Executed efficiently, offsite construction offers developers reduced risk, accelerated occupancy of a scheme and numerous other benefits. At best, the adoption of offsite can also be seen as part of a larger shifting paradigm in which the developer’s role becomes more engaged, from project inception, with designers, builders and even end-users. A survey of players of all stripes in the development space reveals some of the gain and pain entailed in effecting this change.
THE NEW GUARD
Shane Mundey is the Development Specialist at niche Brisbane based company Raw Property Studio, whose mission is to create sustainable urban spaces. He believes the role of developers is ripe for a shake-up.
“The developer should be demanding better standards in renewable building materials, better construction methods to reduce injury on site, reduce waste and use less energy in the creation of the project and reduce carbon.”
Avoidance of fossil fuel usage, a bias towards carbon neutral solutions and reduction of energy wastage all play a part in Raw Property Studio’s ethos, which he says, has led to offsite solutions.
“I have had several builder stories with projects around timing and cost once they establish on site, and I have been seeking a better way to avoid a lot of those issues. I began engaging and asking better questions to find out how to reduce the risk once we start construction of a project, which led me to discover offsite construction, sustainable building technologies and mass timber construction.”
Mundey has worked on a number of projects with CLT and panelisation innovator Strongbuild, and presented in partnership with Strongbuild Managing Director Adam Strong at the prefabAUS 2018 Conference in September, with an emphasis on the benefits of early contractor involvement (ECI). He confirmed during that presentation that he’d had little direct engagement with builders until around two years ago. Over time, he said, the silo mentality and lack of innovation afforded by price-driven, traditional tender processes had become evident. What he found was “very little end-to-end understanding” between all players in the value chain about how to deliver buildings effectively.
Mundey’s approach could be seen as a holistic one in which end-user demand and the activities of the developer and builder are aligned. “I invest a lot of my time talking to the potential end-users of these developments, and they are increasingly demanding sustainable, energy efficient, progressive housing. If you have the end-users on board, it’s not a hard sell to convince builders that, in principle, they should start engaging in new ways of building.”
“I invest a lot of my time talking to the potential end-users of these developments, and they are increasingly demanding sustainable, energy efficient, progressive housing. If you have the end-users on board, it’s not a hard sell to convince builders that, in principle, they should start engaging in new ways of building.” Shane Mundey, Development Specialist, Raw Property Studio.
He says the current surge of interest in CLT means builders are beginning to engage with offsite, although they are still grappling with how to expedite and resource it. He encourages ECI as an effective enabler of greater interface between construction and design practitioners. “If developers are going to engage effectively with builders, they need to get rid of the traditional tender process and engage more directly from the outset.”
“Developers need to have a greater understanding of the offsite delivery process and supply chain and set the standards early in engaging with a builder. Developers are usually focused on the bottom line and think the cheaper price or the tender process will reduce the risk of the project, but the major risk is once construction starts and the majority of the cost is expended in delivery of the built form. This is where the majority of issues of cost control happen once you are committed to a builder and the construction of the project.”
Fraz Tanvir is Director of boutique property developer Faymus, which is carving a niche for itself in sustainable, progressive projects targeted at forward thinking inner urban dwellers.
A recent example of its output is The Hugo in Melbourne’s inner west. Designed by John Demos Architects and comprising 23 apartments, The Hugo was envisioned as a departure from the norms of its category, with an emphasis on natural light, structural solutions that would encourage air flow and solar panels on the rooftop to run lifts, water pumps and communal lighting. It’s a ground-breaking project utilising innovative technology throughout. And while the project was conventionally built, Tanvir believes it will prove the forerunner of comparable offsite schemes.
“Clearly, enhanced efficiencies and speed of delivery are what makes offsite so appealing to a developer. The jury is still out on whether the actual cost of the building is lower. However there are certainly advantages from our point of view in being able to secure occupancy of a building more quickly by using an offsite approach. If you have a 14 month build reduced to eight months through the use of offsite, the debt carried by the developer will be defrayed more quickly. The risk profile of the project is also greatly reduced.”
“The jury is still out on whether the actual cost of the building is lower. However there are certainly advantages from our point of view in being able to secure occupancy of a building more quickly by using an offsite approach. If you have a 14 month build reduced to eight months through the use of offsite, the debt carried by the developer will be defrayed more quickly. The risk profile of the project is also greatly reduced.” Fraz Tanvir, Director, Faymus.
However the same elements that are so appealing to a developer can be viewed in a less favourable light by lenders. “The interest on the finance side of the equation is going to be reduced by offsite, so there’s less incentive for financiers to support it. It’s certainly a harder sell, but we believe that as offsite becomes more commonplace, finance will start to be structured accordingly.”
