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15 Mar 2017

Build to Rent and Modular Construction – A good fit?

Is modular construction the answer for Build to Rent developments?

The emerging ‘Build to Rent’ (BTR) market is increasingly being seen as a key tool in the box for addressing the current housing shortage (or crisis as some would term it). However, BTR still faces a number of political, commercial and technical challenges before it becomes an established asset class. Similarly, fully modular construction methods have yet to become commonplace in the UK construction industry, but perhaps both industries will find themselves in the right place at the right time to foster a symbiotic relationship.

Like most things, modular construction offers a number of significant benefits but also has a number of drawbacks. Could BTR offer the right context in which modular construction can come into its own in the UK and demonstrate the value and advantages of such methods? Might this take it beyond the confines of its present, somewhat limited, preserve of student accommodation and budget hotels?

Do the advantages of modular construction outweigh the drawbacks in a BTR context?

Some of the key issues which have traditionally been barriers to modular construction include a high cost of entry to the market, higher unit construction costs, a perceived lack of quality or lack of confidence in quality (perhaps a hangover from the days of the post-War ‘prefab’), significant upfront expenditure with suppliers and legal risks associated with off-site construction. On a traditional build for sale project, these potential drawbacks may seem like serious disadvantages without any upsides.

However, with the different objectives of BTR (not least from the investment perspective) comes a different construction context. A key aspect of the commercial rationale for BTR projects is their ability to generate long term incomes rather than the more immediate capital gains of build for-sale developments. BTR projects will therefore benefit from shorter construction periods which will accelerate the rental income stream and also reduce finance costs such as interest payments on development loans.

Is modular construction faster than traditional methods and can it reduce development costs?

Whilst examples are still somewhat limited there seems to be general agreement that modular construction methods can achieve significantly reduced build times, although the extent is likely to vary in practice. Some current examples, such as a project for 249 new homes in Greenwich to be constructed as 632 modules with 60% of the work off-site, claim that modular methods will reduce the time spent on-site by 50%. There seems to be some general consensus around this sort of figure but the reduction of the total construction programme is likely to be more modest. Research by KPMG published in their report Smart Construction found that “in spite of the increased construction costs associated with one-off offsite construction projects, financial net savings of 7% were possible as a consequence of the shortened construction period”. This is an encouraging finding but there are also other advantages to consider.

Modular construction is particularly suitable where it is possible to achieve economies of scale which mitigate the higher upfront and unit costs. According to the Urban Land Institute’s best practice guide on BTR it is anticipated that most BTR developments are likely to be at scale with 100+ units which is compatible with the advantages of modular construction.

Are there long-term benefits for a project?

Another commercial priority for BTR developments is minimising the whole life costs which is important for long term financial returns. Modular construction can provide solutions here too. Historic concerns about quality, based on the (sometimes personal) experience of the prefabs of the late 1940s and early 1950s, are misplaced. The quality of design and construction techniques and materials has advanced significantly since 1945. This can be seen in the growth of the ‘posh prefab’ market where specialist house builders supply luxury bespoke prefabricated homes to customers’ precise requirements. This is already more commonplace in Europe but there is increasing interest in this sort of product in the UK.

The improved quality and precision which can be achieved in off-site prefabrication can help minimise whole life costs by improving sustainability engineering such as sealed unit insulation and energy consumption. It can also significantly increase design life and durability reducing the need for maintenance and refurbishment but also making these quicker, easier and cheaper when they are required. For example, modular systems can be designed to allow for ease of access from public areas and ease of repair/replacement of defective parts. Minor ‘refresher’ refurbishments can be carried out in a formulaic and uniform, process driven way, and when more substantial refurbishments are needed these can be carried out in discrete sections with modular units, such as kitchens and bathroom pods, being replaced wholesale in very short time frames and without affecting other parts of the building.

What can be constructed off-site and what are the advantages?

Modular construction is a form of off-site construction which is not uncommon in the UK industry but which has, until recently, been largely limited to the standardisation and prefabrication of components such as steelwork, bricks, and façade systems. The more comprehensive modular construction envisaged for BTR schemes involves the off-site modularisation, standardisation, and prefabrication of significant elements of the works (such as kitchen and bathroom pods, or perhaps whole units) completed to a finished standard prior to delivery to site. Legal concerns around off-site construction such as ownership of goods and transfer of title, transit risks, and insurance obligations can be managed through careful contract drafting.

Construction off-site will typically mean that the work is carried out in a factory typesetting. This has the advantages of being a secure, weatherproof environment with fewer health and safety risks which are more easily managed. It is also possible to utilise high-precision equipment (which has no need to be portable) and processes on an efficient and uniform production line approach. This leads to reduced time on site which limits exposure to onsite risk such as adverse weather, poor quality workmanship, and accidents resulting in damage to health or the works.

The advantages of modular construction appear to plug neatly into many of the technical and commercial requirements of BTR developments and if they play their cards right, the two industries could have a promising future together.