In a new departure for Red Brick, we are publishing a ‘long read’ briefing paper rather than the usual blog post. It’s been researched and written by Ross Fraser, who has become a regular contributor to the site. He wanted answers to some basic questions about Offsite Manufactured Housing and to find out whether some of the claims for it – on cost, speed of delivery, quality, environmental impact – stood up to scrutiny.
In his conclusion, he asks what approach an incoming Labour government, committed to an expansion in housing supply in general and genuinely affordable housing in particular, should take to OSM – because some people see OSM as making the difference between success and failure.
Although significantly longer than our usual blogs at over 3,000 words, we hope you find this briefing format useful. We hope it helps stimulate debate about a key issue that the housing industry has to address over the next few years. Steve Hilditch
By Ross Fraser
Can offsite manufactured housing (OSM) play a key role in solving the housing crisis by ensuring that new supply targets are met?
- Why the construction industry crisis threatens new supply targets
The government has set a ‘new supply’ target of 300,000 homes per year. Labour has adopted a similar target, with the proviso that it must include 100,000 social homes per year. The GLA has set a target of 90,000 new affordable homes over five years. Other regionally devolved administrations have also set ambitious new supply targets.
Under normal circumstances, these targets would be challenging. However, there is growing concern that the construction industry will be unable to meet this demand if it is primarily reliant on traditional building techniques.
The construction sector crisis takes three forms:
- low productivity and rising cost
- housebuilding methods haven’t changed much in 150 years and productivity has flat-lined
- build costs are 24 times higher in 2015 than they were in 1971 (a real-terms increase of 1.78)
- this is largely because homes are hand-built, using labour intensive methods, in largely uncontrolled conditions
- materials costs are still rising, partly due to shortage of bricks, as are skilled labour costs for reasons explained below
- an acute skills shortage in the housebuilding industry
- the average age of the construction workforce is increasing – the industry is likely to lose 620,000 domestic workers (c25% of current labour) to retirement by 2026 (source: Farmer Review 2016)
- the industry is struggling to replenish this loss of capacity with new entrants – partly because all-weather outdoor working is not attractive to many
- the past and current shortage of labour has forced building firms to increase the proportion of tradespeople from abroad, often at higher wages, thus increasing the cost of traditionally-built homes
- much of the EU construction labour force is likely to depart post-Brexit
- major construction projects such as Crossrail or HS2 can absorb large proportions of the available workforce
- reduction in build quality
There is a growing body of opinion that the new supply targets cannot be met without innovation in the construction supply chain – through the adoption of Offsite Manufactured Housing (OSM).
Proponents of OSM argue that it can increase the productivity and cost of construction, improve the thermal efficiency of new homes and reduce the environmental impact of development. The DCLG White Paper notes that:
“industry reports suggest homes constructed offsite can be built up to 30% more quickly than traditional methods and with a potential 25% reduction in costs.”
Proponents of OSM suggest that there are four markets where OSM may have a major role to play:
- speculative volume build – by major developers, for sale
- custom build – by owner occupiers, often on small sites
- Build to Rent – by institutional investors, for long term rent
- social rented or shared ownership housing – councils and housing associations seeking to build at scale often with no or minimal grant subsidy
The GLA recently noted that in the only two post-war periods when mass public housing took place, OSM played a key role:
- post-1945 prefabs – low rise with gardens
- mid-60’s to mid-70’s systems-built construction – particularly on council estates and tower blocks
Three major recent documents address the potential OSM contribution:
2. What exactly is OSM?
The GLA report contains a helpful summary of what we mean by OSM.
OSM is an umbrella term for a system of house building that relies on individual components being ‘manufactured’ in a factory, transported to a site and mostly, or entirely, completed and assembled on location. OSM is sometimes referred to as MMC (Modern Methods of Construction) modular housing or precision manufactured homes.
