Housing experts gathered for the MFG Lunch Club, in association with Legal & General Surveying Services, at Cabotte in the City of London to discuss the way forward for housing standards.
The past year has seen more scrutiny of building standards and focus on build processes and systems as a result of the Grenfell Tower tragedy than at any other time in living memory. The conclusions and decisions we make now will impact our ability to build for the future and affect the confidence of the entire industry.
If we are to meet the challenge of our housing crisis, what needs to be done to forge a framework – at component, system and building regulation level – that can deliver the confidence in delivering the new homes that need to be built quickly?
James Ginley, Technical Director, Legal & General Surveying Services: In relation to housing standards, lenders are advised from the different pockets of expertise that exist, including surveying services. Some think lenders should be specific about what they want from the valuation but I don’t necessarily think that. Lenders set their own risk parameters and customer parameters. It’s for other areas of the market to come up with solutions, such as quality benchmarks, customer protection, advice and mortgage proposition.
The changing environment has been brought about in the last year by a variety of matters. We’ve got a government that is interested, more so than ever, in the housing capacity problem but it is difficult for them to crack while there are other matters such as Brexit.
Housing goes in fits and starts. The fits include problems in demographics – first-time buyers and increasingly last time buyers. We have events around the quality of buildings, following the Grenfell Tower fire, where lots of unforeseen consequences have emerged. Not much has happened in the valuation space post Grenfell and by that I mean market impact on high rise tower blocks. We have a void in thinking about the way forward on the topic, where the responsibilities lie, where building regulations may go. And along with the housing standards debate comes the housing supply debate.
Apart from traditional house building there are other ways of doing things from modern methods of construction (MMC) to offsite factory environments. Where are the parameters of quality in those different environments? The debate is complex.
Luke Christodoulides, Senior Corporate Account Manager, NatWest Intermediary Solutions: A few years ago there was a very different view to modern methods of construction. There is now offsite house building such as the L&G factory. Once warranties are in place we are happy to lend. So it’s about understanding each MCC and how they look and feel.
James Chidgey, New Homes Relationship Manager, Mortgage Advice Bureau (MAB): Warranties simplify things for lenders, they provide that reassurance. Problems occur where you don’t have standards. There has been a challenge on defining some of these types of construction and this is being discussed in working groups to try to simplify the terminology. On the NHBC website there are 54 different systems that are approved so how do valuers and lenders understand all that? Customer understanding and customer protection is coming more to the fore now.
Graham Sibley, Market Development Manager, National House Building Council (NHBC): The bottom line with MMC from the consumer point of view is that any home we warrant should be mortgageable and insurable on normal terms. NHBC will do the rigour we need to do on any home and even more so on an untried or untested product right through from the factory to onsite and the finished home. Lenders want that confirmation and the confidence they get from an NHBC warranty or an equivalent warranty as there are a number of warranty providers in the market.
We are looking to set an industry standard and threshold of quality for all warranty providers to ensure the right level of warranty and security is in place.
MMC working group
Mark Farmer, Founding Director & CEO, Cast Real Estate & Construction Consultancy: (Mark heads up the Ministry of Housing, Communities and Local Government’s MMC working group on assurance, insurance and finance).
A white paper issued by the government last year looked at the whole issue of mortgage finance and buildings insurance for MMC-led housing. The working group that I lead is trying to address this so mortgage underwriters can feel comfortable. Mortgage finance for MMC housing has been fairly erratic in terms of take up and there are still issues of education.
Part of what the working group has been tasked with is to get to terms with the terminology of MMC. Is it just modular homes that are built and transported on the back of a lorry and moved to a site? No, it is so much more than that. So part of the issue is to try to clarify what is out there in terms of different systematic approaches to building, component-led and sub-assembly-led construction which is morphing into hybrid approaches.
The working group is also looking at evidence building. We don’t have enough evidence of what MMC really looks like and how it performs. Once we have that we can build systems with data that goes into the underwriting for mortgages or buildings insurance policies.
The biggest part of this, which will move the market on, is to create a unified approach to how the warranty market and the manufacturing market deals with quality and standards. There is a big opportunity to address what is quite a disparate warranty market, bringing it onto a level playing field through some kind of protocol for the warranty providers. A protocol would also be a barrier for entry for poor warranty providers and manufacturers.
Peter Andrew, Deputy Chairman, House Builders Federation (HBF): From a developer’s perspective, the prognosis for MMC is good. There are some real drivers in the market place for MMC to move in the right direction, primarily around skills. There is a lack of skills in the housing industry and we need to address that if we are to deliver 300,000 homes on a sustainable basis. So we need other forms of construction.
The second issue is around quality and the prognosis for offsite manufacturing is good. The home building industry, while sceptical, is ready to employ MMC but it’s a disorganised market. If you are a big player you have the resource to go in, understand it and do trials. But if you are a small player it’s really quite difficult to understand what’s good and what’s bad.
