Katie Saunders, a partner at law firm Trowers & Hamlins, examines the shifting attitudes toward UK MMC (Modern Methods of Construction) and the barriers that remain to its widespread adoption
How far has the UK MMC come in the provision of housing in the public and private sectors? The government’s Construction Playbook highlights the use of MMC as key to improving quality in public sector construction, with Homes England requiring UK MMC to be used both on its Affordable Housing Programme and for 25% of homes built by its strategic partners.
This article examines the motivations and potential hurdles still to be overcome before UK MMC is widely adopted, reflecting the findings of an August 2021 survey conducted by Trowers & Hamlins to gauge views on MMC (in particular, volumetric and panelised systems) within the affordable and private housing sectors. There has been a clear shift in thinking since Trowers’ last modular housing report in 2019 and while concerns exist, MMC is generally viewed positively as an alternative to traditional build.
Motivation for adopting MMC
Build quality and costs are among the key drivers across the public and private sectors, along with the need for less labour (when using volumetric and panelised systems, for example) – unsurprising given the skills and labour crisis faced by the construction industry.
Equally, sustainable development and energy efficient homes were cited as strong motivators for using MMC. This undoubtedly reflects the increasing move towards and pressure for funders and developers to transition to net zero carbon.
However, tension exists in the private sector between homes for sale and rent. While MMC can significantly reduce build time and bring greater advantages for build to rent and other purpose-built rent (such as student/affordable housing where the quicker people move into a finished product, the better), developers of homes for sale face ongoing pressure not to bring too many new homes on to the market simultaneously, often preferring the finished product to be drip-fed into the market.
Funding
Traditional vs modular
Traditional build is tried, tested and understood. It has established warranty schemes, certifications and a model for drawing down funds linked to the progression of works on-site, backed by well-known suites of guarantees and warranties. As works progress, the value of the site/development (over which funders have security) typically increases.
By comparison, modular housing construction is still relatively new and while investors push to put funds into projects with good ESG credentials, some funders remain hesitant. There are standardisation concerns and the flow of money versus progression of works on-site differs. Upfront costs are greater than traditional builds since inevitably most work is factory-based and transported to site.
Nonetheless, solutions are being created. For example, agreeing a trade facility arrangement to cover production costs, where funds are released as works progress on-site rather than being released on day one of manufacture.
Since Trowers’ 2019 report, there has been a greater use of equity and development finance to build using modular construction. However, the biggest funding source for local authorities and housing associations are GLA/Homes England grants. Public funds play an important role in supporting the adoption of volumetric modular for the affordable sector. However, more could be done including supporting SME manufacturers potentially through guarantee schemes.
As the market adjusts to this new form of construction, government funds can help de-risk and build confidence. The stipulation of 25% of MMC for Homes England strategic partners and the encouragement from the GLA for bids with a MMC pipeline are important drivers from which the industry can learn and refine working with MMC.
Overcoming the hurdles
Fear of the unknown
Housing construction has operated the same way for a long time and funding structures, valuations and security are based on established traditional build models. Lack of familiarity also poses concerns around the longevity, maintenance and long-term impact on value of modular products.
The requirement to use MMC as a proportion of an overall development shows there is an element of certainty and a step-change in attitudes. However, public sector concerns exist about how acceptable modular properties are as security for funding.
A key solution is the existence of more modular schemes, coupled with developed standardised warranties and questions for valuers. NHBC, LABC and Build Offsite Property Assurance Scheme (BOPAS) all offer accreditation and having more established warranties and product guarantees backed by reputable insurers will provide confidence to funders, particularly if knowledge and experience is shared.
Capacity
There are two key issues. Do enough factories exist to deliver modular homes at scale? Secondly, what are the alternatives if a manufacturer goes bust?
Manufacturers need pipeline consistency. The mandate on MMC as a proportion of affordable housing builds will help with this and some registered providers have formed consortia to provide this certainty, which also enables manufacturers to standardise their products for the group of commissioning clients.
Collaborative procurement greatly de-risks projects, helps solve the problem of insolvency risk and can provide a safety net if a manufacturer gets into financial difficulties during a project. For example, having a number of manufacturers appointed on a framework where products and designs have been standardised could enable another manufacturer to pick up the project and complete the manufacture and installation for the client.
An increasing appetite for MMC
The latest Trowers & Hamlins findings show an increasing appetite for using MMC and demonstrate that parties across the housing sector are willing to consider innovative solutions to overcome many of the hurdles.
Learning, experience and standardisation are the keys to wider use across the housing sector. This will continue to increase as more and more companies become familiar with the processes, risks and benefits of using modular housing.
Katie Saunders
Partner
Trowers & Hamlins
Tel: +44 (0)20 7423 8000
