is backed by Lloyds insurance and that addresses questions about longevity or quality.”
Don’t mention the ‘p’ word
While Stanworth agrees that there is still a public perception problem around modular, he says that as the method becomes more commonplace in the rental sector, that could change. “If you are buying a house, there’s still quite a cultural barrier in the UK where people think modular construction means post-war pre-fab,” he says.
“But I can see a situation where you prove the concept in the rental market - people will live in modular homes and not even know it and then eventually the culture will move on.”
Clearly, there are still real barriers to the expansion of modular housing, but many in the industry are optimistic that with the right set of government interventions, offsite construction could be finally ready to move into the mainstream. If that proves to be the case, the UK will have taken a significant step forward in tackling the housing crisis.
Original link - Property Week
