The proportion of homes built using MMC over the next 10 years will rise from around 8% today closer to 20% according to a new report from real estate advisor Savills.
The pandemic is likely to be the turning point, accelerating change and seeing the industry fully embrace MMC.
The report found that the three main drivers behind adoption are: the cost and availability of labour, housing supply shortages and regulatory or government intervention.
Although it is acknowledged that the cost of adopting MMC is generally higher than continuing with business as usual, however, labour shortages are driving up construction costs. Adoption of MMC, which improves productivity and reduces onsite labour offers a potential solution.
The need to improve energy efficiency and reduce the environmental impact of housebuilding is a further driver of change. Building homes under factory-controlled conditions allows a much tighter tolerances to be met - improving energy efficiency and reducing waste.
The UK was already facing the three main challenges before we entered the current pandemic:
i. The Farmer report highlighted that between 2016 -2026 around 62,000 workers would retire each year – and Government’s latest figures show only around 23,000 new apprentices starting each year
ii. Despite housing delivery increasing steadily over the past few years, the number of new homes built still needs to increase by 24% to reach 300,000 homes per annum – a tall order using traditional construction methods alone
iii. If we are serious about meeting the pledge to be carbon neutral by 2050 then the energy efficiency of homes will need to dramatically improve along with reducing the environmental impact of construction
These three factors will be the drivers to an increased adoption of MMC over the next decade with the proportion of homes built using MMC increasing from between 6 - 10% today to closer to 20%.
Covid-19 has the potential to accelerate this change and the ‘Homes for Heroes’ campaign, if fulfilled it would provide the certainty of demand needed for manufacturers to attract investment and scale up production.
The North & Midlands are emerging as centres for excellence
‘Construction corridor’ across the north of England, supports the levelling up agenda and reflects the location of an emerging cluster of factories. And while there is a broad distribution across the country there is a clear cluster running across the north west and Yorkshire and the Humber, with a second large cluster in the Midlands.
The Welsh Government is actively encouraging the sector, specifically to support the delivery of new social housing – Wales is now home to 16% of all MMC factories.
Savills research analayst, Richard Valentine-Selsey, says; ‘We have identified over 100 schemes in the development pipeline utilising MMC. Combined these total around 17,000 new homes across a range of tenures, the majority due to be delivered in London and the south east which closely mirrors demand. In the short term MMC is likely to be driven by the need to increase housing delivery and the shortage of construction workers and these two drivers indicate demand is likely to be strongest in London, South East and the East of England.’
Wil the disruption caused by Covid-19 drive wider adoption across the country and super charge demand nationally?
New use for warehouse space
Savills notes that up to 40 new factories will be needed across the country in order to meet the increase in demand for modular housing in the UK, if an additional 40,000 units are to be delivered annually by MMC.
Looking at the existing market, up to 150 sq ft (13 sq m) of warehouse space will be required per additional unit, equating to circa 6 million sq ft (557,418 sq m) in total. Research suggests that if this capacity was required imminently then it would increase the average amount of transactions for warehouse units over 100,000 sq ft (9,290 sq m) by as much as 37%. However, it is more likely that space will be taken over a longer time frame, along with the ebbs and flows of housing demand.
However, the availability of warehousing is historically low, which has been compounded by the rise in online retail, especially in light of the Covid-19 pandemic. Consequently, vacancy rates stand at just 6.8%. To date, this has not impacted on MMC requirements as the majority of factory space has in fact been retrofitted second hand stock. Nevertheless, Savills believes that as the industry matures it is likely that efficiencies will require more bespoke product. This is likely to see an increase in demand for Build-to-Suit (BTS) units, but this could have cost implications for operators, as the average lease length for a BTS unit in 2019 was 18 years, compared with just 12 years for second hand space.
Kevin Mofid, head of industrial research at Savills, comments: “Competition for space within the industrial & logistics sector remains fierce, especially for Grade A BTS units. A key enabler of MMC growth will be the award of contracts from local authorities and housing associations. From a traditional developer perspective this is likely to make MMC operators more attractive as potential tenants as their sales pipeline is effectively backed by the state. For investors, this type of income is hard to come by, especially in light of ongoing uncertainty, creating a strong proposition to those looking to invest in the sector.”