Backing the outcome of a recent independent review of the sector, Zing Mortgages director Paul Flavin said the introduction of a more ‘affordable’ modular housing package was needed to encourage investors to return to the market in certain areas where yields had fallen to unsustainable lows.
His comments followed the publication of a government-commissioned review, which found new construction methods were needed to offset a general shortage of skills in the construction sector, which had inflated building costs and made housing schemes ‘too expensive to build’.
CEO of construction consultancy Cast, Mark Farmer, had been commissioned to undertake a review of the UK’s construction labour model by the Construction Leadership Council and respective housing ministers in February 2016.
His so-called Farmer Review had recommended the launch of a pilot programme, which would test the use of pre-manufactured construction in the residential space.
Flavin agreed. Considering the market from a buy-to-let perspective, he said: “I am becoming more involved with the world of modular housing seeing it as a true way forward in many areas. In the South East property prices have grown to a point where rental yields can be as low as 3% and 4% meaning landlords aren’t purchasing in these areas. The introduction of a more affordable modular housing package could be the only way to increase rental yields to a sufficient level, encouraging investors to return to these areas.”
“In dire need of change”
Farmer looked at the availability of skills in the market as well as the potential role new forms of off-site construction could play to resolve the country’s housing shortage.
Among other things, he highlighted a dysfunctional training model, lack of innovation and collaboration as well as a non-existent research and development culture, which were holding back the market.
He said the industry needed to modernise to become a more compelling proposition for prospective new entrants or it would face a future of decline and marginalisation. In short, it’s “modernise or die”, he said.
Farmer came up with 10 recommendations, including piloting off-site built and modular housing; a wholesale reform of the current Construction Industry Training Board (CITB); government-initiated change; and modernisation using better technology.
He said: “The construction industry is in dire need of change. What is clear to me following the nine months spent conducting this review is that carrying on as we are is simply not an option.
“Unless we find some way of promoting innovation in construction and making the work less labour intensive and more attractive to new entrants, there’s a very real danger of the construction sector going into an inexorable decline over the next few years.”
Farmer suggested a medium-term solution could be a “carrier bag charge”-style deterrent scheme, forcing businesses to opt for new models of construction.
This would levy a tax on businesses who buy construction work in a way that doesn’t support industry innovation or skills development. Clients could face paying a suggested levy equal to 0.5% of a scheme’s construction cost but would have the ability to avoid paying this tax completely by commissioning construction in a more responsible way.
The government said it would “carefully consider” the recommendations. “Given the launch of the £3bn Home Building Fund, Mark Farmer’s important review in this vital sector is very timely. It makes a strong case for change in the industry, identifies areas where it needs to improve, and sets out areas for action,” said Industry Minister Jesse Norman.
Legal & General, which already invested £500m in a modular housing project this year, welcomed the report. “This review sets out a clear way for the construction sector to reinvent itself in order to meet the ever-growing demand for homes and infrastructure,” said Legal & General Capital managing director Paul Stanworth.
He added: “Legal & General is helping to address this problem by investing in a modern factory to produce homes using manufacturing processes seen in the production of cars and other consumer goods. This construction method is safe, clean, and fast, providing a high level of consistency and durability. We sincerely hope that Farmer’s review galvanises the entire sector to invest in innovation and secure its future.”