It feels a little bit like pioneering with MMC. If we can bring confidence into the market driven by the confidence of both lenders and warranty providers there is a really good chance the market place will grow; and MMC could be a really good contributor to the overall housing stock. We’ve got a way to go but it’s a really good start and there is some momentum behind it.
Luke Christodoulides, NatWest: Along with other lenders we are very keen to look at this market, more so than we have in the past. The new build sector is healthier than it has ever been. If you go back a few years there were two main players but now you can see a want in lenders’ new build appetite.
James Ginley: There are 19 warranty providers in the UK and some lenders assume the warranty provider is the insurer. So if lenders think that what does the customer think they are getting?
Professor Nick Whitehouse, Oxford Brookes University and Buildoffsite Property Assurance Scheme (BOPAS): BOPAS was set up some years ago and BLP joined as insurers but the feature of Lloyd’s Register as assurers is critical because of risk. Some of the features of BOPAS include a full Lloyd’s assessment of competencies to make sure that firms have the skills.
We often find that knowledge of a warranty is not always very deep. It only really penetrates when people have to make a claim. BOPAS has set itself at a high standard. There has been a fairly low but steady number of firms joining and going thought the process covering a whole variety of different approaches to offsite construction. But in recent years huge numbers are applying. There is discussion between all the warranty providers to try to get commonality on standards.
BOPAS has a database that is readily accessible and you can look up a building to see how it was built, when it was built, when an extension was added, etc. Inspiration and aspiration start to align. Robustness and long-term value become very important and that is something that offsite construction can deliver.
At Oxford Brookes University we do a lot of post occupancy evaluation and we see traditional construction is struggling to meet the standards that are set by the building regulations, particularly with permeability, thermal walls etc, let alone more obvious defects such as cracks and condensation.
Richard Benson, Managing Director, Block and Estate Management, Kinleigh Folkard & Hayward (KFH): We manage blocks of flats from new build to existing stock, from traditional construction to some modular buildings where, for example, you bring in bathrooms and slide them into the building. There is a misunderstanding by residents as to what a warranty actually covers. They think everything in the block is covered. As an example, some residents are concerned with lift designs and they automatically assume the lifts are covered. They don’t realise it is mainly the construction side of things that the warranty covers.
In terms of the Grenfell fire. Over the last 12 months we have seen a significant spike in health and safety, for obvious reasons. There has been a shift in compliance. At the moment everyone is concentrating on a specific type of cladding, but the reality is there are other types of cladding. The modular housing looks great but how do we maintain it, what is the longer-term maintenance of it?
Mark Farmer, Cast Real Estate & Construction Consultancy: There are commercial pressures for developers. Too much money is spent on land so effectively you have less money for the build. The reality is that is not a sustainable model. We need to take the manufacturing process and embed it into the wider supply chain to include SMEs, not just big manufacturers. The only way you can do that is to move towards what is known as platform design, commonly used in the automotive sector.
This is where you have commonality of components put together in lots of different ways – a library of components. So a vision that in 10 years’ time an SME builder would have an assembled component that is driven by a range of product platforms. You do less on site and derisk the construction process by making it more assembly-led and doing more in a controlled environment. The SME gets access to industrialised construction but to get there we have a massive journey to go on in terms of educating the design profession.
Ben Derbyshire, president of the Royal Institute of British Architects, gets this and I think he will promote that debate. There is a whole swathe of the profession that sees it as a blight on architectural creativity but I don’t think it is. It allows architects to get on and build beautiful buildings. The chassis and components of the building are much more manufactured.
Peter Andrew, HBF: From a housebuilders perspective, the high land cost over the last 20 to 30 years is due to a shortage of consented land over a long time period. The consolidation we saw in the industry back in the late 1990s and early 2000s up to 2007 was where big land developers could not get enough consented land so bought another housebuilder to get that consented land back – and that just drives up the price of land. The shortage of land is a key driver to the price of land getting higher. Land used to be 25% of the outturn of a house, it went up to almost 50% around 2007 but it has dropped back again. The HBF has driven more planning consent and that is evident in all the stats and as a consequence land prices stabilised. In some parts of the country land prices have gone backwards and in other parts we are getting a supply of land that is slightly ahead of the number of homes being built for the first time in my memory. So that is a positive step.
For big housebuilders, their risk is in what they build, they always want to build with product. They are worried about reputational risk and systemic failure if they use a different product from standard construction. I think customers are open to buying anything that is mortgageable so standard construction is not the be all and end all from a customer perspective. House builders are very open to building with different products and materials but it comes back to confidence. They will not build 18,000 homes out of a new product without it being absolutely assured in every single way. As we get this platform that Mark is talking about that confidence will grow and more of it will happen.