Offsite manufacturing is distinguished from ‘traditional’ building methods that rely on ‘linear construction’, where each stage of construction takes place on site and must be completed in sequence before the next phase of building can take place. Offsite construction allows most of these phases to be undertaken simultaneously. While site preparation, foundations and utility connections are being prepared, whole completed housing units are being built in a factory ready for final assembly and finishing in situ.
OSM housing comes in many different forms. Generally, there are five main categories used to classify the various construction systems:
- Volumetric or modular (three-dimensional units produced in a factory, fully fitted out before being transported to site and stacked onto prepared foundations to form dwellings)
- Panellised (flat panel units built in a factory and transported to site for assembly into a three-dimensional structure or to fit within an existing structure)
- Hybrid (volumetric units integrated with panellised systems)
- Sub-assemblies and components (larger components that can be incorporated into either conventionally built or factory-built dwellings)
- Non-offsite manufactured element (innovative methods of construction used onsite and the use of conventional components in an innovative way).
3. What are the benefits of OSM?
Collectively, the BSA, DCLG and LGA cite the following benefits:
Speed of construction
- speeds construction by allowing building works to take place in parallel – as opposed to sequentially when traditional methods of construction are applied
- speed of construction enables housing providers to realise a rental return earlier than in normal development – thus reducing the cost of development finance and overall risk
- further reduces cost/risk by reducing reliance on the availability of skilled trades, mitigating the impact of adverse weather – and by minimising the cost of materials
- lighter weight of OSM homes means they can be built on hard-to-develop sites more easily than traditional construction and require shallower, cheaper, foundations
- environmental benefits from a reduced number of material site deliveries and the fact that OSM homes are generally more energy-efficient than traditional construction. (There is some evidence that any reduction in construction traffic will apply primarily to smaller OSM homes – larger homes cannot be transported for on-site assembly in a single journey)
Quality of design
- designing for manufacture is increasingly assisted by technology, including Building Information Management (BIM) software and parametric design. Digital construction enables the high quality that distinguishes OSM housing from its prefabricated predecessors
Construction industry capacity
- OSM requires less labour than traditional construction – private sector sources claim 60% less
- OSM will create factory-based design and assembly jobs which are more attractive to new entrants than on-site all-weather traditional construction roles
- What are the risks of OSM and can they be mitigated?
None of the three reports examines the risks of OSM in any detail. And none reflect on the tenant experience of living in the OSM-produced council estates built in the 1960’s/70’s, set out definitively in Lynsey Hanley’s ground-breaking book Estates.
A balanced assessment of the potential of OSM requires policy makers and providers to reflect on the following issues:
- innovation carries risks, which are accentuated by the challenge of taking any product to the scale where cost efficiencies can be realised – e.g. quality control, shortage of qualified installers, etc.
- poor site assembly can undermine environmental benefits and safety
- OSM structures have a reduced carbon footprint by using less concrete and steel in favour of (primarily) timber components – but is timber (as some fire safety experts claim) latently less fire-resistant than concrete and steel?
- will space and other design standards be compromised in favour of cost and volume?
- a Manufactured Housing Design Code is required to secure economies of scale – but how feasible is this, particularly until the findings of the Grenfell Inquiry are known?
- OSM benefits are based on identical design. This may not be an issue in terms of custom-build or small infill developments – but if applied to larger social housing estates will this create an instantly-recognisable and quickly stigmatised form of housing like the systems-built estates of the 1960’s and 1970’s?
- full OSM is better-suited to the construction of buildings of up to 4/5 storeys than high rise. It can however play a role in high rise (e.g. bathroom/kitchen pods)
- how durable are OSM structures? The BSA report suggests that modern OSM methods are “so new that there can be little or no historical data demonstrating how they will weather and the likely lifespan they will have”
- housing maintenance professionals have reported higher maintenance costs on previous OSM housing compared to traditionally-built homes. What evidence is there that modern OSM construction will easier and cheaper to maintain?
- what has gone wrong with the government’s Accelerated Construction Programme? What does this tell us about the capacity of OSM construction? (see below)
- can collective procurement processes be developed which share risks and prioritise quality rather than reduced cost? For example, can the Manchester deal (see below) be resurrected – there is understood to be an appetite to do so?