Tanvir is currently looking at the possibilities of deploying offsite methodologies on a second scheme, The Precinct, also located in Melbourne’s inner west.
Over the long term, he says his aim is take Faymus vertical, enabling top-down control of the value chain in which offsite methodologies start to drive real efficiencies. Until then, adopting offsite thinking is a complex manoeuvre with many moving parts.
The Hugo - the scheme’s developer Faymus says future comparable projects will be built using offsite methodologies.
Render of a Raw Property Studio retirement living scheme in South Brisbane, using CLT.
Interior - Tullamore by Mirvac.
Raw Property Studio: targeting the market for sustainable, high quality builds, the company has embraced ECI and offsite solutions.
Mirvac’s Tullamore residential development in Doncaster, Melbourne - a collaboration with Drouin West Timber & Truss, using panelised solutions.
“It’s not just a case of working with a CLT manufacturer. You still need a head contractor to take responsibility for the electrics, the plumbing and so on. The head contractor needs to be on board with offsite, but that’s a big cultural shift. Their processes and their costings and scheduling are all aligned with conventional building approaches.”
“Another example is compliance. Just because you build something in a factory, that doesn’t make it easier to ensure it’s compliant with fire safety and acoustic regulations.”
“The regulations and the planning framework and policy are out-dated for the kinds of buildings we need to supply to afford people affordable housing. There are stipulations about ceiling heights and outdoor space requirements that are too restrictive. They stifle innovation.”
Developers entering the offsite arena for the first time would benefit from an evolutionary approach, incrementally developing their offsite capabilities, he adds. “So a composite or hybrid approach, using offsite for elements of a build and conventional approach for other parts of it. Each project is an opportunity to build up our own capabilities in offsite.”
Tanvir’s own aim is to plough profits from Faymus into proprietary research and development. “Rather than partnering with offsite players, we’d be hoping to attract young talent and build our own methodology from the ground up. We’d be bringing in architects, engineers, material specialists. We’d also be looking at developing our own automated plants and product. This really is the only way to secure the necessary economies of scale in the Australian market.”
While the Australian market faces systemic challenges in terms of lack of volume and scalability, he is optimistic that as major cities continue to grow, persistence in promoting the benefits of offsite construction will pay off. And he’s clear that developers have an important role to play.
“I think we’re yet to reach the tipping point with offsite. It’s like conquering space. We’ve built the launch-pad; we’ve switched on the ignition, now we need the drive from a greater mass of participation in this space to overcome the gravitational pull of out-dated ways of doing things.”
“I think we’re yet to reach the tipping point with offsite. It’s like conquering space. We’ve built the launch-pad; we’ve switched on the ignition, now we need the drive from a greater mass of participation in this space to overcome the gravitational pull of out-dated ways of doing things.” Fraz Tanvir, Director, Faymus.
David Chandler OAM FAIB, Principal of construction consultancy CE Advisory, indicates current paradigms in which developers purchase land and build on it, are ripe for disruption. Companies such as Nightingale, which focuses on sustainable, affordable urban developments, are to the old school building industry what Airbnb and Uber are to the hospitality and taxi industries respectively. It’s more accurate to see such companies as platforms or aggregators of clients and client demand, says Chandler. Like Airbnb and Uber, Nightingale, which has used prefab CLT on its output, is noteworthy for its direct interface with end users. Having secured rights to a site, its approach is typically to hold briefings with potential home-buyers to ascertain their needs before designing the scheme. It also financially pre-qualifies clients as purchasers which enables it to secure project funding. Capped profits, transparent project costs to investors and purchasers and cost reduction through the removal of marketing and display suites are other notable hallmarks of the Nightingale approach.
Recognised players in the development field have been gaining traction in the offsite space for some time, but not without challenges. David Haller is National Operations Manager of the Masterplanned Communities construction division at Tier 1 property group Mirvac.
As one of the rare developer-builders in the industry, Mirvac has an opportunity to play a leading role in generating more respect and understanding for the value offsite can bring to development, he says.
“Each development is considered successful based on a number of metrics and KPIs, but the two key items are Internal Rate of Return (IRR) or Return on Invested Capital (ROIC). Both these metrics are heavily dependent on sales rate and overall duration of the project and if Mirvac can deliver a project faster and generate more land sales by offering an improved end product through offsite, then it is always going to be in the best interests of the developer to promote prefab wherever possible.”
Mirvac’s move into offsite methodologies has been customer-driven.
