The Loop

How does the construction industry innovate to build housing?

• RSM UK

Share episode

1.5m homes – that’s the ambitious target the UK’s housing market is striving to meet. It’s a challenge that brings with it a wealth of opportunities for innovation and growth within the construction industry.  

In this episode of The Loop, we focus on the future of the UK’s housing sector. Our host, Kelly Boorman, Head of Construction at RSM UK, is joined by John Guest, Head of Social Housing, and Laura Schmuttermeier, Risk and Business Transformation Partner, to discuss how the industry is adapting to new government policies, infrastructure challenges and the role of technology.  

They also explore the proactive measures businesses are taking to manage growth, despite workforce shortages and supply chain complexities.

For more insights into the UK construction industry, visit RSM UK website 

And follow us on social:
LinkedIn - https://bit.ly/3Ab7abT
Twitter - http://bit.ly/1qILii3​​
Instagram - http://bit.ly/2W60CWm

Hello and welcome to our latest episode of The Loop. Today we're going to focus on the current and future developments in the housing market. I'm your host, Kelly Boorman, head of construction at RSM. We'll be discussing the challenges caused by infrastructure and the impact of new government, along with new policies and the approach to housebuilding in the UK. We'll also consider housing targets, planning reform and how businesses manage their growth while navigating the workforce shortages, supply chain issues and funding for working capital. Today I'm joined by my colleagues John Guest, head of Social housing, and Laura Schmuttermeier, risk and business transformation partner. John and Laura, welcome to The Loop. Hi, Kelly. It's certainly great to be here today. I certainly think there's a degree of enthusiasm in the housing market in the UK in terms of development. I still think there'll be some challenges along the way and I'm sure we'll touch upon some of those during today's podcast. Thank you so much, Kelly. It's lovely being here and it's also really nice to see the enthusiasm for the sector and recognise its importance for the UK. Yes, there are challenges. There always are. But that's the way of business. Absolutely. Laura So let's jump in today then. So there's definitely a sentiment, a positive sentiment out there, and we've seen some of the government's messages around policy and framework to stimulate growth. But I think also some of the challenges really around some clarity of infrastructure projects and what that's going to look like for the future. Obviously, with all of this alongside some labour shortages, as you've just mentioned, and I guess just managing that growth position, it brings us back to how does the industry achieve the productivity? It is behind other industries and we've seen that in the past ten years statistics. So I guess over to you, John. How do we handle this growth and how we move it forward? Yeah, sure, Kelly. I mean, I think there's a lot of work to be done. I mean, ultimately we've seen from government some quite punchy targets, 1.5 million homes over the period of the first government. That's going to be quite a challenge to it to achieve that. And I think organisations, house builders supported by social landlords and so on and so forth, will have to think a little bit differently moving forward. How do they deliver and the housing need in the best possible way? And I think probably part of that as I as we look at the infrastructure to deliver those housing needs. So we've got the planning and I know you'll touch on the reform, etc., but is it fit for purpose? Will we will we kind of get to a position where these volumes will be achievable? I suppose my my concern would be we're hearing all the right messages around planning reform and how that might work going forward. But ultimately, is there going to be a time delay in terms of how that actually sets in? And there really are some significant challenges in terms of delivering that number of social home or I'm not just, social homes, but homes, full stop. And planning reform will go some way, but I think we need to think differently about how we deliver that. And then we start touch upon delivery models and how we look at just the availability of land. And I think that will create some challenges for the sector to meet those ambitious targets. Yeah, and I think you're spot on. When we look at the conversations on the ground, there's an optimism, there's a volume, there's a demand. But, you know, the realism of delivering that and the reforms will be actually enable, you know, with a come in quick enough to enable the housebuilders to be able to forecast what those volumes are in a, you know, in a timely manner and be able to gear up for that. And I guess in itself, Laura that brings some challenge around gearing up as well. I mean, that is always the biggest challenge of all, at least one of the biggest challenges actually, because I do think to your point, the biggest challenge will be workforce. And we come back to that. But it is a really long supply chain. I mean, we're talking from usually award of tender to actually starting is 18 months and that requires a lot of forecasting, a lot of demand planning. It has a lot of parties in the supply chain from the manufacturer to the supplier to the subcontracted