A number of manufacturers of modular housing are in distress. We touch on: how the Living Sector has changed its attitudes to Modern Methods of Construction (MMC), why things have gone wrong for a number of high profile businesses and what the industry can do next to reassure and grow what is hailed as being part of the answer to the UK's housing supply issues.
The news that Ilke Homes went into administration last week just a short time after Legal & General halted production at their Leeds factory was not what the industry wanted to hear and dashed hopes and expectations that Modern Methods of Construction (MMC) might finally be the catalyst for faster and cheaper housing delivery.
MMC has taken time to get off the ground in the UK (excuse the pun) but things had seemed to be looking up. The Government had highlighted that the use of MMC would make the UK housing "greener, better, faster" and had called for 25% of homes being funded by the Affordable Homes Programme to be MMC in the Capital Funding Guide. Ilke itself was partially backed by Homes England. The inherent ESG advantages in MMC made it all the more appealing. Aviva and Persimmon had only recently announced their respective investments into TopHat in April this year.
So with an industry becoming more willing to make MMC work and some real progress made in terms of getting funders comfortable what's behind the recent spate of failures:
- Exclusivity - Unlike other large scale manufacturing facilities to enable funders and developers to get comfortable with the legal security over the product (and sometimes even the factory) many modular facilities only deal with one client's order at a time. This means that the success of the MMC manufacturer has become inextricably linked with the success or failure of the client's project. If the project is delayed, production grinds to a halt.
- Start up to Scale challenges - setting up a manufacturing facility (especially when seeking to innovate and scale – think British Volt) involves considerable up front expenditure which then needs to build to scale quickly to recoup investment. Expectations as to output have not been met. Reports of Ilke's expected output being 4000 year against an actual 350 per year delivered.
- Unsurprisingly and inevitably some blame has been directed at the UK planning system for inconsistent and clumpy rather than consistent and steady demand from housebuilders. Factory production works best with consistent steady runs of output so if planning delays are leading to delivery delays on booked production schedules that must be a problem (although not the whole story).
- Pipeline shrinkage – due to wider economic turbulence there have been fewer starts on site with many housebuilders looking to offload existing stock onto Single Family BTR investors who are keen to buy it (see recent Barratts deal with Citra). Planning can also be blamed for pipeline contraction as schemes are caught up in the Nutrient Neutrality moratorium and the scrapping of housing targets.
- Over engineering or Quality failures or both – can these opposite issues both be true at the same time? Probably yes, L&G very publicly suffered from quality control issues (possibly as a result of the extremely exacting standards they were trying to achieve) and some say the manufacturing processes at other facilities have been too focused on the detail at the expense of speed and getting units out of the factory door.
- Payment profiling perfect storm – cashflow is notoriously challenging in construction but is emphasised in MMC. With no materials vesting on site and delivery of units quite late in the process, there is a reluctance to part with money in advance and high up-front costs for the MMC manufacturer to self-fund.
- "Volatile macro-economic conditions" – no-one can deny we are in volatile and uncertain times but such times can also be an opportunity and one that TopHat seem to be managing and capitalising on.
- Plain old fashioned industry conservatism. MMC is still new and not necessarily trusted. Although no one in the industry now remembers the 1960s personally, the legacy of poor pre-fabs from that era still hangs over and many developers and contractors prefer the old ways of bricks and concrete.
What we can learn
On the bright side:
- Proof of concept – hurdles around acceptance by UK banks and investors have partially been dealt with although there are plenty of investors out there who will look very carefully before approaching an MMC scheme.
- MMC product delivered has been of a high quality.
- As mainstream building contractors struggle in the current economic climate this emphasises that traditional construction methods are never entirely risk-free either and (if contracts are well drawn) the risks in delivery of MMC can be massively mitigated.
MMC manufacturers must try harder to:
- Work very closely with developers to locate schemes that can be delivered in a reasonable period.
- Work with insurers to build insurance products that deal with the market's concerns around risks in factory, in transit and on site.
- Demonstrate that the benefits of the MMC product in terms of time saved, costs reduced and quality delivered. At least two of these are essential for success in a sceptical world.
- Show how the delivery of the units to sites can be de-risked so that funders can be comfortable to pay at a reasonable rate for the units rather than totally back end them.
- Try to find a way to work on more than one project at the same time so that the risk of delay in planning or funding (the two normal causes of delay to projects) does not stop the factory entirely.