“As a developer-builder we have two very distinct customers – the internal (Development Department) and the external (the end user of our homes). For both categories we have always looked at offsite manufacturing as a way to improve the experience for both. For the internal developer, we need to be more efficient and entail less risk in every way. Offsite manufacturing achieves this. For the external customer, we need to have a better product that demonstrates an improvement in presentation, quality, durability and performance and this is easier to achieve with offsite manufacturing.”
“There are a few developers that are trying to drive offsite methodologies, however they represent only a minor portion of the whole industry. My opinion is that the developer should play a pivotal role in fostering offsite, however, this is not currently the case. Most developers in this country develop land for sales only and do not build homes. As long as they are selling land in line with their sales rate, there is no real incentive for a developer to care about how a product is built on the land.”
“My opinion is that the developer should play a pivotal role in fostering offsite, however, this is not currently the case. Most developers in this country develop land for sales only and do not build homes. As long as they are selling land in line with their sales rate, there is no real incentive for a developer to care about how a product is built on the land.” David Haller, National Operations. Manager – Masterplanned Communities, Mirvac.
In light of the softening market, developers may be looking for more opportunities to support their land sales rate, he says, “so they would hopefully look at other ways to sell land, or to assist builders in creating opportunities for customers. One of those ways could be to offer a higher quality home that performs better and can be delivered more quickly.”
“The main factor I believe preventing developers from further supporting offsite, is cost. At the moment, the offsite manufacturing supply chain in Australia is quite small and not able to be cost efficient, so the costs associated with an offsite option are usually a higher initial cost than conventional construction. As a result, despite the fact that there are efficiencies in an offsite manufacturing option on site, there is also additional cost which cannot be easily offset in a development feasibility.”
There is also greater opportunity for uptake of offsite in a re-think of the financial and contractual relationships between builder-developers and offsite manufacturers.
“I believe the relationship needs to be more like a partnership rather than the conventional vendor relationship. As offsite is in its infancy stage in Australia, I believe that developers-builders and manufacturers need to partner with the big picture in mind rather than just the individual purchase of isolated materials. Some do this well and others do not.”
“At the moment pretty much all of our projects in the pipeline have offsite in mind, but even in a highly innovative company like Mirvac, we still struggle to unlock offsite opportunities due to non-standardisation of design, which leads to a lower volume of purchase from an offsite manufacturer, which in turns costs us more upfront to do prefab; it’s a bit of a vicious cycle. We are getting better with every new project by planning earlier and now clearly understand the key factors for financially viable offsite manufacturing opportunities to be realised.”
Dale Clark, who held the position of General Manager – Group Project Management and Direct Procurement, at Stockland for around nine years until September 2018, claims the arguments for offsite are increasingly hard to ignore.
“The key challenge for the construction industry is productivity; we’ve seen no material gains in onsite construction over the past two decades, and we’ve seen continual cost escalation driving a lowering of affordability, while labour rates continue to rise. Offsite is a way to crack the code and the end game is affordability.”
“The key challenge for the construction industry is productivity; we’ve seen no material gains in onsite construction over the past two decades, and we’ve seen continual cost escalation driving a lowering of affordability, while labour rates continue to rise. Offsite is a way to crack the code and the end game is affordability.” Dale Clark – prefabAUS Director + former General Manager – Group Project Management and Direct Procurement, Stockland.
Like many of its peers, the Sydney-headquartered company is in the early stages of exploring offsite solutions, and while Clark didn’t cite specific examples of projects that embrace the approach, he indicated the significance of developers’ engagement.
“As the generator or initiator of projects, developers/ owners have a significant role to play in lifting the capacity of the offsite sector.”
Stockland doesn’t build but it does deliver turnkey packages and like other developers is looking at how it can partner with the prefab industry, particularly in the housing space.
Certainty of quality and supply is a key consideration for developers looking to utilise offsite, he says. Cost blow outs, delays and unforeseen problems are all key issues associated with the conventional “buy and build” model and cited in “thousands of surveys” undertaken each year with customers across the industry. The surveys target end users (homeowners) but the problems cited are equally onerous for the developer.
Clark does outline what he describes as a “gradual shift in the mindset at developer level,” which is resulting in better “upfront design” at the inception stage of schemes. But challenges peculiar to the Australian context remain.
“There’s very limited choice in supply chain by geography that can deliver volume, although we are seeing it organically growing with the scaling up of commodity manufacturers of wall and floor lines typified by companies such as Timber Frame and Truss, TBS and Strongbuild.”
