Modular house-building firms may have failed but modern methods are on the rise

Ilke Homes, Legal & General Modular, Modulous, Urban Splash Modular, Lighthouse, Swan Modular Homes … the list of recently failed modular house-building firms is long and growing.

After nearly a decade of hype, hope and public investment, as well as the formation of a trade body, Make UK Modular, the viability of building significant numbers of modular homes in factories to sell into the UK market now looks limp if not shot. If a major investor like L&G, with an ample supply of patient money, can’t make it work, who can?

Perhaps more worryingly, this failure of firms leading the modular approach to modern methods of construction (MMC) casts a dark shadow over attempts to modernise how we build homes.

Those in the know recognise that the modular approach to house construction was always ambitious. It sits in Category 1 of the government’s MMC framework. This, roughly defined, embraces methods that create large buildings with preconstructed rooms made in factories that are then shipped to site. This is distinct from panelised systems, such as timber frame, which fall into Category 2.

Unfortunately, by association, the confidence in MMC more widely is likely to be dented. Perceptions matter often more than fact, particularly given the rich popular history of failure with prefabrication in English house building.

This is a concern. The case for modernising house building has seldom been stronger. So, this spate of failures raises questions over how well set the house building sector is to modernise production and what lessons can be learned.

In seeking to understand the failures, it’s wise first to step back and look at what has driven firms to adopt MMC. Simply put there are three powerful prompts: the need to adapt to skills shortages; the urgency of meeting net zero; and rising political pressure to raise construction productivity.

Indirectly, Brexit has also played a part. It’s worth noting that most of the modular firms mentioned above were incorporated after the 2016 EU referendum. Exiting the EU heightened fears of severe skills shortages as it restricted the supply line of European workers at a time when a huge number of UK-born workers were closing on retirement age.

The potential and real impact of this can be seen in two charts. Chart 1 shows a slide presented to a London Construction Excellence meeting back in February 2017 to discuss the labour and materials implications of leaving the EU. It shows the age demographics of the construction workforce in 2016 Q3. Chart 2 shows the same chart for 2023 Q4. The data are from the ONS Labour Force Survey, courtesy of the Construction Products Association.

The threat of serious skills shortages was very clear in 2016 and much of this threat has been realised, as we see in the 2023 statistics. The ‘bulge’ of older workers seen in 2016 has shrunk and we have seen fewer young EU workers entering the sector – all as expected.

Fortunately, there’s been a rise of about 65,000 in those aged over 60 staying in construction. Despite this rise in older workers, the overall workforce has fallen by about 170,000 – a drop of around 7.5 per cent since autumn 2016. And the data suggests more heavy losses of older workers to come. Add to this squeeze on available labour the political pressure to raise productivity in construction and the case for MMC becomes very attractive.

The case becomes even stronger when we add in the argument that off-site manufacturing offers benefits in reaching net zero. It is little surprise that there was a rush to develop factory-built homes as these pressures grew.

In 2019, strong political weight was put behind MMC with the government appointing Mark Farmer, chief executive of Cast Consultancy, as champion for modern methods of construction for housebuilding. At the time, the political and media focus around MMC was seduced towards modular housing. This fitted the zeitgeist with words such as ‘robotics’ and ‘disruptors’ peppering the language of advocates. Homes England, meanwhile, was investing heavily in modular firms, such as Urban Splash Modular and Ilke Homes.

Clearly there were faults in these assumptions because the crash came rapidly.

But there is good news on the progress of MMC which has received less publicity. There is growing evidence of a quiet revolution led by those already embedded within the industry. Major house-building firms are steadily shifting to MMC.

A big prompt for them to adopt new construction methods is the Future Homes Standard. This introduces challenging changes to Part L (energy) and Part F (ventilation) of the Building Regulations for new dwellings. Furthermore, MMC also offers the potential for greater control over the supply of both materials and labour, delivery times, and quality.

Among those leading the pack is Persimmon. Recently it has gravitated towards a more vertically integrated business model. It has in-house brick and tile manufacturing and owns the timber-frame producer Space4, acquired with its 2005 takeover of Westbury Homes.

A year ago, it invested in the modular home producer TopHat Industries. Along with delivering modular housing, TopHat has a patented brick facade system, which seems to appeal to Persimmon. It can be used with its Space4 frames to reduce build times and on-site labour. Persimmon estimates that using TopHat’s brick facades with Space4 frames can cut between two and three months off the production time, creating customer and cashflow benefits.

It will be a while before the impact of Persimmon’s shift to increased MMC is clear. But early signs suggest a big drop in labour on site. It is hard to be accurate and consistent when measuring the labour needed to build a home. There are many factors at play, not least the variable use of subcontracted workers and differences in house types and location.

