Inside The Collapse Of Urban Splash And Sekisui's Modular Housing Business

One of the UK’s highest-profile modular housebuilders suffered a death spiral caused by poor quality work at its Midlands factory.

Defects in the modular building process set off a house of cards chain reaction in which stakeholders lost confidence and did not put up new funding, which in turn prevented the business from acquiring the new sites it needed to maintain work volumes at the factory. Factories get more efficient the more units they make. 

The inefficiencies caused by not having enough work, and too many costly defects to put right, plunged the business into administration.

So said the administrators’ report into the collapse of Urban Splash’s modular homes business in May 2022.

The collapse highlights why the modular sector is not expanding as fast as some had predicted: One of the points of building modular houses was that it offered error-free replication that would cut costs.

A constellation of subsidiaries with schemes in Manchester, Birmingham and Merseyside fell into administration earlier this summer after appeals to its secured funder, Japan-linked housebuilder Sekisui House UK, still left it unable to meet its costs.

Urban Splash's foray into modular is not the only one to face financial issues where build capacity considerably exceeds output. A new factory capable of producing 4,000 units a year is being pursued by TopHat and backed by Goldman Sachs, yet UK modular output last year was 5,000 units in total.

The report from administrator Teneo Financial Advisory said “design issues resulting in production defects … the costs of which could not be passed on,” proved fatal to a business that had been underperforming and loss-making for a prolonged period.

This “eroded confidence with the group’s key stakeholders,” Teneo said, and “that in turn restricted the group’s ability to secure future developments” that would keep the factory busy and cost-effective.

The collapse meant 164 redundancies (of 189 staff) most of them at the Alfreton factory, near Nottingham. It also leaves half-built schemes scattered around England. At phase 3c of the New Islington scheme, Manchester, all 13 homes remain incomplete; at Northstowe, near Cambridge 10 of 43 homes remain incomplete; and at phases 3a and 3b of Birmingham’s Port Loop scheme 98 homes are yet to be completed.

Sekisui House is one of Japan’s largest housebuilders with a global reputation in modular development.

The holding company, Urban Splash House Holdings, was a joint venture dating from 2019 between Urban Splash shareholders (48%), Sekisui House UK (48%) and Homes England (4%). Urban Splash Modular Ltd was the subsidiary running the Alfreton modular factory, a venture acquired from SIG in 2018 when it hit an earlier bout of financial trouble.

Although the report suggested planning delays held back the flow of work to the factory, producing inefficiencies that could not be mitigated, it also said that the factory’s output was not up to standard and that this was the root of its problems. This resulted in rectification costs that could not be passed on to its customers, helping to tip the group over the edge.

Urban Splash House Holdings and Urban Splash House are likely to be able to repay unsecured creditors, the report said. The other entities will be wound up.

The administrators said of some corporate entities: “The group experienced delays identifying and obtaining appropriate planning permissions for new sites, and the throughput with USML [the Alfreton factory] was below forecast. This resulted in inefficiencies and cost overruns, which negatively impacted the group’s overall cash flow position.”

The Alfreton factory subsidiary Urban Splash Modular, ended £17.5M underwater after net losses of £4.5M in the year to 31 September 2020, £7.7M in the year to 30 September 2021, and a further £2.4M in the six months to 31 March 2022.

Teneo’s attempts to sell the Alfreton business came to nothing, and the factory is now being wound down.

Staff are one group of creditors that will lose out. Preferential creditors at House Holdings and Urban Splash Modular are unlikely to be paid. Claims for amounts owed to staff for wage arrears, holiday pay and pension contributions come to £100K affecting 130 people at the factory. They have also lost their jobs.