Who are the key players in the offsite manufacturing sector?
There are probably no more than 10 larger established manufacturers, and then 50-100 smaller companies with some element of off-site manufactured products or systems in their portfolio. Companies like L&G, Berkeley and Urban Splash have all started to invest in establishing manufacturing capability, but there are an increasing number of start-ups who are also entering the market.
Which are the key markets? And where is the biggest potential for growth?
Offsite covers lots of systems such as panelised and hybrid. In the short to medium term, the greatest potential comes from volumetric modular technology. These are large building elements, built offsite in a factory environment, and then shipped to site, and assembled.
This approach offers a number of advantages over traditional construction techniques:
1. Shorter construction programme: Since manufacturing of the modules can start in parallel with groundworks, enabling infrastructure and construction of foundations, programme savings can be significant.
2. Greater cost certainty: Since the factory environment takes away many of the variables on a traditional construction site, there is much less variability in out-turn cost. In our experience, traditionally built schemes typically come in at 10-18% greater than original tender price, whereas volumetric modular schemes typically come in within 2%.
3. Reduced health and safety risk: Less working at height, controlled environmental conditions, and easier oversight all contribute to making volumetric modular an inherently safer way to build.
4. Less environmental impact: The Waste Resource Action Programme (WRAP) reports that 67% less energy is required to produce a modular building in comparison to a traditionally constructed building with 40% less traffic movements to sites and up to 90% less waste.
5. Improved environmental performance: Manufactured buildings exhibit a higher level of air-tightness and, pound for pound, better energy performance than traditionally-built buildings.
Over the last five years the Department for Education has driven the use of volumetric modular solutions for new-build schools, with a target of 30% of new schools to be built using MMC and an aspiration for 50%. This has driven up both quality and capacity, and many of the lessons gained from the education sector can be applied to other markets.
Build-to-rent is a prime example. The commercial model for built-to-rent developers is very sensitive to reductions in construction programme; the quicker the building is up, the quicker rental income can flow. Other growth areas include student accommodation, the hotel sector and later living.
What are the push and pull factors that will increase take-up of offsite?
As a nascent industry, economies of scale have not yet fully kicked in. For this to happen, manufacturers need greater and more consistent demand for their products. Cost reductions of up to 15% are possible, but can only be achieved by standardising design, aggregating demand and rationalising procurement.
Collective problem solving and 'myth busting'
Much of popular opinion isn't based on recent evidence and experience, but on hearsay and rumour originating from early, less sophisticated versions of what the industry is now able to deliver.
The whole industry needs to come together to re-baseline understanding of modular. Where there's compelling evidence to dismiss concerns, that evidence needs to be shared. Where concerns are justified, the industry needs to listen carefully, and work together to identify and implement workable solutions.
The Construction Industry Training Board have reported that without modern methods of construction, UK housebuilders will need nearly 200,000 additional workers to meet the government's mid-2020s target of building 300,000 new homes a year. It's difficult to see where these workers will come from.
Estimates from the CITB suggest that modular construction requires 14% less labour than traditional construction. In addition, modular construction requires a 60% shift of labour from site to offsite. By locating factories in areas of lower employment, modular construction can help to address many skills shortages by providing access to new sources of labour.
Can you explain the financial and commercial constraints on manufacturers in terms of expanding their output?
The key factor that drives return on investment is forward visibility of demand, which enables them to invest in additional capacity and drive efficiency into their operations.
One way to achieve forward visibility of demand is by organisations coming together to aggregate their needs, communicating it in a digestible form to a wider ecosystem of manufacturers. We're seeing encouraging signs already, with both the London and Northern Housing Consortium recently launching procurement exercises to appoint integrators to help them to aggregate and communicate their forward demand.
One solution we've been involved with to rapidly scale manufacturing capacity is the use of "pop-up" factories; temporary manufacturing facilities created for a specific development scheme. This approach requires less initial upfront investment.
What new investment models are we seeing coming through to help manufacturers expand? Who are the disrupters in the sector?
The recent debt and equity investment made by Goldman Sachs into TopHat demonstrates how much potential institutional investors see in modular manufacturers. We're also seeing a lot of disruption from many of the leading housebuilders and global players, who are making some game-changing investments in the industry. For example, we've recently seen the Japanese house builder Sekisui House investing £22m in Urban Splash's modular operation.
How are traditional housebuilders and main contractors adapting their operations?
The main contractor model for delivering construction projects is best suited to situations where there is a need to coordinate and integrate a large number of subcontractors, who are each delivering a small percentage of the overall construction value.
There are two trends emerging; main contractors developing or acquiring their own manufacturing capability so they can offer clients cost efficiencies over subcontracting, and clients opting for a construction management approach.
How is government helping the industry move to offsite?
The government is already taking some initial steps, for example through the award of R&D funding from the Transforming Construction Challenge, and we've seen investment in the Manufacturing Technology Centre near Coventry and the Transforming Construction Alliance.
However, this isn't enough. The government could further encourage uptake by, for example, setting a presumption for MMC, particularly for public sector housing and that delivered by local authorities.
What's the next big thing in offsite/modular technology?
The really significant innovations in volumetric modular will come from the Proptech field; digital solutions that help make property and construction transactions quicker, more transparent and better value for money.
Ben Adams is value proposition leader, precision manufacturing at Arcadis