AN INDUSTRY IN DEVELOPMENT

MICHAEL: Welcome to the sixth edition of the Built Offsite Forum sponsored by Sensum. Today’s discussion is dedicated to developers and how they work within the offsite space. I’d like to start with an overview of the level of awareness and understanding of offsite among property developers.

CHRIS: I guess there’s a curiosity about prefabrication and there’s a general awareness of it, but I think it’s something that’s more of a personal interest that drives you into that discussion. If someone, a developer, has passion for it, that will drive it. But it’s not front-of-mind when one development team goes to assess a site.

You might have conversations about prefabricated pods and there’s certainly an opportunity for that in a more high-rise type environment, but I just don’t think the whole solution’s there yet. I think the industry probably still needs to go a little bit further on the journey to demonstrate its capabilities on a small scale and build up to doing something on a more significant scale that developers can adopt.

ROBERT: The issue is about prefabrication is that it’s a system to develop efficiencies. It doesn’t mean we have to be using completed product, but there are pods, there are parts of walls, there are floor systems – that’s all prefab too.

CHRIS: I guess from my perspective, what I would classify as prefabrication is something that encompasses a number of trades or is preassembled in a way that it’s going to eliminate the need for a lot of trades on site.

DAMIEN: I think that definition is a really important thing to discuss. At prefabAUS we do talk about that a lot. When we called the organisation prefabAUS, it was a potential issue because of the negative connotations around prefabrication. But if you think about it as an umbrella term, there are a lot of components and parts of projects of commercial large scale buildings that are already prefabricated, and it’s how much more of that can be done and what is the developer comfortable with? Precast panels, bathroom pods… we’re seeing just about every big building using those and then it starts creeping into other aspects like MEP, and then structures, and those other elements of building.

It is a matter of understanding what’s available, what technologies are there, and picking and choosing parts for your project to get the best outcome, but you’ve got to have someone there driving it from the developer side. And that’s I think where we probably need to do some more work; to educate the developers on what the potential benefits are, as well as looking at technology as a real driver behind this around digital technologies, around augmented reality – all those sorts of things. This is what people want to do now; they want to build it digitally, they want to understand logistics, procurement, supply chain, and then when they go to site, the building should come together seamlessly, and prefabrication allows that to happen a lot better than conventional construction.

“It is a matter of understanding what’s available, what technologies are there, and picking and choosing parts for your project to get the best outcome, but you’ve got to have someone there driving it from the developer side. And that’s I think where we probably need to do some more work; to educate the developers on what the potential benefits are, as well as looking at technology as a real driver behind this around digital technologies, around augmented reality – all those sorts of things.” Damien Crough, Founding Director and Board Chair – prefabAUS.

MICHAEL: What actions do you think may assist a developer to better understand what the opportunities are?

DAMIEN: I think it’s really showcasing some successful projects – how they’re being done, how they were put together, how that engagement happened at the front end with the consultant engineering design team and what that meant through the life of the project to completion.

So, I think because it is in its infancy, really, it is an emerging sector. It is a growth sector. It’s been identified as that, so we still have a lot to do. I think it’s really about the more projects that get done, the more that we can show the industry what’s happening and how well it’s being put together, and that will, obviously give developers more comfort around exploring that upfront instead of being something that might be an alternative.

ROBERT: I don’t think developers really mind; it’s the builders. As long as you’re a first tier builder the developer will trust the builder with whatever system they’re going to adopt, so I wouldn’t be focusing on developer.

CHRIS: Spot on. I think from a developer’s perspective, we’re interested in creating a great environment through built form, placemaking and architecture. So it’s about sitting down with an architect to develop what we want to achieve, and then the architect developing schemes that can be readily sold or leased. In terms of the manner in which it’s built, we want something built really safely, we want something of really high quality, and we want something the market wants and if something’s going to make some money as well would be nice.

To the extent that it’s prefabbed or stick-built onsite, it’s not a key driver in our selection of how to implement in development.

NICK: Even the return on investment, does that come into play at all?

CHRIS: Return does, but if you’re moving the conversation to more about speed of manufacturing, I don’t know yet that, as a developer, we can back that one. When we have conversations with builders about what is the opportunity for prefab in certain elements and it’s still pretty early on discussions, there’s not the confidence that we’re going to get a significant saving on program.

From a developer’s perspective, if we’ve got a 10-storey residential or commercial building that’s all documented up and we go to the builder, it’s the competitive advantage of the builder that’s pursuing prefab that counts. They’re going to have to show the ability of prefab to beat the other three or four tenderers in a conventional building format. That’s where the tension’s going to come and that’s where it’s going to drive the market more to prefab.

“From a developer’s perspective, if we’ve got a 10-storey residential or commercial building that’s all documented up and we go to the builder, it’s the competitive advantage of the builder that’s pursuing prefab that counts. They’re going to have to show the ability of prefab to beat the other three or four tenderers in a conventional building format. That’s where the tension’s going to come and that’s where it’s going to drive the market more to prefab.” Chris Kakoufas, General Manager Development, Cbus Property.

