Disruption in Development Disruption in Development
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UK Development – Autumn 2019 Disruption in SPOTLIGHT Savills Research development The impact of political, fi nancial and environmental disruption on the development industry Savills_Dev_p01-08_cover.indd 2 04/10/2019 11:31 Disruption in development Disruption in development Talk about disruption and people typically think of a new product or manufacturing method that transforms an industry. Housebuilding appears ripe for such change. There have been repeated calls for the industry to diversify to meet housing demand. With government and private investment in modern methods of construction, housebuilding appears to be on the verge of a tech-driven revolution. However, focusing solely on technology would be to miss the wider financial, political and social changes that will shape demand for housing. In this low interest rate global environment, institutional investors are after steady income streams. Residential will be an attractive asset, particularly if it can provide a long-term, index- linked income, such as affordable housing. For this to happen, developers must understand the priorities of large investors and adjust their product accordingly. Politically, there are increasingly interventionist policy debates around how to meet the UK’s housing needs. Coming to the fore are the issues of land value capture and the provision of social housing. Both could have a big impact on financial models, putting pressure on developer margins and land value. Finally, the development industry can’t ignore the challenges posed by environmental change. Meeting carbon emission goals will require radical change in how we plan and deliver housing. This report investigates how these forces will interact, and identifies the methods Ready-made developers can adopt to deliver resilient and sustainable revolution housing in an ever-more unpredictable market. Political, financial and environmental Patrick Eve forces are collectively disrupting the Head of Regional future of housing delivery. Could modular Development, 01865 269 071 methods of construction be the next big [email protected] leap in mitigating these influences? savills.com/research 2 3 Savills_Dev_p02-3_intro v2.indd 2 04/10/2019 14:13 Savills_Dev_p02-3_intro v2.indd 3 04/10/2019 11:32 Technological disruption Technological disruption About 10% of new build homes are delivered using MMC, equating to around 20,000 homes each year. We estimate that capacity is up to 27,000 homes a year Most houses are still built utilising the MMC is well makes it possible to create a database that most banks have a cap of around 10% of stock same materials and techniques that have placed for fast would store and track all data about the built being built using MMC. This isn’t yet a major been used for at least a century. There is a delivery, ease of environment. This will allow the full lifecycle barrier as so few MMC homes have been built: perception among policymakers that this management and costing and management of homes to be only 14% of housing associations build more needs to change, and there have been several consistency of undertaken with much-increased accuracy than 25% of their new homes using MMC. But initiatives to boost the adoption of Modern product – especially important for institutions and 50% expect to be doing so in five years’ time. Methods of Construction (MMC). But the housing associations that will be owning industry has remained largely resistant. and managing properties for the long term When will the balance tip? Perhaps that is because these traditional in relation to their returns and valuations. At present, only about 10% of new build homes have primarily been built for sale to This is of huge value to investors in Build homes are delivered using some form of MMC, individual owner-occupiers or small-scale to Rent and housing associations, who are equating to around 20,000 homes each year. landlords. If that were to change towards looking for greater consistency of product, We currently estimate that manufacturing a greater share of new homes being built lower and more predictable operating costs, capacity is between 25,000 and 27,000 homes for institutional owners, then the spotlight and ease of management. a year. And it’s growing; Savills has identified would switch to consistency of product, more than 75 companies seeking to use MMC ease of management and fast delivery, Why not build modular? to deliver housing at volume. as well as longer-term savings through The most obvious deterrent to offsite There are new entrants to the housebuilding energy efficiencies – things that MMC construction is that it costs on average 10% sector, including Goldman Sachs, which is well placed to deliver. more than building in the traditional method. invested £75 million in TopHat, a modular Increased regulation is also likely to Incurring this cost is unlikely to result in manufacturer, and Boklok, which already focus on energy efficiency and a push for higher sales values to individual buyers. has a successful track record in Scandinavia. more sustainable