The renaissanceof the prefab

The renaissance of the prefab


 

#2 Real estate

Increasing numbers of property developers are responding to the growing housing shortage with standardised house-building solutions that intelligently combine social and environmental aspects. Properly costed, such projects offer profit potential.

One architectural concept enjoying a particular upsurge in popularity – not least because of the renewed interest sparked by the 100th anniversary of the Bauhaus movement in 2019 – is the use of prefabricated modular units. Despite the bad reputation earned from their association with Soviet-era housing blocks, these units are now being rediscovered as a solution for functional housing in inner-city locations. “Standardised construction does not necessarily have to mean low-quality mass-produced housing, like the many bad examples from the 1970s and 80s. These properties can become sustainable investments if the right quality standards are applied in the selection of materials and with regard to emissions reduction and energy efficiency,” says Duy Ton, a senior portfolio manager in the ESG team at Union Investment. The demand for such properties is likely to grow as a result of the climate action plans of the German government, given that direct and indirect emissions from buildings account for 20 per cent of global greenhouse gases.

                                   60%

Modular methods reduce construction time by up to 60 per cent compared with non-prefab construction.

New concepts for affordable and sustainable housing

Whether designed as point blocks, perimeter blocks or terraces, or as units with balcony or deck access, these buildings are planned and manufactured on production lines in a variety of sizes and can be slotted into existing urban spaces. They offer a number of advantages, one being that they perform a social function by allowing affordable new rental properties to be created within a short space of time in inner-city areas where housing is scarce. Given the notable yield compression within the residential property segment, modular development projects of this kind in urban centres offer investors an opportunity to invest in property that has both income and capital growth potential. However, this requires the buildings to meet certain criteria with regard to location and quality. They must also meet the highest possible sustainability standards, which include the facades being thermally insulated in accordance with the stipulations of the Energy Conservation Ordinance (EnEV), the use of thermal insulation composite systems, windows being made of thermally insulated glass, and the installation of eco-friendly heating systems. When incorporated into the concept from the outset, such measures also reduce the need for subsequent refurbishment in order to meet environmental regulations. They also reduce the risk to investors of being unable to command higher rent levels or the full sale price because the properties no longer comply with current environmental standards.

Modular-style new builds in Frankfurt
Modular-style new builds in Frankfurt. This construction approach has become widely used as a smart way of condensing inner-city housing in an economically viable way without compromising on quality.

Residential property developers are specialising

Innovative solutions that combine affordability with social and eco-friendly aspects are increasingly common in German cities. Developers include Vonovia, an exchange-listed company that started out as a conventional property management company but has recently taken a major step into the housing development market with the purchase of the Austrian firm BUWOG AG. Another player is Essen-based Instone Real Estate, a pure developer without any property management aspirations. Going forward, both Vonovia and Instone intend to focus on scaling up the construction of prefabricated and modular homes that meet general affordability requirements.

Vonovia sees potential for around 35,000 factory-built modular units that could be realised in the coming years by filling in gaps between existing buildings, increasing density or adding additional storeys onto properties.

In conversation with Stephanie Baden, Executive Director ULI Germany/Austria/Switzerland

Union Investment wants to know more

Ms Baden, ULI recently published a research report on affordable housing, especially in the mid-range price segment at European level. What role does construction based on large-scale prefabrication play in this context?

We examined this aspect as part of the wider field of modern methods of construction (MMC). It is a topic for the future which combines opportunities in housing construction and value creation. In the specific case of providing housing for medium-income house-holds, construction based on large-scale prefabrication can be a supporting element. The availability of building plots or existing (heritable) building rights and the price of land are key factors in this context. But as this method offers environmental and economic benefits, it can be used very effectively to provide housing.

What are the biggest risks and opportunities for residential real estate investors in this segment?

First, the prefabrication plants have to be set up and operated profitably. In addition, the operators have to build expertise in the planning of large-scale prefab projects. These investments are speculative, come with a certain financial threshold and take some time to pay off. But provided this method continues to deliver good results, there are some obvious advantages – most notably the speed at which projects can be completed and thus generate cash flows, and the fact that high-quality components can be constructed in a resource-efficient manner.

How is this segment of sustainable construction going to evolve in future?

Of course, we are hoping to see positive effects on urban spaces and are curious as to whether we will start to see this method being adopted for mixed-use projects with an element of public use. Moreover, we hope that a rise in the market share of large-scale prefabrication and assembly will not result in valuable building expertise and craftsmanship being neglected. But new production methods can also promote innovation in technology and project development.

 

#ULI

The Urban Land Institute (ULI) is run by its members and was founded as a charitable research and education organisation in Washington D.C. in 1936. Today, the ULI is one of the most active networks in the sector – a global think tank that provides a platform to discuss and realise opportunities in urban development in a collaborative and interdisciplinary way.

 

ESG as an answer to low yields

In a property market that has already become overheated in many towns and cities, standardised, production-line construction of housing in urban locations offers investors an opportunity to enter this segment at a realistic price with income potential. If developers and architects integrate ESG criteria, particularly the environmental and social aspects, into their projects, the quality, lifespan and potential capital gains on such properties increase. However, the increasing proportion of rental income growth accounted for by these types of new development in recent times suggests that other residential property companies risk coming under further pressure unless they shift their strategic positioning. Despite the current environment of low yields and regulation of rental prices, we are confident that the future of the residential property development sector holds solid opportunities both from a financial perspective and in terms of social and environmental aspects.

Duy Ton

Duy Ton

Senior ESG Portfolio Manager at Union Investment

As at 03 July 2020.