to contractor and actually the employees, etc.. But also these are multi-year programmes. So it's not like you can turn a switch today and start tomorrow. So I think the forecasting, the planning itself is a massive risk. And then when you start looking where the suppliers are located, how you get them to the UK and the current geopolitical tensions, it makes it even harder because, you know, we have seen the impact of war between Russia and Ukraine had and how quickly you can lose an otherwise stable supply chain because you suddenly cannot buy from your suppliers anymore. So you need to find alternatives. But of course, whenever you have two dual sourcing or have two suppliers running, you don't get the volume discounts you need. So in an industry where the margins are already running quite slim on around 2%, that has a negative impact on the cash flow. And I think I guess just looking at actually, you know, the supply chains obviously critical for the delivery. We've seen a number of challenges. We have seen obviously a number of insolvencies. The construction industry, you know, was one of the big hits around the insolvency that I think, you know, still some challenges in that supply chain. So I guess, what should businesses be looking out for? How do they manage that situation? It's really understanding the supply chain and who is where and who is responsible for this and also understanding the operating model. Because especially in the construction industry, there is a big reliance on subcontractors and contractors, and therefore all of that gives you flexibility, which is great. But it comes at a cost. And this biggest recent insolvencies that we have seen, there will be a knock on impact because these subcontractors and contractors will be worried about losing their money. So they will ask for more money up front, maybe down payments, etc. deposit, which again will put the actual contract holder in a much tougher position from a cash flow perspective because the contract providers are not going to change to a payment method. It's still going to be based on milestone, but it needs a bit of thinking and a think a little bit of forecasting as well to think about forward. Like, you know, yes, you've put out a tender today, but you're not starting for 18 months, so your cost space will not be the same. So what contractual support can you built in so that you are not as vulnerable. With social housing hat on? I know organisations are nervous around contractor insolvency contractor failures. That has a knock on impact on their financial statements, the delivery against their overall objectives and plans and it is a risk and ultimately having some degree of certainty around how projects will be funded will help mitigate some of those risks going forward and allow registered providers of social housing to plan ahead with a bit more confidence. And I think we kind of you wrap all of those points all together. You look at some of the government messaging around or even anti-growth legislation, the red tape. I just want to come back to the land point because I think we kind of move past that at the beginning. And I think that's quite important. And, you know, with the volume and particularly the house build and Social house builders. They going to actually get through that planning, they've got to look at the types of land. So where do you see the challenges around the kind of the land resource? And I think I think we saw 30% of available and it's not even close to achieve the volumes going forward. Yes, I mean, you're absolutely right, Kelly, there. In terms of the availability of brownfield sites, there is a real challenge there. I saw some statistics recently which indicates that even if we identified all the available sites, there's going to be challenges to to meet these housebuilding targets just on brownfield alone. And then there's this concept which is relatively new on around the grey belt. But, again, some relatively small percentages of available land there which would be available for true development. I think this there are some thoughts around thinking differently and repurposing of existing sites. Saw an interesting piece recently where Lloyds Bank had redeveloped some of their existing datacentres and office spaces, repurposing those as social housing. And if organisations can just think a little bit differently about perhaps some of the existing asset base that they have, whether that's through local authorities or working in partnership with commercial organisations that may get, go some way to meet the need. But still I think there's further work to be done. It's not just about necessarily where you build the houses, it's then the right infrastructure that you need because we see it all the time that yes, you can build two houses, but what about the places for kids to go to school? What about GP surgeries? What about dentists? What about hospitals? It's all right infrastructure that is needed, not just the housing stock, unfortunately. I think that raises you raise an interesting point around how we can best use data in terms of working out where the biggest need is. So, using AI perhaps to work out if there is population growth in certain local areas, how that then links into to the NHS to, like you say, community assets such as libraries, schools and some wider thinking is perhaps needed and it's not