Finance and assurance
- lenders are still cautious about the higher requirement for money up-front under OSM and by concerns about the durability of the dwellings
- can and should government back a marketing campaign to help improve understanding of OSM and remove the current stigma some associate with it?
Can these risks be mitigated?
Proponents of OSM argue that parametric design and/or BIM software can design-out the problems of earlier forms of OSM construction. More evidence – certainly than can be found in the BSA, DCLG and LGA reports – is required to support this encouraging assertion.
The lending industry, responding in part to BSA exhortation, has set up the Buildoffsite Property Assurance Scheme (BOPAS) – a quality standard certification, ten-year warranty insurance scheme based on a risk-based detailed inventory of the performance of OSM-constructed homes – all accredited by the Lloyd’s Register.
BOPAS is intended to assure lenders, surveyors and valuers about the durability and maintenance costs of OSM construction and has the backing of BSA, CML, RICS, the developer Countrywide, lenders including Nationwide, Lloyds, Santander and RBS and insurers the Lloyds Register and Legal and General.
BOPAS is developing an accreditation scheme for quality OSM manufacturers, with 16 suppliers already accredited and around 20 currently seeking accreditation. The GLA considers that the success of BOPAS is “crucial in instilling confidence in the sector”.
5. Why has adoption of modern OSM been limited so far and how can its growth be stimulated?
The GLA Planning Committee notes some key impediments to the viability of OSM, including:
- OSM is not cheaper unless procured at scale
- optimum efficiency will rely on UK-based OSM factories – but they need confirmed orders at scale to become viable
- lender and valuer conservatism about funding OSM – due to concerns about durability and longevity
- public conservatism about OSM safety and durability – due primarily to documented failures of 1960/s and 1970’s system-built construction – has meant that the UK lags behind other nations in exploiting the potential of OSM
There are also some other reported challenges within the industry, including the (relatively) long lead-in periods required by manufacturers and a request to be paid up front in some instances.
Nonetheless, there is clear evidence of emerging private sector interest.
Notably, Berkeley Homes – the UK’s largest luxury property developer – is committing to 20% offsite construction and has announced a new factory in Ebbsfleet which will build 1,000 homes a year. L&G has invested £55 million in an OSM factory in Leeds which has the capacity to supply 3,000 homes a year – L&G is a major institutional investor in Build to Rent. Laing O’Rourke has set up its own offsite-factory and has received £22m of government grant to accelerate the use of OSM in housebuilding. SIG has developed a factory in Alfreton. Smaller players include Vision Modular Systems, which has a factory near Bedford. The custom-build industry is embracing OSM.
However, on its own, the private sector will not create an order book of 100,000 new OSM homes a year – the industry’s estimate of the critical mass required to sustain the development of the OSM industry and ensure that its output is cheaper than traditional forms of construction.
It is becoming clear that this target can only be achieved with the assistance of large scale procurement by councils, housing associations and ALMOs. In the social housing sector, commitment to OSM is at an early stage but innovative organisations have been active in looking at OSM as a solution, including:
- housing associations such as Accord, Swan, Richmond Housing Partnership (RHP), Your Housing
- councils such as Manchester, Hackney and Lewisham
- ALMOs such as Nottingham City Homes
However, Manchester’s joint OSM consortium with other Greater Manchester Councils and housing associations was unable to progress in 2017 despite having selected sites and a partner. Your Housing has recently pulled out of a joint venture with Chinese investors, which was intended to lead to six OSM factories in the UK. Commercial risks for the private sector partners and the associated terms they demanded to address them are understood to be at the heart of the breakdown of both these deals.
Further action is required.
