Suzanne Peters is a research associate at Alliance Manchester Business School
Much ink has been spilled chronicling the UK’s shortage of suitable housing options, with even more spent considering the best ways in which it could be tackled. One option often in the spotlight is so-called modern methods of construction (MMC).
“Grants, regulations and tax incentives could play a key role, backed by a coherent strategy and set of measurable objectives”
MMC seem to have an incredible amount of potential. The most advanced forms deliver enhanced quality and consistency, more efficiency, greater sustainability and higher productivity. They typically lessen the amount of work done on site, remove risk, speed up delivery and minimise the need for skilled labour that is in critically short supply.
However, for multiple reasons, uptake remains low. Indeed, less than 10 per cent of homes in the UK are built using MMC, with a recent House of Lords Built Environment Committee inquiry warning that the government’s approach to the issue is “in disarray”.
Our research team from The Productivity Institute, Alliance Manchester Business School and King’s Business School recently set out to understand why this is the case, with our insights published in a report: Driving change in UK housing construction: a Sisyphean task?
As well as uncovering issues with the MMC business model and market dynamics, our research also identified important opportunities for the government and industry to drive change and support its adoption.
Lacking incentives
A key reason for the failure of MMC to take off is the risk it entails. Traditional developers know that they can remain profitable without significant innovation, meaning that there is little incentive to drive change or meaningfully increase volume – especially in the current economic climate of high input costs and low margins for error.
This was underlined by a spate of recent administrations among MMC firms, notably Urban Splash’s specialist branch House in 2022 and Ilke Homes in 2023. Last year also brought the end of production for Legal & General Modular Homes, while the year closed with the collapse of another modular housing firm, Modulous. Each demonstrated how delivering meaningful change can often be inefficient, expensive and incredibly risky.
There is no doubt that real innovation in homebuilding is more likely to come from offsite methods, which can deliver higher energy efficiency, less waste, improved quality and greater productivity. A factory environment also provides a much safer and more practical space to innovate and iterate.
However, construction is a tough business plagued with risk, tight margins and ultimately the highest rate of insolvencies of any industry in the UK. Without reassurances, most firms will remain focused on survival, with innovation falling by the wayside.
Business models
This notion also underpins why so many MMC developers that seem to have the tools for success are struggling to make an impact.
Under the government’s MMC taxonomy, the most advanced form is ‘Category 1’, with the other six categories including pre-manufactured frames and pods, through to digital tools. When analysing the feasibility of various examples of MMC, our research focused specifically on how innovation could deliver sustainability and productivity growth in particular – and of all of the government’s predefined categories, it’s evident that Category 1 holds the most promise to deliver on those two aims.
Across the UK and beyond, innovative firms are poised to consistently build high-quality, low-carbon homes with greater speed and potential for scale, all the while using a more flexible approach to labour that mitigates skill shortages. However, this business model is predicated on developers delivering a volume that allows for scale to drive down the cost per unit while weathering inevitable market fluctuations. Without sufficient demand for their product and an opportunity to gain traction, their businesses are not viable.
Role of government
The key finding of our analysis is that legislation has a vital role to play in supporting the adoption of MMC. The government is uniquely positioned to take significant steps to incentivise, speed up and improve the delivery of more high-quality, sustainable homes, and to support advancements in construction practices.
Grants, regulations and tax incentives could play a key role in encouraging investment in more efficient methods of delivery, as well as zero-carbon factories, materials and methods. Yet, as outlined by the recent Built Environment Committee inquiry, this needs to be backed by a coherent strategy and set of measurable objectives.
In tandem with this, there is a pressing need to reshape processes for planning and approvals to prioritise long-term value (eg, EPC A homes) and support volume in housing delivery.
These are not new ideas. Our own research insights echo reports published over the past three decades that are remarkably similar in terms of the challenges, priorities, solutions and criticality of what we are seeing today, and it’s encouraging to see that the government is receptive to feedback on how its approach could be tailored to work in the modern day.
Modernising methods and meeting the housing needs of this country need not be a Sisyphean feat. We hope the House of Lords inquiry will expedite much-needed improvement in the delivery of homes and will help to realise the transformation that has been called for by so many in the industry.
