Prefabrication in Australia dates back to the 1850s when portable iron clad homes were transported from the UK. One such company offering corrugated iron buildings in kit form was Rose Lane Works, located in Norwich, UK. These systems were cheap to manufacture and easy to transport. Their 1888 catalogue was a diverse offering that included buildings such as houses, church halls, workshops, and even hospitals, among others. During the two decades following World War II there was a plethora of low-quality precast systems manufactured in Australia. In more recent times ‘transportables’ have been the classroom of choice for rapidly expanding schools for decades, buildings that have a design requirement of being transported up to ten different sites throughout their 25-year design life. Mobile ‘dongas’ have been deployed on construction and mining sites throughout Australia in their hundreds and thousands. This history has come to define society’s understanding of prefabricated buildings, which explains the cultural resistance to this form of construction that persists today. This enduring perception is one of prefab’s greatest weaknesses and challenges for penetrating the conventional building industry.
There are firms operating in the modern prefabricated construction industry that have demonstrated excellence through the development and commercialisation of innovative construction technologies. However, these remain in the minority in what may be described as a largely unsupportive industry infrastructure that has matured in tandem with an industry that is well insulated from change.
Although history has demonstrated the building and construction industries are notoriously slow at uptake of new technologies, there are firms operating in the modern prefabricated construction industry that have demonstrated excellence through the development and commercialisation of innovative construction technologies. However, these remain in the minority in what may be described as a largely unsupportive industry infrastructure that has matured in tandem with an industry that is well insulated from change. The challenge for early innovators is achieving progress in an industry that supports the status-quo. The Construction Technologies discussion paper (2015) published by the Victorian Government acknowledges industry’s perception that the Government’s limited recognition and support of new technologies is a disincentive for innovation. A study by Forest and Wood Products Australia into uptake of cross-laminated timber technology found “Factors such as ease of which a task can be completed, having access to appropriate resources and facilities, and financial risk and investments are all factors which can inhibit consumers from performing behaviours even if their attitudes are positive.”
The issue of finance is particularly pertinent. Prefabricated construction in the vast majority of cases is performed off-site, also transferring costs off-site, which is at odds with conventional lending practice whereby payments are made according to milestones defined by site progress. Up to 95% of building completion, particularly for volumetric builds, may occur off-site with installation occurring in a matter of weeks rather than months. However, a study by Steinhardt, Manley and Miller (2013) titled ‘Profiling the nature and context of the Australian prefabricated housing industry’ notes the irony for certain prefabricated construction technologies.
Boulton & Paul, catalogue No. 43 (revised edition), Ross Lane Works, Norwich, 1888
Structural Insulated Panels (SIPs) may progress to lock-up in as little as one-third of the time required for a comparable brick-veneer dwelling, thereby accelerating the builder’s claim for 65% of the build costs.
The ripples of the changed workflow for prefab relative to conventional construction are also felt down the supply chain including those supplying sub-assemblies such as bathroom pods and kitchen modules. Until these assets are installed on-site they remain in the possession of the manufacturer which creates uncertainty for ownership under traditional lending models making finance difficult to procure. SMEs and start-ups are particularly exposed to this barrier of the prefabricated construction industry.
AN INTERNATIONAL CONTEXT
Throughout the United Kingdom, masonry housing has been overwhelmingly popular for centuries, despite this form of construction being expensive and inflexible to evolving housing policies requiring a substantial increase in the supply of sustainable affordable housing. Prefabricated construction on the other hand is able to respond rapidly to change although it has suffered from a chequered history which has fuelled banks’ resistance to financing this non-standard building form. For the past 60 years prefabricated construction has been largely reserved for affordable housing projects such as the Winston Churchill initiative that built more than 156,000 prefabricated houses between 1944 and 1948 in factories previously used to manufacture munitions and aircraft during World War II. The dwellings were cramped, contained very little insulation and were intended to have a lifespan of 10 to 15 years. The high-profile failure of the Ronan Point apartment building collapse in 1968 did little to improve public perception of offsite manufacturing techniques for construction. These failures have contributed to UK mortgage lenders being reluctant to finance prefabricated projects largely due to concerns regarding performance and market appeal.
However, despite an entrenched cultural viewpoint, the winds of change are blowing. The UK Government has embarked on a campaign to abandon the term ‘prefabrication’, instead adopting ‘modern methods of construction’ in a bid to distance contemporary construction techniques from historical failures of manufactured housing. The British-headquartered Legal & General (L&G) is building Europe’s largest factory in Leeds, UK for prefabricated dwellings. At a forecast cost of £55m ($91m) the capacity of the factory will be 3000 houses or 4500 apartments annually using state-of-the-art manufacturing technology. In the long term, L&G are planning to spend £500m ($826m) on similar factories throughout Europe. L&G also reports that consumers will have a very high degree of flexibility in designing their home, contrary to a widespread belief that choice is limited for prefabricated homes.
The issue of finance is particularly pertinent. Prefabricated construction in the vast majority of cases is performed off-site, also transferring costs off-site, which is at odds with conventional lending practice whereby payments are made according to milestones defined by site progress. Up to 95% of building completion, particularly for volumetric builds, may occur off-site with installation occurring in a matter of weeks rather than months.
