The trials and tribulations of scaling modular housing

The housing market is built on competition and delicate tensions. But newcomers using modern methods of construction are calling on their old-school bricklaying counterparts to unite. The call to action is clear: the country needs more homes that are affordable and sustainable. Off-site factory-built homes are a solution, but high costs and barriers to growth mean they still account for just a small part of housing delivery. “The current housebuilding model lacks incentives to build on a faster scale and on a larger scale, because of fears that it could lower prices and reduce profits,” says Hannah Holmes, research associate at the University of Cambridge. “Off-site construction can obviously produce housing much more quickly than traditional approaches.” Modular providers claim to deliver housing in half the time of traditional methods of construction, creating precision-engineered homes, where quality is controlled and benchmarked in a factory environment. Most volume housebuilders have dabbled with off-site, but a greater adoption is needed to reap the real benefits of MMC. Now, the industry must come together and share its experience to create that data. “We need more research to find out exactly what an increased shift to off-site construction and modular homes would mean for local communities, for the economy and for the housing market, and to ensure that we deliver a system that meets needs without exacerbating already entrenched inequalities,” says Holmes. Risky business One of the main barriers for housebuilders is that modern methods of construction are largely still unproven, Holmes says. “If you are able to make a good profit by following the status quo, you need incentives to make that shift to off-site construction.” Patrick Bergin, chief financial officer at Ilke Homes, agrees that MMC is still a minor focus for housebuilders. Bergin spent 20 years in housebuilding, most of that at Crest Nicholson, where he was chief executive. He says housebuilders aren’t intentionally slowing delivery rates, but are limited by sales rates and speed on site. “The sector is increasingly incapable of reaching housing targets and that is very much a function of the fact that this is a low productivity industry,” says Bergin. “It has been left behind. Where so many sectors of the economy have had to modernise and change quite rapidly, housebuilding has, frankly, not made the changes that it needed in order to face the future.” Outfits such as Ilke, TopHat and L&G Modular Homes, although small, are leading the industry. Private equity is often taking the hit on upfront costs linked to opening a factory or research and development into new technology. Goldman Sachs-backed TopHat is investing in research around key materials, componentry and prototyping – for example, a new cladding system that it describes as “visually almost indiscernible” from bricks, but cheaper and more sustainable. TopHat has an 118,000 sq ft factory in South Derbyshire providing capacity for 1,000 homes. Despite recent financial losses, the board has signed off a second factory that will have capacity for 3,000 homes. “Factories are very expensive things to build and it costs a lot of money to get them up and established,” says managing director Andrew Shepherd. Backing from institutional investors has been “a real game changer”, he adds. “They’ve got the ability and the scale to make the investment required.” Proving the economics Institutions will also be key to the industry’s next phase of growth. Crest Nicholson’s first major scheme using MMC was for PRS, which means “there was a known end buyer and we knew the speed of delivery”, Bergin says. “It made a lot of sense to the client and gave great certainty to us, in terms of placing an order with an MMC operator.” At Ilke, Bergin is working with Man Group, among others, providing 277 rental homes in Grantham. “We have huge needs for intermediate tenures, working with registered providers and other social investment funds, with PRS suppliers as well,” he says. “I think the concept is pretty proven. The economics have got to now be proven and there’s a great opportunity to do that.” The government and Homes England have also spurred growth through various direct investments (see also Japanese developer enters UK housing market) from the Home Building Fund, though acknowledging the need for frameworks and scale. The Affordable Homes programme also requires registered providers to use MMC on 25% of homes. TopHat’s Shepherd says: “It takes that leadership to get people to make that decision to jump in to MMC.” He adds: “To make a decision to do something that bit different really takes leadership or a really strong push. That incentive is incredibly important.” For Shepherd, that doesn’t just mean government enforcing new methods, rather encouraging zero carbon, low-waste development and homes. “There’s no incentive for the buyer to buy a better performing home,” he says. “There’s an opportunity there to start looking at stamp duty and the tax regime.” This would build on incentives such as the Green Homes Grant to improve existing homes – but also support new housing delivery. As the housing industry responds to the climate emergency, the modular providers are ready to collaborate and share. Together with local authorities and planners they want to build that case study. “This is an industry where the demand exceeds supply,” says Bergin. “We are very content to share our trials and tribulations and talk jointly about how we might address them.” To send feedback, e-mail emma.rosser@eg.co.uk or tweet @EmmaARosser or @EGPropertyNews