As an important cog within the housing machine, NHBC engages with key stakeholders influencing the offsite sector, including developers, investors and lenders that are seeking assurances surrounding the quality of homes being built are fit-for-thefuture.
"NHBC is very supportive of modular and offsite manufacturing," says Graham Sibley, Senior Market Development Manager, NHBC. "We want to ensure there is sufficient quality in the end product and that is one of the issues that we come across when talking to the market – in particular lenders and investors – about the perceived risk around new technologies and long term durability of homes."
The levels of investment flowing through the offsite industry and the sometimes eye-watering amounts of money being injected into factory developments, product research and system design is unseen since the last hey-day of offsite in the mid-2000s and can only increase productivity and quality.
This new money will provide some answers to the giant problem of housing provision across the UK and boost the programme to build better schools and healthcare facilities. Funding and cash promised by Homes England via the Accelerated Construction programme and 'presumption in favour of offsite' has smoothed progress. This move by government has raised the profile of offsite delivery and encouraged a wider interest of private equity and institutional backing entering the system, with several housebuilders and housing associations funding their own offsite developments with selfconfidence.
However, the government can only provide so much money, time and expertise to bolster construction and housing market development – especially as UK governance continues to be dogged by Brexit. The long term answers rest with industry pioneers and dynamic thinkers to use the flow of investment wisely, to deliver a successful, sustainable expansion of offsite manufacturing.
Searching for Investment There seems to be a knowledge gap – or more to the point a 'lack of time' gap – in tracking down and seeking out potential funding opportunities, array of 'catapult programmes' and wider fiscal incentives. Too many small bits of innovation are happening and the competitive nature of those means that time is at a premium.
"There are all sorts of SME-focused offsite investment opportunities," says Darren Richards, Managing Director, Cogent Consulting. "These aren't exploited well enough and aren't understood well enough. There are support mechanisms that exist but many in the offsite sector are too tied into the manufacturing and delivery aspects of the business, and aren't seeking those pots of cash out." Beyond the funding options available from public sector, the deep pockets of large private capital investment is seen as essential to sustained development and growth. Private equity firm TDR Capital are a major investor in modular provider ilke Homes. "You need large backing to other funding models that are SMEfocused," says Nigel Banks, ilke Homes' Product and Marketing Director. "It requires significant investment behind you. It is very difficult to grow at speed in a profitable way without that. That is a real challenge for the smaller players but in many ways it is not about asking about subsidies and funding, it is about creating a pipeline and certainty of demand." Arguably the most high-profile entrant to the offsite sector in the last two years has been Legal & General, who grabbed many headlines when making a £50million investment in a new factory development near Selby, geared towards tackling the housing market. Rosie Toogood, Chief Executive at Legal & General Modular Homes agrees that it is not easy.
"To build an offsite modular factory at scale takes tens of millions of investment and some time. That is something that not every entrant into the market has. Over the next few years we will see some big players emerge in the market. It is healthy to have competition and choice for customers and having a number of suppliers, manufacturers and developers at scale will keep the supply chain innovative."
"In the short time that I have been involved I have seen a lot of change in Homes England. They have a genuine desire to help the offsite manufacturing industry to stay for the long-term and become a fundamental part of how we deliver homes." Rosie Toogood, Chief Executive, Legal & General Modular Homes
Funding for growth and project development is available – Homes England has been crucial and even in its 'embryonic form' is actively encouraging partnering with developers and offsite providers to enter the market. "It is a challenge as an SME – even for an SME of size – to continue to grow with self-funding," says Mike Fairey, Director at Fusion Building Systems. "Ultimately growth has to come from perpetuation of sales and cash into the business. The dilemma is how to make that next leap – where you need millions – it is difficult to invest further funds without securing consistent volume to base that investment decision on."
Supply Not More Money In the long run, everyone involved in specifying offsite manufacture wants certainty of pipeline, volume, timing and costs and then confidence will grow exponentially. There is also pressure mounting to restructure procurement practices generally and make planning a quicker, easier process to navigate – potentially incentivising and offering a fast track option – where certain obligations can be relaxed or refined. There are cases where the time taken to process a planning application is actively hindering one of offsite construction's key benefits.
"The delays surrounding planning and the length of time it can take to get a project started on the ground are frustrating," says David Foster, Project Director for Joint Ventures, Network Homes. "It's not good for any aspect of the industry. What would be helpful would be creating a way to incentivise or fast track solutions using offsite." As pointed out by many offsite manufacturers recruiting new staff, team members that have come from manufacturing or automotive backgrounds are 'astounded by the uncertainty of the sales cycle involved in the housing market'.
The lack of secure pipeline of projects and sluggish speed projects move to work in progress onsite is unattractive, costly and adds to what is a burdensome risk profile for all aspects of the supply chain. Something that investors, lenders and insurers don't want to see. Pocket Living have gained a lot of traction in the offsite market – especially in London – and have been delivering high profile modular schemes since 2016. "The suppliers are saying we need guarantee of pipeline," says Alun Macey, Head of Construction at Pocket Living.
"And we are saying we need guarantee of competence and mortgageability. If you can generate demand among developers and underwrite risk among manufacturers – everyone becomes a lot more comfortable – it's a dual assimilation." Simply put, if we look at some of the trends in construction skills we are not going to get to the numbers of homes needed without offsite. In London, initiatives including the Mayors Innovation Fund and London Community Housing Fund are supporting delivery of affordable homes and creating an environment to support a healthy offsite sector. But is it enough?