construction techniques. Many remember the post-Second World War Japan’s largest housebuilder, Sekisui House, prefabs, highlighted by a YouGov poll for signed a £90 million deal with Urban Splash Cross-party support Home Group that found 52% of respondents and Homes England to enter the UK market. The Communities & Local Government would be unlikely to want to live in a modular Traditional housebuilders are also select committee report on MMC, published home. This perception is being countered changing their approach. Berkeley Group set in 2019, showed that there is strong cross- by a range of accreditations, assurances and up its own modular factory in Kent in 2018; party support for a paradigm shift in how we warranties set up to thoroughly test the Barratt delivered 20% of its completions in deliver housing, and made the case for wider manufacturing quality of MMCs. 2019 using MMC, and aims to reach 25% adoption of MMC. As long ago as 2005, In contrast to traditional contract terms by 2025. Timber-framed housing accounted a National Audit Office report suggested that where payment is due after products arrive on for 45% of all its MMC completions in 2018 using MMC for housebuilding could cut site, MMC requires advanced payment, prior and roof cassettes a further 37%. on-site construction time by more than half. to the fabrication of offsite components. This Housing associations are looking for ways Homes England uses adoption of MMC increases not only manufacturer insolvency to increase delivery beyond the capacity of as a key scoring criteria for the sale of risk and the delivery of components but also the traditional construction sector. Swan public land. This has already been seen at the cash-flow burden for developers. set up its own modular factory in Basildon to Northstowe, Cambridgeshire, where Urban For institutional investors and housing deliver homes at its Beechwood development. Splash, which will build homes using MMC, associations, there may be advantages if Places for People struck a £100 million deal was selected as delivery partner ahead of the additional cost of construction results with ilke Homes to deliver a total of 750 new a number of well-known housebuilders. in lower ongoing maintenance costs. But homes across multiple sites. The Greater London Authority (GLA) housing associations often have a limit on The signs are that outlooks are changing. published Designed, Sealed, Delivered in the proportion of their loan security that We could be on the cusp of a revolution 2017, which called for the use of offsite can be of non-traditional build. Currently, in how we deliver housing. construction to meet the capital’s housing needs. Mayor Sadiq Khan has since launched Prism, a free web-based tool that aims to accelerate the design process for precision- Some 50% of housing associations expect to be manufactured housing in London. It Piece using MMC to build new homes in five years’ time combines London’s spatial planning rules with data from manufacturers to quickly test a site’s suitability for MMC. by piece Long-term thinking To fully realise the potential of MMC requires If MMC is to replace traditional housebuilding, a change of mindset from housebuilders attitudes towards the new technology need to Image: Laing O’Rourke and a widespread adoption of Design for Manufacture and Assembly (DfMA). change – from banks, buyers and housebuilders This aims to simplify design and increase the efficiency of constructing houses. Full adoption and integration of digital technology into housebuilding, for example using Building Information Modelling (BIM), savills.com/research 4 5 Savills_Dev_p04-5_tech_1.1.indd 4 04/10/2019 11:36 Savills_Dev_p04-5_tech_1.1.indd 5 04/10/2019 11:37 Policy disruption Policy disruption Provision of affordable housing was cited as the second-highest priority for voters in 2018 This could be offset by shorter building SOCIAL programmes, as build out would not be AWARENESS limited by sales rates. Shortening the time on Alongside the desire for House site, and earlier cash receipts for developers, increased delivery of could result in access to cheaper finance. new homes, is growing demand for homes that Fair shares meet specific social Linked to the debate on increasing delivery needs. With increasingly rules has been the emergence of land-value capture stretched housing All political parties will have to adopt increasingly as a prominent issue around solving the affordability, the need innovative solutions to tackle the housing shortage housing crisis. There have been calls across for more affordable the political spectrum for more attention housing, particularly and address the issue of land value to be paid to increasing land-value capture social rent, is chronic. within the development process. MHCLG’s 2018 figures The Letwin Review called for local showed more than 1.1m authorities to use developer contributions households on local via Section 106 agreements to effectively cap authority waiting lists residual land value at 10 times existing use and 83,700 in temporary Ongoing political turbulence has been In contrast, Labour’s Housing for the Many value on greenfield land.