DAMIEN: I get that perspective, but at the same time, I think as the developer, you have certain demands that you can make because you’re the one paying for these projects. You make those demands to your builder and they will do what they need to do to provide that solution for you. That might push them further to explore these different ways of delivering things.

In some sectors, that’s already starting to happen in a small way such as in student accommodation. The developers are procuring the prefab bathrooms directly from the manufacturer. They have a very clear understanding what it is they need, they go to the market, they get that, and they issue it and provide it to the builder.

“I think as the developer, you have certain demands that you can make because you’re the one paying for these projects. You make those demands to your builder and they will do what they need to do to provide that solution for you. That might push them further to explore these different ways of delivering things.” Damien Crough, Founding Director + Board Chair, prefabAUS.

JULIAN: To provide some context to that, obviously, we’re going through a bit of a transition in the development space at the moment with the residential market. I think it’s probably seen as an opportunity now where developers and builders can be innovative in terms of ways to create cost efficiencies and time efficiencies in their projects that give them a competitive edge, where pre-sales may be taking six or 12 months longer now. If they make up time to ensure they’re protecting their bottom line return, if these are products that can do that, then that’s something that could have some merit.

CHRIS: I think that the question is at the high end of residential development, is the market interested in prefabrication and I don’t know the answer to that. I haven’t seen that being done, but I think the market wants quality. Is the market ready to not be stepping on a solid concrete suspended slab? Is it ready to be compromised by having a column in a living room because you need to deal with spans because a conventional structure can deal with it better than a prefabricated structure?

NICK: I think that’s where the perception issue comes in. The builder’s going to respond how they can most efficiently build that design, but if the conversation starts early in the design, it can be planned to be built efficiently. Trying to adapt a prefabricated solution to a conventional build is where the issues come.

CHRIS: My point more so probably may be better articulated by saying I’m not against. I’m encouraging and am supportive of prefabrication. I just think in the space in the market that Cbus Property operates is trying to be at the high-end residential, high-end commercial, and commercial’s harder again because you need bigger spans. If we take high-end residential, I think we just need to go a little more slowly.

We need to go on a journey. I know it really works well in student accommodation and I know it works well, theoretically, from their affordable accommodation, but I need to see a bit more of the journey before we’re ready to adopt it in high-end residential.

And because doing top end developments, we don’t want to be doing 500 apartments in a single tower. I guess prefabrication is going to rely on volume to a degree as well, and I’m not sure what the magic number from a volume perspective is, is it 200 apartments in a building? Is it 100? Is it 500? I’m not sure. But we are trying to be a more boutique level of development, and I just think necessarily a little bit more work.

MICHAEL: It raises the broader question in terms of design for manufacturing assembly. I think that’s what you’re driving at with that remark. Is that something that any of the panel has been actively engaged with?

CHRIS: Not so much. I think we do rely on the consultants coming to us with guiding us on how to best procure and deliver building forms.

And so, to the extent we’ve been talking about BIM for a number of years now, this is an extension of that and the extent to which something can be documented, straight out to manufacturing, fabricated, built, and back to site. Developers are all about transferring risk. We want to get the nice shiny beautiful buildings in that community and we want someone else to manage the delivery. We’re not able to do that. We’re happy to be challenged. We’re happy to participate in the improvement of the industry, and we really need the consultants to come and educate us on all of that. But the actual manufacturing, we try and leave—as a principle, I guess—we’re trying to leave that up to who we deem are the experts in working on how to best get something from wherever it’s manufactured in the world onto site in a way where quality and safety are going to be ensured.

So, I think it’s essentially we’re seeing that as being for others to solve, for others to put investment into and to encourage. They can tell us about it, and if it makes sense, we’ll support it.

MICHAEL: So, in some respects, to reiterate your remark, it’s a builder-led discussion that they then present to you.

CHRIS: It’s builder-led, and I guess, then the builders will turn around and say maybe it’s a supplier lead or consultants and maybe it’s part of getting everyone to talk.

My observation of the market at the moment, I think, is that we’ve been very busy doing the same thing for a long time: building the same buildings in the same way. The builders are all very proficient and they’re building buildings with 5-day cycles or 4-day cycles, and they think “This is fantastic. We’ve been working on 10-day cycles 15 years ago.” So they’re just focused on going down the pathway that they think is efficient as possible.

But what the industry needs is to breathe and to start questioning itself that you can only do that when you’ve got time. And you don’t have time when you’re frantically doing that job of four-day cycle, and the next job of four-day cycle, and you got the next one straight after it. You need to have people to stop them then have a look of what they’re doing because there’s no doubt there’s heaps of opportunity for improvement.

ROB: That’s a great segue to something I’ve experienced the last two years about trying new things.

I was involved with a tier 1 builder project and as a point of differentiation, I suggested let’s just do it all in timber. Okay? They thought about it. They said, “But we build in concrete.” And I said “The best thing that happened for the timber industry is to have a recession,” because something that’s concrete is not economically viable anymore. Follow the money. Viability starts to come back again because you got a lower cost solution, and they’re forced to do it because there’s nothing else to think about.

