Modular Construction Can Help Solve Housing Crises, But It Still Has Big Problems To Overcome

It’s the classic chicken and egg situation. Modular construction methods can help build houses more quickly, cheaply and efficiently, and could go some way toward solving housing crises in cities the world over.

But until the sector reaches scale, developers will be wary of using these methods and the companies that provide them. And unless they do use them, they can never reach the necessary scale. Hmm.

A panel of experts at Bisnow's London Residential and Affordable Housing Outlook, moderated by Shakespeare Martineau Head of Real Estate Louise Drew, weighed the pros and cons of modular, off-site construction. The benefits are clear, the path to achieving them less so, but solutions to overcoming problems were offered.

After many years of debate, the residential development and construction industry wants to throw its support behind modular construction. The real estate and investment arm of insurance company Legal & General has built a 550K SF housing factory near Leeds, from which it aims to deliver 3,500 homes a year.

Berkeley, the U.K.’s most successful volume housebuilder, has announced plans to open its own factory in Ebbsfleet in Kent, and fellow housebuilder Countryside is investing in a factory in Warrington in the North West.

“For Legal & General this is something we have staked a huge amount of time and money on,” L&G Investment Management Head of Public Sector Partnerships Pete Gladwell said of the company’s reported £55M investment in its facility. “There is a skills shortage to build homes nationally, but there is no skills shortage for us to find labour around our factory in Leeds. For us it’s about delivering something for the future of the country, because we can’t deliver to build homes on site in a muddy field.”

As well as being beneficial for developers in terms of the potential to be cheaper and more efficient, there are also big benefits for the ultimate resident, especially those at the bottom end of the socio-economic scale who need the most help.

“They can bring huge benefits for residents,” housing association Optivio Chief Operating Officer Jane Porter said. “They are warmer and drier, so you can reduce your heating costs, and that helps take our residents out of fuel poverty. That has health benefits, and increased health benefits lead to increased educational attainment for children.”

But achieving this in practice is not easy. L&G’s factory was due to start construction in the first half of this year, but delays meant it did not start production until November.

“It takes a serious amount of commitment, a serious amount of investment, and a serious amount of perseverance; we have been through the mill on this one as you all know,” Gladwell said. 

Part of the issue is volume. For factories to be truly efficient they need economies of scale and to achieve that they need volume: That is why car plants or aircraft factories run day and night employing multiple shifts of workers.

Modular construction just isn’t at that stage yet, meaning it is financially precarious for those trying to deliver the end product. And that makes developers uncertain.

“We’ve had our fingers burned with MMC [modern methods of construction, a term often used interchangeably with modular construction] that’s gone wrong, because there is a big cash flow issue,” Porter said. “The factories need throughput, they need volume, they need standardisation, and we are not good at that either. The thing about MMC is that we don’t pay for it until the end, when most of the house has already been built, and that creates cash flow issues for the factories, and you need commitment and trust between them and developers to make this work. But it helps our cash flow: The quicker units go up, the quicker we get people in and paying rent, and that helps us derisk schemes. So we like, we just need to have the confidence that we will actually get it.”

“The issues are that the unit cost is higher because there isn’t enough demand at the moment,” Greater London Authority Head of Housing Strategy James Clark said. “There's lots of risk involved for developers and housing providers because there are lots of different systems in use that are not interchangeable, and there are a lot of these factories going bust overnight, leaving you with a scheme that is half built and you have no way of replacing the parts.”

Examples of modular housing firms to have gone bankrupt include IBS in the U.S.

There is also the fact that modular units or parts imported from abroad have gone up in price because of the weak pound, and there was uncertainty from developers over the deliverability of modular schemes, Porter said.

Asset managers may also pause because factory-made housing, with pipes and electrical wires built in to walls, can be difficult to repair, she said.

So how to solve some of these issues? One part is already in progress: Some of the investors setting up these factories, like L&G and Berkeley, have the scale to ride out fallow periods until the demand is there to make facilities more efficient. They also have a large pipeline of units for their own schemes that can keep factories ticking over, with additional demand from other developers being added on to this to increase efficiency.

Clark said the GLA was working with several companies active in the sector to work out ways to aggregate demand — taking orders from multiple developers or housing associations and bundling them together so that the order has the volume to make it profitable for the factory owner, and also reduce the cost for the developers. He said it is launching a digital tool to help this in January.

Gladwell added that to help cash flow issues, L&G was looking at leasing modular units to developers as well as selling them.

“That could be interesting,” Porter said.

The will to make modular housing a success is there, and the way is not impossible to find, but it will be a bumpy road.