In the US, the manufactured housing industry started to become popular in the 1930s following growth in the recreational vehicle industry. After World War II manufactured housing provided a solution to housing shortages but it was not until the 1950s when manufactured housing shifted towards permanently sited dwellings. Manufactured homes in the US have traditionally been financed by chattel mortgages which attract higher interest rates, shorter loan terms, fewer rights when in default and fewer lenders. This is largely due to the history of ‘travel trailers’ and homes built prior to 1976 when the Manufactured Home Construction Safety and Standards were implemented. The landscape was further improved in 2000 when the Manufactured Housing Improvement Act was introduced, which improved installation standards and dispute resolution procedures for consumers. In 2004 the state of Washington implemented ‘An Act Prohibiting Discrimination Against Consumers’ Choices in Housing’ to achieve a position of equity and fairness among all housing construction types with respect to zoning and land-use regulations, thereby reducing barriers for manufactured housing. While many states still title manufactured homes as personal property, there is a growing trend to convert these to a real property title once the dwelling has been assembled on land owned by the homeowner. In other cases lenders will now offer conventional mortgages to manufactured homes subject to pre-approval of the design and location.
POLICY, REGULATION AND THE FINANCE INDUSTRY
The barriers for prefabricated construction overseas are not dissimilar to those in Australia. Governments and regulatory bodies have the capacity to incentivise prefabricated construction and create a more supportive framework through the top-down enforcement of standards. The National Construction Code contains minimal deemed-to-satisfy provisions that directly apply to prefabricated construction, meaning designs must follow the performance solutions that often require prohibitively expensive supporting evidence that becomes an obstacle on all but the largest projects. This spells danger for the viability of the local prefabrication industry as it seeks to compete against imports in what has already become a global market.
There is general sentiment that prefabricated construction will benefit Australia’s construction industry. The Productivity Commission’s 2014 Inquiry into Public Infrastructure noted prefabrication has tremendous scope to lift productivity that will enable it to become cost competitive against imports. The Victorian Government’s Construction Technologies discussion paper (2015) identifies the construction materials and technologies sector as strategically important and an opportunity to increase targeted trade and attract investment. However, the Victorian Department of Economic Development, Jobs, Transport and Resources acknowledges there is a hurdle;
a general lack of understanding about prefabricated construction including by regulators, educators and financiers which is stifling the sector’s development.
The greatest concern of the mortgage lender is the loan repayment and whether the sale of the asset will cover the outstanding balance of the loan in the event of default. With conventional construction, there is a direct correlation between on-site progress and the provision of funds. There is a fundamental change in the risk profile if project progress moves off-site, especially when calculating security on the loan and how assets may be recovered if the borrower goes bust. The scenario is further complicated if the asset is being prefabricated offshore.
Banks will finance prefabricated construction provided the developer has a proven track record of past success. The Little Hero building was manufactured by Unitised Building and financed by the Arab Bank. A subsequent prefabricated project by Unitised Building in Coburg, ‘The Nicholson’, contains 199 apartments including low-cost public housing that was financed by a major Australian bank as a result of a government contract and past performance of Unitised Building through the Little Hero project. Progress payments were made based on an arrangement involving asset completion in the factory. Other major prefabricated builders such as Modscape have had to privately finance the build process.
ACTIVITIES AT THE ARC CENTRE
One of the four programs based at the ARC Centre for Advanced Manufacturing of Prefabricated Housing is developing new models for financing innovation to reflect the needs of Australia’s prefabricated construction industry. The advanced manufacturing sector is characterised by optimised supply chains supported by sophisticated decision support tools to maximise efficiency and competitiveness. Financing models for successful advanced manufacturing sectors are also well developed with significant engagement from investment banks. By comparison, the prefabricated housing industry has inherited a traditional construction industry supply chain that is fragmented and inefficient. Similarly, as it is producing a housing product, the industry has been pigeon-holed into a retail banking financing structure that is misaligned to the rapid construction times of prefabricated housing. This model requires the prefabrication manufacturer to carry the entire cost and risk of the project inhibiting the ability to scale up as capital is tied up in existing projects.
The Centre’s industry partners have identified inefficient supply chains and stifled models are the cause of lost productivity and inefficiency to the point where they have created a major hurdle for the growth of prefab in Australia. However, some of the Centre’s industry partners have been highly successful at navigating these challenges. The Centre’s activities will focus on mapping new supply chains and creating new financing models for prefabricated housing. A key objective of the Centre’s training program is to work with prefabAUS to train business and economics professionals to transfer knowledge and to frame persuasive arguments for the reluctant banking sector.
The Centre’s first project in this space is addressing the supply chain by developing models that incorporate various risks such as inherent complexity and uncertainty within the industry to supply network designs that are robust to various forms of risk. The second project is examining existing construction finance models that are based on in-situ construction and financing arrangements which preclude the mortgaging of prefabricated housing until they are in-situ. Further, this project is seeking to develop a model that better meets the needs of stakeholders including buyers, investors, lenders, and regulators.
A BRIGHTER FUTURE
Growth in Australia’s contemporary prefab industry is hampered by a lack of support from an industry model that has evolved with the needs of conventional construction and rewards the status-quo. The move to off-site manufacture has fundamentally changed the risk profile for this innovative technology that is at odds with conventional construction finance models. Countries such as the UK and US have also experienced many of the growing pains being experienced by Australia’s prefab industry.
Despite the many challenges encountered in prefab’s past the future is very positive. The landscape is gradually changing and there are a number of local prefab builders discovering mechanisms to successfully fund and deliver prefab projects. Legal & General’s new factory in the UK is not only a beacon of light for prefab, it is a testimony to the prefab’s role in the delivery of modern houses. The ARC Centre is building upon the success of its partners and working with Australia’s finance industry to create new models that not only account for the different risk profile in the supply chain but also better meet the needs of stakeholders in Australia’s prefab industry. ■
Dr David Heath – CAMP.H