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Block by block
With the real estate industry facing growing calls to reduce its outsized environmental footprint, modular construction is back in fashion. It's greener, faster and more efficient.
Written by
Zsolt Kohalmi
Deputy CEO & Global Head of Real Estate
Modular construction is not new. In the nineteenth century, British immigrants shipped prefabricated houses to Australia, while Americans used them to rapidly construct accommodation for fortune hunters during the California Gold Rush. Later, it played a crucial role in the rebuilding after World War Two, especially during the 1970s-1980s big building rush. But the results were not always durable – or aesthetically pleasing. In many of these buildings you could see the line where the modules were fitted.
Today, technology has vastly improved what is possible. We are looking at Modular 2.0, or even 3.0. And it offers several key advantages over conventional building, including the disappearance of those dreaded lines, as builders have learned to add external tiles on site.
The first advantage is environmental. Construction and demolition account for more than a third of all waste generated in the European Union, including cement, bricks, wood, glass, metals and plastic.1 A modular approach can reduce this to near zero by building in a factory, to exact plans, and putting in exactly what is required. Any surplus can then be used for the next module.
Modular also works particularly well with wood, which is in itself a very environmentally-friendly material. This is a growing but still small sub-segment of modular construction.
Secondly, modular buildings need much less on-site construction time. A regular building project would usually be on-site for six to 15 months, while a modular one can be assembled in as little as three weeks. Everything – from kitchens and floors to televisions – can be inserted into each unit in the factory. On-site work is limited to creating foundations and then assembling the modules – almost like pieces of lego. Latest technology has greatly improved the precision with which the blocks fit together. And the use of lighter materials (such as timber) means the foundations don’t need to be as deep, nor use as much as cement.
Plus, there is less pollution – both from noise and from traffic. Modular construction sites generate up to 70 per cent less traffic relative to traditional ones.2 That’s because you no longer need multiple deliveries of each building material and each fitting, all coming from different locations.
Fig. 1 - The rise of modular
Share of offsite housing construction, %
Source: KPMG, "Scaling modular construction", September 2019.
Of course, the factory process also takes time – usually two to four months from ordering – and the planning and design phase is broadly the same for all types of construction. Overall, though, modular buildings can still be produced faster and more efficiently. The total project timeline typically compressed by 20-50 per cent, according to McKinsey.3
Fully modular construction, in our experience, is best suited to buildings that are naturally split into small units, such as residential, hotels and student accommodation. That’s because the last phase of transportation is always by road, so the load must fit onto a truck. That means a module can have a maximum width of 4-5 metres and a length of 10-12 metres – not much use for large open plan offices or logistics warehouses.
However, a partially modular approach – assembled from individual parts, such as walls, rather than whole units – can be used more widely. The UK, for example, is looking into developing a flatpack kit for railway stations.
When it comes to cost, the benefits of modular are more nuanced. Research from McKinsey estimates that there is an opportunity for savings of up to 20 per cent over traditional construction, largely due to labour, but up to half of that can be eaten up by increased spend on logistics and materials. This potential for cost savings has to be put into context. If you employ people in your modular factory and you are not at full capacity, your modules could even cost more. Hence the importance of managing long-term capacity for many of the newly established small modular operators.
Over time, we expect the cost savings to increase as the market likely consolidates, production volumes ramp up, and economies of scale become increasingly possible. There is also the potential to construct the modules in areas where this can be done more cheaply. For example, modules for use in Sweden, where it is very expensive to build, could be put together at a factory in Italy or even further afield and then transported. Last – but by no means least, especially in the current environment of high inflation – modular projects tends to have less volatility in pricing because the factories order the same materials all the time and often have their own supplies (such as forests for providing timber).
At Pictet, we are currently working on a few modular apartment projects, in particular in Spain.
The environmental and efficiency benefits are already there, and greater cost savings are likely to come. We expect modular to account for an ever more meaningful part of residential construction in the years to come.
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