just focussed on on housing per say. I think that's a really interesting point, John. When we look at AI and data and I guess understanding and predictive models, I mean we come to the devolution really of, of planning and volumes targets how the government assessed the need and demand for certain types of housing and in what location that housing is. Obviously we saw Manchester and the West Midlands. There was conversation during the budget around there, now take some ownership around that funding, etc. So I think we're seeing the move towards this. But I guess what does that really mean and how does that factor into kind of use of land banks and the build for the, you know, going forward in those those locations? If we can use data and AI and that prediction capacity to work out where that need is. That will help inform where, I suppose where the demand is, it's then what do we do with. What do policymakers do in terms of making sure that resources are allocated in the right way? The infrastructure is there to support those individual locations with meeting some of that need. Our local organisations, local registered providers of social housing, local councils. Ultimately, they have the best understanding of that individual demographics. But then politics come into play in terms of where the resources land. So I think it's going to have to evolve over time and perhaps you, we need to use the data in the right way. But there's clearly a balance to be had. And I think it's a great point. You know, having all this data and we know is going to get great traction and at pace is how do we best use that data? And I think, as you say, like the local authorities will have that understanding, but then it's empowering them really to set their budgets and targets and give incentives. But I think with like anything, it's putting that big jigsaw puzzle together the infrastructure, the lands, the homes and I guess the businesses, how they they manage that big, big burning. Question What's the labour workforce? And I guess one of the stats and I'll hand over to you, Laura, you know, I saw 250,000. Needed in the industry really just to achieve 2028. And I think you we probably assess that with the age profile and average age at 49, it's probably a lot more than that set that how to businesses possibly you know AI, data, labour force, demographics, so much to think about, how do they even start? Yeah. Why don't you throw me the massive question? Tthat's about ten questions in there. I think it is genuinely the most difficult challenge the construction industry faces. Because to your point, AI can do a lot. I love a good data lake, and the data lake can pick up on the points that you made before, John, but also looking even at how the space is being used by the people so that you can then design it around people and not for people. So to make it more user friendly, however, I personally think it will be a few decades until we can have AI or drones operated models to build. So we really do need to get more talent into it. And it's a tricky one because a lot of people want more flexibility to work. There have been changes introduced that you, for example, work ten days and then have 4 or 5 days off so that you get more time at home. Eventually theres more needed. It works for some, it doesn't work for others. So how are you going to get around that? There's a big challenge around culture as well. How do you attract people? If you have a small pool there's also a big focus on salary because by moving around you still do the same job but for more money. So, it becomes a little bit of a spiral. And it's really important to attract people into this. And I think it's focusing also on what the industry did and what the focus for it is going forward is really proud industry to be in. The stuff that you build will have a long lasting, legacy. One even after your time, people will go down and say, Look at this building. I mean, we do it every day. So it's just kind of bringing out the positives of being in the industry a bit more and thinking about incentives for people to join. But I think it'll be quite interesting to see how the role of modern methods of construction will you know, will evolve over time, I'm sure. I think there's been a degree of nervousness perhaps around MMC and we've seen some significant failures around modular build. How we overcome that, I'm not quite sure. But does it involve, you know, increased linkages with the advanced manufacturing sector, working in collaboration with some established manufacturing businesses and actually learning from other other, other sectors. We've seen significant investment in technology and automation and perhaps the automotive or the aerospace industries as well. Is there some role that technology can play to ultimately increase efficiency and help deliver this? Ultimately, there's this real need that we have to build more homes. And I think it's fair to say that the construction industry might not have been an early adopter of AI, but its benefit will be that you have a much less steep learning curve, so you can adopt it much, much quicker and you're not going to make the same mistakes. And the biggest advantage will be in just making the supply chain end to end much more efficient. But also the back office that goes back to the cash flow point before if you have it automated, yes, it does