Modular Construction: A Clarion Call for Greater Innovation, Affordability and Pace

In pre-pandemic days, growth and productivity were key focuses for all businesses regardless of sector. One doesn’t need to be an expert nor an investor in real estate to know that the construction sector is the behemoth laggard on both counts of all sectors that are measured.  And it will take time for it to recover from the knockback of global lockdowns. Yet the construction sector is essential to national and the global economies accounting for 13% of the world’s GDP, employing 7% of total labour but remains about as productive as it was in the 1950s.

Think of the transformation of any other sector…travel, retail, energy, finance, manufacturing…in the last 20 years or even the last 5 years and we all have examples of radical changes that have made the experiences better, the products more appealing and the time to market even faster. But in construction? In housing?  In most countries new housing lacks innovation, is unaffordable for many Millennials and Gen-Zers and lacks the pace and urgency to keep up with demand.

It is important to find ways to make projects more efficient, innovative and attractive to be able to convert them into successful investments. And I concur with the desperate findings of the McKinsey Global Institute (MGI) in 2017 stating that the construction sector is in serious need of redefinition if it has any hope of realising higher productivity…only 1% a year for 20 years…in the future. (Reinventing Construction: A Route to Higher Productivity).   Fair enough that construction is highly regulated in most countries and vulnerable to economic cycles with their fits and starts and it is also highly dependent upon the public-sector for investment.  And we all know how long public sector projects, approvals, budgeting and investments take. 

But I also agree with MGI that the companies which are producing in factory then erecting on-site in a fraction of the time are some of ones that will win in the future. It’s called Modular Construction and I am one of its greatest proponents but conversely also a critic for the lingering limits on its pace and scalability.   

Modular Construction: the solution for our time

A construction process that is greener, more innovative, faster and cheaper is called Modular Construction where a building is made off-site, under controlled plant conditions, using innovative materials and processes in about half the time as conventional building on site. Buildings are produced in ‘modules’ that are put together on site, reflecting the identical design and specifications.

The factory-controlled process generates less waste and provides more flexibility even reuse. Modular buildings can be taken apart having been used on a site then relocated and refurbished for new use, reducing the call on raw materials and minimizing the energy needed to create a new building.

Built in-factory waste is often eliminated with recycling, controlling inventory and protecting building materials. Many of the newer players in the sector are green to their core and highlighting the sustainability of their products from sourcing to completion. Additionally, today’s designs deliver improved air quality because the materials used are dry negating any moisture being trapped during construction.

Why not more Modular builds?

As someone who invests in hostels (A&O Hostels) and student housing assets in Europe, I am surprised that there aren’t more Modular providers for those type of properties.   By removing almost 80% of building activity on the site you have significant reduction in disruption, traffic and overall safety and security worries are minimised. But It’s not just hostels and student accommodation that would benefit significantly if the sector scaled up but also most other asset classes, including offices, hospitals, care homes, not to mention more affordable housing to keep pace with demand.

Inflated house prices and high rents in major cities are damaging employment prospects for millions of young workers across the European Union, according to the World Bank. “Housing in European metropolitan areas has become unaffordable for many because new construction is not keeping up with demand,” said Gabriela Inchauste, Lead Economist for Poverty and Equity at the World Bank. “Since a large portion of housing stock is owned by older generations, this shuts out younger generations who cannot afford to live in the most productive locations with the highest employment rates, such as capital cities.”

In London, many young professionals are resorting to ‘Guardianship’ schemes renting offices as apartments, rooms in former hospitals or care homes whilst developers decide on what to do with abandoned sites. Charging significant rents for unsuitable facilities keeps the squatters out and the young with access to the jobs they want by having somewhere to live. However, they are really not up to standard.  

Micro-housing: to some just sleeping pods for commuters

In the US micro-estates are being used as the solution to affordable housing. Some 5.6% of Americans currently live in ‘manufactured housing’ which you can read as trailers or mobile homes. The term ‘tiny home’ or micro-housing means something under 46 sqm which are popping up on the outskirts of Silicon Valley, Phoenix, Austin, Seattle and Atlanta city centres to name a few that can’t accommodate workers within their city limits.

Across the Atlantic it seems time for EU policymakers to earmark unused public land for developments and to speed up approval processes for modular, affordable developments. Without doubt it is time to invest in greenfield projects with improved transportation links from suburban areas to ensure cities project wider economic value. But still, there needs more access to Modular Construction to deliver affordable, green and attractive options faster.

Rethink design, processes and scale

Technology will be the key enabler for not just improving design and productivity but also helping to standardize processes and scale production. Real estate lends itself to increase the scale of projects because of the repeatable nature of them. This is true for most asset classes. But construction lags behind most sectors employing state of the art digital technologies. Advances exist using the best of additive construction and 3D printing is already used in Modular Construction. Pioneers WinSun Construction in Shanghai produced a six-story apartment block built entirely with a 3D printer.  

Robots and drone technology have also impacted construction. In Australia, brick-laying robots have improved productivity by 100%. According to MGI’s findings the priorities to scale more innovation in construction means embedding innovation throughout the entire value chain, strengthening the link between tech suppliers and owners and to share the risk of trying new approaches.

As an investor I am looking for visionary partners who want the future a lot faster than it is currently being delivered. The recovery from the pandemic and the negative hit, which all sectors have experienced, will take time. Hopefully, we will emerge more creative, willing to progress faster with bold solutions whose time has come.  The societal and economic imperatives are staring us in the face.