The BSA report seeks to persuade lenders, valuers and building insurers of the reliability of OSM. Amongst other recommendations, the BSA proposes:
- standard terminology for OSM/MMC to reduce confusion
- greater standardisation of OSM design to give greater comfort to lenders
- RICS valuation guidance to specifically address OSM
- increased lender/insurer recognition of the Build Offsite Property Insurance Scheme (BOPAS)
- that the government backs the BOPAS 10-year warranty on OSM construction to provide reassurance to lenders
In its White Paper, the Government committed to:
- stimulate the growth of this sector through our Accelerated Construction programme and the Home Builders’ Fund
- support a joint working group with lenders, valuers and the industry to ensure that mortgages are readily available across a range of tested methods of construction.
- consider how the operation of the planning system is working for modern methods of construction (MMC) developments
- work with local areas who are supportive of this type of manufacturing to deliver growth, provide jobs, and build local housing more quickly, and
- alongside the Home Building Fund, consider the opportunities for offsite firms to access innovation and growth funding and support for them to grow
However, the government appears to be struggling in its attempt to boost OSM via targeted allocation of its Accelerated Construction Fund (ACF) and through its support for Custom Build. The £2billion allocated to the ACF in the 2016 budget was then cut by £1bn in the 2017 budget and to £690 million in the 2018 Budget.
The GLA Planning Committee calls on the London Mayor to:
- promote the use of OSM – particularly in the build-out of GLA-owned land, particularly TfL-owned sites
- work towards defining and adopting a Manufactured Housing Design Code to drive a more standardised and aggregated demand profile
- announce a further round of his Innovation Fund that is specifically focussed on OSM that would reflect the funding needs to support OSM developments
- set up a London-specific OSM led procurement framework
The Mayor has responded by promising to:
- set out in his London Housing Strategy how he will support a move to precision-manufactured housing and address some of the challenges faced by the OSM industry
- provide funding for OSM homes via his Approved Housing Programme and his Innovation Fund and in strategic partnerships with housing associations
- negotiate with government for a share in the Accelerated Construction Fund, on a flexible basis, to further support precision-manufactured housing in the capital
- for the new London Development Panel to include experts in precision-manufactured homes
- Conclusion: what should an incoming Labour government do about OSM?
Proponents OSM argue that the government’s new supply target of 300,000 per year cannot be met without the use of OSM methods. As the BSA report notes:
“utilising offsite construction methods offers a way of providing well designed, high quality, affordable homes at a faster rate than is currently possible. If the UK doesn’t diversify its housing supply, the imbalance between supply and demand cannot practically be broken.”
The scale of the housing crisis, and the likely inability of traditional construction supply to respond, demands that OSM is developed as a viable at-scale option for future construction. Proactive steps are urgently required.
However, caution in industry, social housing and in the lending, surveying and valuation sectors will only be overcome by compelling evidence that the mistakes of earlier forms of OSM construction will not be repeated.
What we build now will last a very long time. The recent review of 50 Years of the English Housing Survey points out that 97 per cent of houses that existed in 1967 are still in use (albeit in a different pattern of tenure). Looked at another way, 60 per cent of stock we now have is more than 50 years old. There is little or no evidence to date that OSM construction will last at least 60 years.
Mistakes in housing policy tend to be long-lasting. The first post-war housing minister, Nye Bevan, said:
“We shall be judged for a year or two by the number of houses we build. We shall be judged in ten years’ time by the type of houses we build’.
Therefore, the key message is not ‘avoid – too risky’ but ‘proceed vigorously but with care and transparency’.
In practical terms, an incoming Labour Government should:
- actively investigate OSM
- procure independent research into the causes of the failure of earlier historic versions of OSM and whether new technology can ensure that these problems will no longer occur
- develop a properly-balanced and evidence-based assessment of the capacity of OSM
- ‘bend’ funding programmes to secure the 100,000 new homes per year of supply required to prove its economic model
- require as a funding condition that resident/consumer input is secured in the design of OSM homes delivered on housing estates
- follow the (expected) lead of the GLA in defining and adopting a Manufactured Housing Design Code to drive a more standardised and aggregated demand profile
- support and promote the BOPAS scheme
Ross Fraser, March 2018