There’s also a risk mitigation strategy because where we saw the infrastructure band going, concrete was always going to be in short supply.

JULIAN: From a market perspective and I agree with your comments around it being builder-led, but when we’re speaking to developers daily and a lot of feedback is that construction cost has gone up, concrete prices up 25% – we’re in an innovation drive to change things.

MICHAEL: So, in some respects, it’s a financially-driven market, levered decision if you like. As a commercial real estate specialist, you’re in a position to ignite that discussion and perhaps plant the origins of this idea. Is that something that you take away from this conversation?

JULIAN: Yeah, definitely. I’ve worked with architects, town planners, heritage consultants, traffic engineers – all sorts of consultants in the development process in our campaigns. Probably there’s a degree of ignorance from my industry in that we haven’t ever really tried to explore that to the next level, around what actual process would you be thinking about in terms of how to build the thing on the site. It’s probably more for example where a site might be quite skinny and we know it’s going to be hard to build because you get that feedback on those type of listings very regularly, and we might look to have a discussion with a builder. In general, purely from, purely from the perspective of an agent trying to do a better a job, if we have those suggestions across different avenues that we can provide to the market and interested parties that we think can help them buy the site, then we’re all for it.

MICHAEL: So it’s about making the numbers stack up?

JULIAN: And more important for us in sales industry at the moment, I think developers are typically going through more due diligence to actually arrive at a position where they’re purchasing a property; they’re much more thorough than they were two or three years ago.

MICHAEL: An emerging market is what’s known as build-torent, and I understand that you may have fielded some enquiries with regards to potential sites. In terms of prefabrication, we spoke about high repetition as being particularly well-suited to student accommodation, or aged care, or potentially, hospitals. Is build-to-rent something that the forum/panel would consider to be relevant for prefabrication in that respect?

ROBERT: From my point of view, I think build to rent, and actually prefab, and actually creating the dwellings we need as a country, prefab’s the only way we got to do it.

The industry’s nearly at capacity, and it doesn’t take much to get to capacity purely in the private sector market, let alone a build-to-rent and the affordable housing market.

If we’re going to reach the 100,000 additional dwellings we need in the next five or 10 years on top of the market, prefab is the only way we’re going to do it, but we have to get our mindsets around that.

We have to put on a pipeline. The real tragedy is that our super funds have several billion dollars invested in housing Americans and not $1 in this country. That’s not their fault, it’s the financial system that doesn’t let them earn a buck. Once you change that, billions will come back in, build-to-rent for the middle Australia, not the ones that are happening now which is the niche market, that is a fundamental necessity for a country that’s prosperous, to be economically creative, innovative, and more inclusive. You have to shelter your people.

“If we’re going to reach the 100,000 additional dwellings we need in the next five or 10 years on top of the market, prefab is the only way we’re going to do it, but we have to get our mindsets around that thing. We have to put on a pipeline.” Robert Pradolin, Founder, Housing All Australians.

MICHAEL: I understand. I think perhaps it’s the financial equation that really underwrites the entire topic is one that needs to be teased out and broadly shared. Is that a fair remark?

CHRIS: And to the extent of the financial equations don’t provide the support to go down the prefabricated route, that’s where you need a lot of people with passion to go out of their way or to accept they’re going to pay a premium to do something or be a bit more experimental or be innovative. So you need the industry to be seated with those people that have got the passion to try new things, to experiment, and develop, and showcase them well enough that it does become more mainstream.

MICHAEL: But perhaps one way of looking at it would be to create that financial equation, those financial case studies. This is a building in one conventional build and this is an offsite build, so you can really flesh out what the realities are. Would that be something that could be worth pursuing to create that level of financial feasibility?

DAMIEN: I think that it’s more around the laws and around tax and other things which are really stifling developers and preventing them from moving into that market because there aren’t the mechanisms there for them to do it and do it well. In other parts of the world there’s tax laws and other things which make it profitable, and interesting, and attractive to developers to get involved. I think that’s the bit that we need to work on.

ROB: Correct, which is more of a policy setting. You can’t rely on prefabrication to solve the economic gap. Not enough. There are some fundamental changes required, but if then the gap was very close, then innovation comes out with prefab to bring the cost down, so it’s viable.

DAMIEN: In that market with build-to-rent, if you own an asset and you’ve got an operational cost to that asset, if you can spend perhaps a little bit more upfront to get a much better performing building, high-quality building—which is going to significantly reduce the operational cost of that asset over that 50 years—then it’s just a financial equation. That’s all it is.

And prefabrication or offsite allows that to happen a lot easier because lots of the components can be manufactured to within smaller tolerances, better quality, and with digital technologies every single part of that building is known, so servicing, maintenance and all those things become a lot easier and a lot cheaper. And it makes sense in specific sectors and markets, and perhaps doesn’t make so much sense in others.

MICHAEL: To me, a central plank of the discussion really is about the financial equation and how to present that to the market for the different demographics of that market right from the high-end development through to affordable housing, and then also empowering commercial real estate agents to better express what the opportunities are for that particular site.

I’d like to thank all the panel members for being part of today’s forum. Thank you.■