Regarding the repetitively of components, that is exactly where housebuilders are moving to at the moment. There is a lot of repetitively in standard house building already. Standard construction isn’t really as standard as it was 20 years ago, there is a lot of offsite manufacture in it. If you are building 20,000 homes a year you absolutely need repetitively. It doesn’t have to look the same but some of the internal spaces and components could be the same but the specification might change in terms of what it might look like.
We are on the journey to that and I think it will lead to more consistent, high quality than perhaps you get with some traditional build. The offsite manufacturing requires skills ,as well as traditional build – we’ve got to blend those two together so they don’t compete and find enough people to do both and drive up quality onsite as well as offsite.
Graham Sibley, NHBC: It leads to what the consumer expects or understands from a warranty and insurance. What the warranty provider does is to ensure their homes are structurally sound, they are going to stand the test of time, the components in there are going to last 60 years – and that is what the mortgage lender and the insurer require.
You have to have the data to look for trends. NHBC data is over 80 years old. By inspecting homes we see what trends emerge. I think valuers would want to know that, it would give them some confidence of how homes have been built.
Peter Andrew, HBF: One other matter challenging the industry is that customer perceptions are rising and customer requirements are broadening. So if you look at the car industry which adopted processes 20 years ago, now we’ve got consistent quality in the car industry across all manufactures and massive choice. That is literally just round the corner in house building; we are in the place where the car industry was 20 years ago.
The All-Party Parliamentary Group (APPG) for Housing and Planning started in 2016 and last year published 14 recommendations from quality to a housing ombudsman. HBF commissioned a study with WI Consulting looking at the various recommendations and how they can be dealt with. One of those is about unifying the various codes and we are working with all the big warranty providers. In April they signed up to working towards a unified code to cover the consumer as well as house builders and warranty providers. But also to move towards what a voluntary housing ombudsman would look like covering the whole of housing.
Graham Sibley, NHBC: Consumer awareness is very important. NHBC and other warranty insurers are regulated by the FCA and PRA so at the centre of that is treating customers fairly. The consumer has to be at the heart of every decision from making sure the product is sold correctly and that people are aware of what it does.
James Chidgey, MAB: How do valuers do comparables on MMC when it is still early days and most buildings are traditional brick and tile?
James Ginley, LGSS: The valuers’ role is to follow the market not lead it. It’s a problem when you can’t demonstrate value because of uniqueness so we have to go further afield. There are certain construction types where that is already the case such as where you have modular with cladding, or where there are concerns around proximity to infrastructure because it’s a new site in a location that hasn’t been tested.
There are possibilities for surveyors to do upfront valuations that aren’t necessarily defining value but giving parameters around value which then can be absorbed into lenders’ systems. If lenders can define what exposure they want and define their parameters of value then they define what they want in terms of asset liability. So rather than the approach we have currently, which is valuing after the event, you could do it upfront.
But it needs centralised control so you don’t have just one valuer you have a variety of available information that combines the lenders’ position of types of product set against different benchmarks from different valuers. At the moment you are looking at individual units.
Peter Andrew: One of the challenges around valuation is the creation of new towns and villages, really big sites that change a place. Some of these sites don’t get their value until after placemaking. (Placemaking is a multi-faceted approach to the planning, design and management of public spaces.) What is the value over and above the surrounding area before and after placemaking? That is a real challenge because placemaking value is needed to make the town work and these things are infrastructure heavy. How do you get the value for that early on within a site?
Luke Christodoulides, NatWest: It’s about the relationship the builders have with the lenders and with the technical teams of valuation panel managers. We’ve been doing some work with L&G on pre-site exposure limits and how we can publish that as well. It’s all about getting the information upfront as quickly as we can, the valuer does the assessment for us then we can set our exposure limit and we know where we stand quite early on.
James Ginley, LGSS: We have to deliver that data back to the lender in a way that they can absorb it. We have to build systems so the lender can utilise those management information tools in real time. It can then be communicated to the broker world about positions on site.
Mark Farmer, Cast Real Estate & Construction Consultancy: The term MMC won’t go away because it has gone into common language. There are levels of manufacturing content that go into projects, which could be a level of components, level of sub-assemblies all the way to full modular apartments.
There are also advanced techniques that are increasingly coming into construction that involve non-tradition materials. There is a debate as to whether something like a zinc roof is a modern method, it is certainly non-traditional.
Ultimately you will see more site innovation where a home might be built traditionally but with non-traditional materials. You are also going to see the beginnings of site worker augmentation which could be in the form of robotics, it could be in the form of augmented reality visualisation tools. Do you class that as MMC? It can still be used in traditional forms of building.
We want to encourage innovation in the market and tie that back into potential underwriting risk for lending and legacy risk for buildings insurance.
Source: Mortgage Finance Gazette