Wearing his other hat as a Director of prefabAUS, he says another hurdle for Australia is lack of alignment between states and territories. “We really need harmonisation of the regulations between the states and of course better alignment of those codes to an offsite approach. That’s something that we’ll be looking to advocate for via prefabAUS going forward.”
He adds that developers also need to re-think project finance in terms of how to stage the allocation of capital for the build. “It’s unreasonable to expect a prefab manufacturer to carry the cost of producing the building components. You only have to have one or two projects encountering a delay to cause material issues for prefab suppliers.”
Certainly the economics of development point to a new approach. Given the growing trend for developers to value-add purchased land through the provision of housing “product”, offsite seems to make sense, particularly with the cost of product rising compared to land values.
“The cost of building the home itself is becoming a much greater proportion of the total cost of housing. It’s can now closer to 50/50, whereas say two decades ago, the cost proportion of the home was often much lower.”
“Developers should be playing a broader role as they have privileged access to every element in the supply chain. Companies with the scale of Stockland, Lendlease or Mirvac also have access to the local government and planning authorities. We should be advocating much more strongly and proactively in this space.”
“Developers should be playing a broader role as they have privileged access to every element in the supply chain. Companies with the scale of Stockland, Lendlease or Mirvac also have access to the local government and planning authorities. We should be advocating much more strongly and proactively in this space.” Dale Clark – prefabAUS Director + former General Manager – Group Project Management and Direct Procurement, Stockland.
THE CONSULTANT’S PERSPECTIVE
A Senior Structural Engineer at Wallbridge Gilbert Aztec (WGA), Simon McCarthy is an experienced Structural Engineering designer of modular buildings in Australia. He utilises experience gained from sharing ideas from colleagues in North America, U.K, Europe and Singapore to target best-practice techniques in his approach to modular buildings and has been involved in a number of offsite projects, manufactured both in Australia and in China. Predominantly, they have been PPVC (pre-fabricated, pre-finished, volumetric construction).
“From my experience, developers in Australia want to dip their toes into the ‘modular’ pond to save on time and costs. However, it only works if it is done with quality and experience mind. Too many times I see developers think ‘savings, savings, savings’ and then end up with a project that has more headaches than normal and doesn’t end up saving on cost or time.”
A key factor preventing modular construction from growing in Australia is lack of experience in the field, he says. “Small in number, local modular fabricators have full workloads, so their prices are not as competitive as they could be. Labour costs in Australia are still high, partly due to lack of willing people who want to develop their trade skills or take up an apprenticeship. This makes it hard to compete against good quality modular buildings being imported from China.”
While many developers have concerns about importing building products or completed modules from China due to compliance issues, this can be alleviated by using the right manufacturer in China who has an Australian base and understands Australian compliance requirements, he says.
“From my experience, developers in Australia want to dip their toes into the ‘modular’ pond to save on time and costs. However, it only works if it is done with quality and experience mind. Too many times I see developers think ‘savings, savings, savings’ and then end up with a project that has more headaches than normal and doesn’t end up saving on cost or time.” Simon McCarthy, Senior Structural Engineer, Wallbridge Gilbert Aztec (WGA).
Meanwhile, another contributing factor to relatively slow uptake in modular in Australia is funding. “Banks have been the traditional lenders and will not provide progress payments until modules arrive on site (creating cash-flow problems). That is, their systems do not recognise a building being made in a factory. This is slowly changing, but other methods of funding are increasingly available. I have a client who also provides funding to developers for modular projects.”
Overall, McCarthy advocates for better collaboration between all value chain participants to ensure offsite becomes a safer bet for developers. For example, the buzz around DfMA, (Design for Manufacture and Assembly) needs finessing; Often seen as a cure-all offsite enabler, DfMA is a complex approach that must be correctly executed to be effective.
“DfMA essentially means the design needs to be conducted as if it is to be built in the factory and assembled on site using consistent, non-complex connections. This sounds straightforward, but world’s best practice shows it takes collaboration between the architect (design), engineer (manufacture / materials) and builder (assembly). The team need to work together from day one.”
“The need for early engagement around every aspect of design is clear. While savings on a project are often made in terms of design costs, expenditure on materials or labour to account for the additional work required to overcome complex connections or erection procedures often outstrips savings exponentially,” McCarthy says.
“The collaborative procurement model is the most productive model I’ve seen that benefits everyone.”
“While savings on a project are often made in terms of design costs, expenditure on materials or labour to account for the additional work required to overcome complex connections or erection procedures often outstrips savings exponentially.”
The collaborative procurement model is the most productive model I’ve seen that benefits everyone.” Simon McCarthy, Senior Structural Engineer, Wallbridge Gilbert Aztec (WGA). ■