Alternative procurement strategies to meet value targets

BTR investment rationale, and best strategies including ‘intelligent procurement’ so developers can stand out amongst competitors and meet their value targets.

Giles Heather, Director, Linesight discussing intelligent procurement | BTR News
Giles Heather, Director, Linesight.

By Giles Heather, Director, Linesight

The UK Build to Rent sector is forecast to grow to £500bn by the time it reaches maturity. However, the market is beginning to see some serious growing pains which can only be overcome with a smarter approach to managing construction programmes and schedules.

Why is Build to Rent proving so successful? For tenants, dedicated Build to Rent developments offer the clear benefit of modern living accommodation, built to a high standard and set in attractive surroundings. The schemes are enhanced by good quality fixtures and fittings, and they feature a range of curated social activities and concierge services, all included in the rent. The challenge for the market is that delivering all of this requires high quality materials, products and design and construction skills, as well as the ability to secure the best sites.

The investment rationale for purpose-built Build to Rent is strong. Investments are underpinned by stable occupancy rates, thus producing consistent cash flows, as rental growth continues to outstrip inflation and needs-based demand is decoupled from economic volatility. Build to Rent can also be delivered much faster than other forms of housing. Compared with ‘for sale’ developments, investor capital can be deployed and start generating revenue far more rapidly.

Such is the demand for a slice of the fast-growing Build to Rent market that competition among developers and investors is increasingly intense, with an array of new players coming to the market, including some less expected entities like retail giant John Lewis. It should also be emphasised that the sheer scale of the sector means that there are opportunities for companies of all sizes, across the spectrum of specialisms, to operate profitably by making a long-term investment in their capabilities and skills base, thus creating jobs and driving growth.

This poses thorny challenges as the market grows, not least because development and construction costs are rising across the property sector, compounded by shortages in materials and the availability of skilled labour. Residential developers will need to consider alternative procurement strategies in order to achieve the best possible value in terms of price, build quality and hitting completion targets.

As the construction industry embraces new techniques such as modern methods of construction (MMC), there is an opportunity to deliver Build to Rent schemes on time and without any compromise on quality. Developers can take advantage of the repeatability aspect of schemes that might feature several hundred homes – elements like kitchens, bathroom pods and balconies – to develop a supply framework that will allow them to identify preferred suppliers and generate value through economies of scale.

Such a framework can offer contractors visibility of their supply chain over a long period, giving them and their developer clients confidence about what can be delivered during that time, while keeping costs to a minimum. This is especially important when, as is currently happening, there are materials shortages, prices have risen sharply, and labour is at a premium. The framework will both allow a broad range of suppliers to become involved in the programme and also deliver benefits such as net zero design and the use of MMC, as the suppliers will be invested in the programme and will appreciate the visible pipeline of work.

We call our approach to these challenges ‘intelligent procurement’. Using any technology to deliver new homes, but particularly with modular methods, requires utilising market intelligence, analysing data from surveys, engaging with the marketplace, and ensuring the rationale for whatever strategy being adopted is validated from the outset.

We believe the best approach for developers looking to meet their value targets is to develop their own supply chain, one that is bespoke for the scheme they are delivering. This could involve building up significant workload plans, batching projects together – requiring main or sub-contractors to commit to preferred rates and supply teams – and agreeing to specific standards and performance metrics. These would be agreed at the beginning of a project and driven through the design and procurement phases.

To help developers pull all this together, we use our databases covering materials costs and procurement management to help predict supplies and workloads for a particular scheme over a given period of time, which may be five, 10 or 15 years.  

Using analytics, we are also able to engage earlier with the supply chain and advise clients on a particular procurement approach. As a result, developers see cumulative economies of scale across their businesses.

Applying this data and also understanding what will be needed over what period of time, will result in a smart procurement approach which can be factored into a contract, leading to a main contractor engaging with specific manufacturers and suppliers.

Overall, a more successful project outcome is likely to be ensured by early engagement and also by creating sensible risk allocation between clients and contractors, so that suppliers are encouraged to work with both parties. In this way, everyone emerges positively from the project.