"There is more that can be done," says Francesca Lewis, Housing Policy Manager, Greater London Authority. "But we need to pin down where the gaps are and how we can help, rather than pouring in money or underwriting risk at scale. The public sector can't afford that so we need to synthesise that argument better." There is plenty of private equity and individuals ready to step into the market but it's all about 'aggregated demand' and pipeline.
Whatever business model has been made and investment put in place, a surety of demand and guarantee of work flowing through the factory is required, to be able to 'press the button and get on with making it'. Moving Markets We need a market full of commercially viable offsite-based solutions that clients and developers can choose from. The Homes England pilot schemes are set to be a great catalyst to demonstrate various forms of offsite – not just volumetric modular.
"They are an opportunity to pin down policy learning," adds Francesca Lewis. "What lessons are there to understand if precision manufacturing was prioritised on these sites, what does that look like? What barriers do you run into and what additional government intervention is needed? We need an evidence-based programme to plan from."
What are the key criteria funders and investors are looking for when investing in homes built using offsite? Or when investing in offsite manufacturing facilities? Warranty providers, NHBC, BOPAS et al, is hugely important to give assurances to funders and investors. But what else is stymying the large volume roll out of offsite manufactured homes?
"The issues being raised surround repairability, maintenance, adaptability and the implications around modifying for future use," says Graham Sibley. "How do you value a home using MMC? These are what valuers and surveyors consulting to lenders and investors are concerned with. That long term asset value of a home built using non-traditional methods. NHBC's approach is that we are assessing offsite products on the same basis as any standard material and offering warranty on the same terms as a traditionally built home.
This should convince investors in the long term." Ultimately, the lending community including the Association of British Insurers, Council of Mortgage Lenders and the Building Societies Association, need to be better educated and engaged with what offsite manufacture can do. It is finding a way to do this, so they get the right assurances and feel comfortable and dispel some of the industry scepticism – often based on lack of knowledge and fear of the unknown.
"Problems arise when you go from delivering 24 units on a single site to 150 units on four sites – you can manage the risk by going to two or three different manufacturers – then lose economies of scale – or worry about one manufacturer and whether it can carry all the work without slowing down." Jeff Endean, Director, Cast Consultancy
Stressing that offsite is a 'change in process not materials' is sometimes difficult to explain. "The penny drops when people visit the factory," says Nigel Banks. "When they see the same plasterboard, the same windows, same kitchen and get their head around the robustness of what is being designed. They see that largely, it is wellunderstood components put together in a different way." Having the correct accreditation and set of 'badges' isn't everything. Those from disciplines unfamiliar with factoryled precision engineering, need to see and understand the system benefits themselves and weigh-up the risk – or often lack of it. To see a factory in operation helps understand the process, allay fears, meet expectations and helps a lot. Ultimately it is about trust and understanding the product.
But it is up to the manufacturers to convince a fickle money market that the assurances are there. "You validate a manufacturer like you validate a contractor," says Alun Macey. "You expect the accreditation to be in place – BOPAS, BBA etc. – and that provides comfort. That is the starting position, then you look at how sophisticated they are as a business. Are they just a manufacturer or turnkey provider? If lenders can get comfortable with a contractor they should apply the same logic to a manufacturer."
Critical Thinking Perhaps the offsite construction sector – in all it formats and materials – can help itself by defining specific projects or initiatives that would help propel the industry forward collectively – something as straightforward as protection of volumetric modules during transportation – that could benefit every part of the industry. Those with an eye on lending money or guaranteeing longevity are looking for proof of quality and long-term efficiency. Working on individual and collaborative R&D is not being exploited enough – many across the offsite sector seem unaware of the financial returns available under HMRC's R&D Tax credits – where investment into new innovative products and systems can be partially recovered.
There is no shortage of money ready to be invested in offsite manufacture, whether it is private equity, institutional investors or dynamic, growing companies self-funding factory developments and expansion – this is done in the knowledge that what they do works. The issue is not the size of sums of money to succeed, but the slow pace of the 'normalisation of offsite' and pipeline of work to satisfy the risk profiles and levels of investment. Again, Homes England are playing an important role here and have proved that government can help facilitate a degree of confidence. The offsite world is not short on visionaries. It is now about hammering home to the money markets and wider community of clients and developers that offsite has less risk than they realise and offers a raft of gains. The concept of risk has many facets and negative connotations but as long
as risk is visible and managed, is just another part of the process to get a project successfully over the finishing line. As in many aspects of the construction sector the pace of change can be slow. However the adoption of offsite manufacture and the changing patterns of investment and money flowing from various directions is changing the way the industry is perceived.
With better, well-rounded statistical evidence and hard data underpinning the numerous benefits that offsite truly delivers beyond all doubts, the investment landscape will change even more. New entrants to the offsite market are bringing a modern, contemporary high-tech feel that is attractive and 'legacy operators' that have been in the industry for many years, are busy retooling and refocusing their efforts.
This is all geared towards making UK housing better quality and healthier but also easier and quicker to build. Many thanks to NHBC for hosting the Roundtable Event and thanks to all participants for their time and contributions to the discussion. For more information on NHBC visit: www.nhbc.co.uk For more information on offsite related activity visit: www.offsitehub.co.uk