However, health and safety data can be used indirectly to estimate the number of construction worker years it takes to build a home. If firms publish detailed HSE Riddor data with both the number of accidents and the accident rate per 1,000 workers, a figure for worker years can be associated. This can be set against the number of home completions to provide a caveated approximation of worker years per home.  Persimmon publishes this data. The results can be seen in Chart 3.

The data indicates that the number of construction worker years to build a home has fallen, and coincides with Persimmon’s efforts to further modernise its building techniques.

Persimmon is not alone among the majors in looking harder to MMC. Barratt bought Scottish-based Oregon Timber Frame in 2019 and recently built a new timber frame factory near Derby.  In 2018, 19 per cent of completed homes used modern methods of construction. By the financial year 2023, the proportion had risen to 32 per cent.

Taylor Wimpey is also looking to ramp up the share of timber-framed homes it builds, targeting 30 per cent by the mid to late 2020s. It has announced plans for a new timber-frame factory alongside its Peterborough logistics site.

Timber frame might look a bit old hat to builders in Scotland where more than 90 per cent of new homes are timber framed. However, in England where timber frame only accounts for 10 per cent of new homes and in Wales where the share is below a third, this shift in construction methods will cut the numbers of site workers, easing construction labour shortages more widely.

While there are positive signs on MMC emerging from established firms, it leaves tough questions over what went wrong with those lauded as ‘disruptors’ and what lessons can be learned. The collapse of multiple modular house-building companies came despite large injections of public cash and heavy funding by investors.

Understanding the root causes is critical, but far from straightforward. The House of Lords Built Environment Committee convened late last year to address the issues as modular firms tumbled. In early January it sent a letter to housing secretary Michael Gove stating: ‘throughout the course of the inquiry it has become increasingly difficult to understand why Category 1 [Modular] housing has failed to fulfil its potential’.

Part of the problem may lie in a willingness of politicians, commentators, think tanks, and many within the industry to adopt unchallenged assumptions as fixed truths, such as construction is poor at innovating and has unreasonably low productivity.

Arguably, the nature of construction demands that it brings new ideas, goods and services to the market almost daily – pretty much the definition of innovation. Its failing tends to be embedding those innovations into the wider sector. That says more about the industry’s fragmentation, structure, business models and volatility than it does about its technical and intellectual prowess.

Meanwhile, most critics of construction’s record on productivity fail to recognise that the official measures are at best misleading when taken at face value without due caution. It is, for instance, quite possible that increasing MMC might lower the productivity in construction, as it is statistically defined currently, if high-value work once done on a construction site is shifted to a factory and into the scope of the manufacturing sector.

A third common misconception is that building homes for less money will reduce house prices. That does not follow. It is more likely that land values would rise, although a lower build cost might make some unviable projects viable.

These misconceptions can lead to a near contempt for construction and an underestimation of its complexity. This easily leads to a belief and trust in simple solutions that fail when confronted with the awkward realities of the industry.

An observation in a report on MMC published by the UK Collaborative Centre for Housing Evidence (CaCHE) a year ago may shine some light. The report by Sarah Payne (University of Sheffield) and Bilge Serin (University of Glasgow) concludes that the challenge should be reframed away from MMC and towards modern methods of development (MMD).

Their report states: ‘A key drawback for the debates around MMC is the fact that it is seen as a problem of construction methods. Our review on the other hand shows that wider adoption of MMC requires a comprehensive look at the whole development process.’

One key takeaway from the recent flirtations with MMC in English house-building suggests that established builders, with control over the process from land purchase to sale, appear better positioned to innovate. They can look through the whole value chain, targeting the key areas where innovation is likely to stick and assess the benefits and costs more holistically.

A second observation worth noting regarding existing players is how regulation prompts change. For housebuilders, the Future Homes Standard is a major prompt to adopt MMC. Indeed, regulatory change was a key prompt in the 1970s that nudged English housebuilders to adopt timber-frame house construction.

A third observation is that innovation, which construction firms do daily, needs to become embedded within the cultural fabric of the industry. Innovation is not just about competing ideas and revolutions; it is about continuous progress. The industry fails to capture and disseminate good ideas as well as it might.

Finally, when it comes to the issue of productivity, which is seen as a major reason to embrace innovation, there is a strong case to take a more holistic view. Perhaps there should be greater focus on how the sector can create the right buildings and infrastructure to boost productivity across all sectors, rather than restricting thinking to the productivity of the construction industry.

To read more on the economics of the built environment see RIBA Horizons 2034