still need human oversight, but if you can make it more efficient, it's a less worry. I love this industry and part of that's because you see you see the assets, you see you know what it creates within the UK. And it is a big part of, you know, our history in our life as to, you know, our assets and how they've been built. So it is great to be part of that. I think when we actually come back to AI data technology, there's a great opportunity to collaborate across that supply chain. I think the tensions and the difficulty now when we talk to businesses about using tech is there, you know, realistically the design phase and then the actual delivery and build is such a challenge for them because something that's designed for a purpose doesn't always it's not always easy, to just build it on the ground. So I think the modern methods of construction point, the modular, you know, is a fantastic point there to pick up. But realistically, how do we join these together? How do we change that behaviour and I guess give the confidence and also the funding and investment for a low margin industry to to take the time and learn, fail and learn again. I think I was going to pick up that points around funding and where in a social housing that's on here and ultimately there needs to be some confidence in the system that, you know, we'll be able to deliver or social landlords will be able to deliver new homes. Grant funding is really positive to see, we've seen some increases in the Affordable homes program in terms of the investment from the Labour Government. That's great to see. But ultimately, is that going to be enough to meet the demand that's that's still going to be out there? There are certainly risks involved in the sector and many social landlords are dealing with some, I suppose, real difficult decisions. Where do they prioritise their resources? The regulator of social housing, for example, and the ombudsman has made it very clear that you need to be investing in your existing homes, making sure they're safe, fit for purpose. We have organisations that are dealing with damp mould and condensation and actually putting the tenants at heart is really key to all of this. So some quite difficult choices and social on loads need to make. And ultimately when you know there there are constraints on resourcing and squeezed operating margins, typically it is the development angle, which is the first one to get switched off. The standardisation is such a challenge in this industry because of the complexities around the contracts and the design. And I think it's an industry, it's always thought we're designing for the customer how they want it. And I think you step back and you think of all the products that are developed in the UK, the standardisation. So I think the modular points, there's a great opportunity to create efficiency, but the also needs to be, I guess, a change in appetite from the consumer as to what does this product look like. The customer side too. And obviously then the efficiency that can be delivered to create that volume as well. So I do think I mean, coming to you Laura on the supply chain standardisation and the benefits of tech, what what's your views, views on that and how the industry copes with that? I mean, I think the great opportunities in there to your point, these are all patents that you've highlighted that are very difficult to pick up by itself. However, if you have a data lake and you have have machine learning running over that, they will be able to identify patterns, identify potential risks and then learn from it and identify where it's coming. So it goes back to what you said before. It enables the long term planning. So you're moving from a being very reactive mode to a much more proactive mode, which means also it's cheaper. You are planning for it, you have it in your forecast, and it generally helps people because you can communicate your expectations as well. I think something else we need to be mindful of is how will the lenders react in terms of being able to mortgage such properties, whether that's through private borrowing or through borrowing in the social housing sector. Typically, when there's been a bricks and mortar asset, it's far easier. The lenders will be more comfortable on charging such such assets. And how will that work with modular build and will there be some nervousness there? Something just to think through? And I think it's such a big shift, isn't it? When we look at a traditional build versus becoming effectively a manufacturer, it's a very different business model. So I think that in itself raises the question around partnerships. You know, I spoke to many businesses that talk about the social housing delivery on sites that talk about prefabrication and, you know, putting some commercial buildings on site or health care education. And they don't have the skill set as an individual business. So I think when we look at kind of that learning, but also the partnerships I think is a great opportunity for people to really explore what they do well and where they then need partnership. And I think also pulling skill sets from other industries too, for kind of that learning around tech to great environment to do that. I think future proofing as well. And when we think about schools and the educational delivery, are they going to be sufficient people able to to teach these types