What Modern Methods of Construction could do for London’s housing crisis

by Charlie Blagbrough, BSA Mortgage Policy Officer
It has been said that over the past 100 years, car-manufacturing has been through three major phases. First, the hand-built ‘one at a time’ approach. Second, the assembly lines and mass production of the Ford Motor Company. Third, ‘lean production’, instigated by an innovative group of pioneering Japanese companies.

Today, the industry continues to push the boundaries through electric models, clean technology and even driverless cars. In all that time, housebuilding has remained largely the same, brick & tile manual labour and always at the whim of the weather. However, in an interesting Policy Exchange report Jamie Ratcliff, Assistant Director for housing at the Greater London Authority, has signalled how the future may lie in ‘off-site manufacture’ or Modern Methods of Construction (MMC).

Ratcliff argues that a combination of MMC and enhanced compulsory purchase powers could produce an additional 420,000 homes in London over the next 20 years. That’s a significant number – an extra 21,000 a year – when currently only around 27,000 homes are built in the Capital.

I  visited the Laing O’Rourke factory, trialling MMC, around two years ago and witnessed how the boundaries of innovation in house-building are being pushed. Properties designed to precise specifications, producing components which can be loaded onto a flatbed truck and transported anywhere in the country for assembly within a day.

Laing O’Rourke signalled their intent to grow this model in the middle of last year by forming a joint venture with Legal & General and Touchstone. The venture is forecast to build an initial 2,000 homes a year for ‘Build-to-Rent’ – Legal & General providing ‘patient capital’ and Touchstone managing the homes.

Investors, and the GLA, see the greatest role for MMC in areas of the market other than homeownership – in areas where the rate of build is not determined by the sales pipeline, as it is in the business models of large house builders. Primarily these are social rent, Build-to-Rent and shared ownership.

While a flourishing Built-to-Rent sector is clearly good news, Ratcliff sees the greater potential in shared ownership:
"In many ways part-buy-part rent (shared ownership) offers a more investible proposition than market rent. The rents are index-linked (the holy grail for long-term investors who need to match their liabilities), long-term leases mean that there is no void risk, there is no repairing liability and with natural churn through ‘staircasing’ it also offers access to investment returns from house price inflation."
However, if the GLA’s aspirations are to become a reality then the involvement of mortgage lenders will clearly be crucial. Building societies already excel at shared ownership lending. We know that Government is keen to support it too. However, if there is to be a revolution in housebuilding – homes built using MMC and sold for shared ownership – then lending policy needs to evolve to encompass these new construction methods.

Properties built using MMC are not the ‘prefabs’ of the 60s. They are built to high design standards through precision engineering and - as Ratcliff notes - institutional investors have a ‘financial interest to create a high-quality product, with long-term value, which would drive positive ongoing returns’ from these properties.

Of course, lenders need to have the confidence that their security will be protected if they are to lend, and this will require an ongoing conversation with valuers. But if house-building is ever going to get out of its ‘one at a time’ phase, then innovation is exactly what we need to encourage.