Beware putting all MMC under the ‘modular umbrella’

COMMENT Last week, as I normally do, I began reading my copy of EG, where the editor’s comment, true to the previous week’s promise, “pushed my buttons” so I wanted to share some of my reflections, to hopefully contribute constructively to the debate. I am in full agreement with the headline prediction that modular won’t be a large part of the housebuilding sector. It is currently less than 15% of housing delivery and, despite the efforts of TopHat and lobbyist Make UK, it seems destined to remain a small slice. I equally endorse the question mark as to whether there is and could have been a better way to invest our collective time and money to address the UK’s housing crisis. Retaining an outcome focus in such times is key, and many of the stories of wasted investment suggest this has not always been the case. Wider application I think there is more to take from the challenges surrounding the modular sector that is of relevance to the broader market: The wider context The struggles of modular firms are reflective of a larger, more troubling narrative within the industry. The demise of AIM-listed Inland Homes and the recent announcement about Stewart Milne entering administration are indicative of a sector under stress. In the year leading up to October 2023, more than 4,300 construction firms collapsed, but modular companies represented less than 2.5%. Financial challenges are not exclusive to modular firms but affect the broader market. Investment and integration The substantial investments in companies such as L&G, Ilke Homes and Urban Splash are indeed newsworthy, yet they highlight difficulties shared by smaller builders. Large modular entities have increasingly moved their business models towards vertical integration as a strategic response to the difficulties in securing customers and maintaining a steady project pipeline. L&G’s evolution from a non-land-acquiring entity to one that cultivated its own customer base exemplified this shift. This adaptation underscores the advantages held by larger builders with substantial land banks and reinforces why SME builders now deliver only around 10% of the market. Balancing act Modular companies have been forced to grapple with the complexity of balancing substantial capital investments against a demand profile dampened by macroeconomic conditions (with viability through the floor) and planning uncertainties. While the fixed overhead of a modular factory is a unique dynamic, reduced demand and delays in approvals are shared issues. Cultural shift EG was direct in questioning whether we are “anywhere close to being able to deliver good homes, en masse, modularly”. This sentiment echoes the views of many and highlights a critical issue that we must confront. For the sake of our planet, we must innovate and change rapidly – five times faster than we have managed so far, as author and former civil servant Simon Sharpe suggests – while ensuring we simultaneously improve the quality of what we build, to avoid creating legacy homes of the future today. To make this a reality, we must address perception and reassure stakeholders that new approaches are not detrimental to what we value in our homes and communities. This challenge is cultural more than technological. Ironically, while modular contractors have wrestled with perception issues, the largest housebuilders have increased their adoption of off-site technologies and manufactured components, doing so behind closed doors and without the stigma of “flatpack”. Barratt, for example, reported delivering more than 4,300 homes through its off-site factory in 2021, some 20 times more than Ilke Homes during the same period. Turning focus to Modulous, unlike modular manufacturers the company didn’t tether itself to a factory but instead invested in developing software to design and create configurable homes through a kit of parts. TESSA, its software, was created to generate full engineered schemes with rich data around cost, carbon, etc to suit any given site. However, being VC-backed, Modulous faced pressure to deliver returns in an industry that is notorious for its slow adoption of digital technologies, sluggish planning processes and fragmented stakeholders. My personal view is that Modulous’ underlying concept was forward-thinking. Integrating processes and the supply chain was one key value-add, and so too was the potential to use technology to rapidly evaluate development potential. Parallel initiatives by companies such as RCKa, led by architect Russell Curtis, showcase how technology can be intelligently leveraged to uncover real estate opportunities that deliver positive social, economic and environmental impact. This aligns perfectly with the aims of the Levelling-up and Regeneration Act, which advocates a digital approach to planning. Although it may take time to fully implement this vision, the potential transformative impact of such a system, particularly when complemented by technologies similar to those developed by Modulous, could be a significant turning point in improving local plans. In retrospect, one could argue that Modulous was perhaps a bit ahead of its time. Positive steps I firmly believe that the broader adoption of modern methods of construction – extending beyond modular techniques to encompass digital and off-site solutions – is a step in the right direction. Modernising how we build in order to create safer work environments, provide stable employment, engage a diverse and inclusive workforce, and enhance social outcomes is the right thing to do. So too must we continue to work to improve the quality of our housing stock, increase energy efficiency, reduce carbon footprints and enhance liveability. EG rightly pointed out that modular construction is not the panacea for our housing crisis. We are dealing with systemic issues within a complex framework, and it is clear that Modulous will not be the last organisation to face challenges while trying to innovate and disrupt the industry. My concern arises when companies involved in modern methods are categorised under the “modular umbrella” and written off. This not only discourages future attempts at innovation and disruption but also exacerbates the risk of failure for those daring to try. The previous week’s remarks perfectly captured the essence of real estate: it is fundamentally about creating places, lives and livelihoods. We must support and encourage those who are striving for improved economic, environmental and social outcomes. As we navigate through the housing and environmental crises, and confront the cost-of-living crisis, embracing innovation is vital, even though it may involve some setbacks. My apprehension is that the narrative around the decline of modular construction could become a convenient excuse for many to maintain the status quo in other areas. This, I fear, will directly work against the very challenge “to be better” that you laid down. Jamie Hillier is a partner at Akerlof Image © Akerlof