of subjects going forwards and deliver that and to deliver into the workplace? And I think it's also worth looking at other countries, like obviously I'm from Austria, we have done not for commercial property so much, but modular built and prefab has been in our DNA for decades and it makes life so much easier because you can put up between 50 and 70 houses a year rather than just a few. But it is how you do it and how you gain, how how willing you are to learn and give it a go to your point before to potentially fail, learn from it and come back better. And I think that's one thing this industry really struggles with because the failings quite often result in some legacy issues, losses, litigation as well. So I think not only do you have the complexities about multiple ways to deliver something and not the standardisation, you also have a little bit, I think, of the fear of the unknown. What is it? How does it change our delivery? And with such slim margins, I think what we've got to see, as you say, the efficiency, but we need the investment in the process. So we come back to without going into too much time to cement, etc., timber, all different types of products, what's the best way to build and how do we replace those products going forward, not just with carbon, but innovative products that will allow us to do them more efficiently. So I think there's a great learning piece across Europe because. I think they are ahead. I think when we look across to the US as well, we look at kind of loans on properties, etc.. But I think if you look at it on the positive side, which is a bit strange coming from a risk partner. But you know, if you are looking at that, yes, it is a bit of a risk and a threat, but the opportunity is immense. And with the experience and the knowledge, we already have to take on that and explore it. I mean, it could be absolutely changing the sector completely. That's right. It's about thinking innovatively. And we've touched upon technology, AI on several points in this podcast today. I think to drive real difference. Be that willingness to change. And some of that comes from that the cultural piece doesn't it. And that's something that we have to embrace if we're to move forward successfully. And I think it as well, you know, the support from government, we've seen some of the announcements around the infrastructure. We're still waiting for clarity around some of the major project funding. But I guess their understanding as well, when we look at procurement, pricing, mobilisation, I think there's a big piece to come from government to actually acknowledge the challenges, not just remove the red tape and the anti-growth legislation, but really understands that this industry does need the support, does need the right pricing models and an understanding of how the supply chain delivers and some challenge around that as well is the best way to procure. And how do we effectively change this industry and how are they going to support that model in that procurement process while still meeting targets with such a low margin as well? I think I think you're right, Kelly. I think the biggest bit a real balancing point. Making sure that there's sufficient investment through through grant funding, through lenders. And there's that long term sustainable plan to deliver. And it is pulling all of that together, which is easier said than done ultimately, isn't it? And there are several factors at play in how we go about doing this. But ultimately, having that funding and confidence really is key. I guess just closing off, I'd like to just ask you one final questhnon. There's one takeaway point you would give to any business, any person listening to the podcast. What would it be? I'll start with you, John. I think for me, it's about thinking differently using innovation. It's clear that there are some significant challenges moving forwards and some really punchy targets, as I mentioned at the start. And if we have any real hope for achieving some of these targets, I think we are going to have to think slightly differently. So whether that's by looking at different sites, whether that's by looking at different revenue streams, possibly around the methods of construction in the longer term. I think it's that willingness to, I suppose willingness to change ultimately and look at things in a slightly different way. It's a tough one because, I mean, this industry has been incredibly resilient and has been through so much in the last centuries. And, you know, we have seen so much happening that no one could have predicted. No one knew the impact the Covid pandemic would have. No one expected that the inflation that we had over the last year. So taking all this into account, I would say businesses, of course, I would need to focus more on their risk management and their supply chain have a much, much clearer understanding, be more transparent also with our customers of why we can't just start building tomorrow. Why? To just get that understanding better. But also don't worry about everything because you won't be able to manage it. So just do business and focus on what's right. What a great way to end. And thank you, John and Laura, for joining me today. For more insight, please follow our RSM's website. Follow us on the loop or so there'll be future episodes to look at business challenges and further debate. Many thanks.