The modular homes industry, initially touted as a solution to the housing crisis, is currently facing challenges in expanding.

• Modular housing offers sustainable benefits such as energy-efficient homes, reduced material waste, and lower carbon emissions during construction.
• In recent years, the construction industry, as well as the sector, has encountered economic challenges.

The idea of using pre-assembled components in housebuilding is far from new.

The practice of prefabrication has been employed in various forms throughout history, including William the Conqueror's use of defenses during his invasion of England in 1066 and Sears' mail-order homes in the U.S. in the early 1900s.

In the future, factories can produce entire modules for homes, allowing for quick assembly in just weeks. This speed is one of the many advantages of modular homes, which are crucial in countries like the U.K. where there is a shortage of affordable housing.

Modular housing, constructed in a factory setting, produces less waste and results in energy-efficient homes. TopHat Communities, a British modular developer, has achieved "zero waste to landfill" in the last three years, according to Andrew Shepherd, the company's managing director.

Fewer delivery trips are required to construction sites when building entire sections in one location, as explained by Shepherd. According to a 2022 report from Make UK Modular, 80% fewer vehicle movements are needed for development sites that use modular building methods.

A study published in 2022 by academics at the University of Cambridge and Edinburgh Napier University found that modular home construction can reduce embodied carbon emissions by 45%. This refers to the emissions generated during the construction process, including the production and transportation of materials.

'A very tough business'

Although the industry has experienced several advantages, it is still in its early stages in both the U.K. and U.S.

Last year, several modular housing companies in the U.K. and the U.S. faced financial difficulties, with Ilke Homes collapsing and Katerra filing for bankruptcy. In the U.K., Legal & General wound down its modular housing factory, while Modulous entered liquidation after failing to find a buyer.

Modular construction firms face a challenge in that they must invest in building a factory to construct modules and have projects in the pipeline to recoup this investment, as highlighted by Jonatan Pinkse, professor of sustainable business at King's College London.

The headwinds affecting the wider construction sector, such as higher energy costs and interest rates, as well as a cost-of-living crisis in many nations, made it more difficult for him to suggest that this presented a challenge.

If a market is going down instead of up and firms can't profit, the issue is that they can't recover their money quickly enough, causing investors to lose faith in the business model, according to Pinkse.

According to Suzanne Peters, a research associate at Alliance Manchester Business School and co-author of the research, the construction industry is a challenging business with a higher failure rate compared to other industries. In 2023, provisional data from the U.K.'s Insolvency Service revealed that the construction industry had the highest number of insolvencies in England and Wales, with 4,371 companies going bankrupt, which was nearly one in five of all insolvencies.

Daniel Paterson, director of government affairs at Make UK Modular, stated that the modular housing industry in the U.K. has faced a "string of unfortunate events" since its launch in 2016/17. He explained that it takes firms around 18 months to establish factories, which meant that the Covid-19 pandemic and the economic downturn that followed soon hit the industry.

Richard Valentine-Selsey, head of European living research and consultancy at Savills Research, stated that perceptions based on previous versions of prefabrication were another issue.

In the U.K., there is a lingering negative impact from the building boom post-war due to the prefabrication of the 1960s, which is associated with lower quality, shorter lifespan, and other negative effects.

The construction industry is known for being conservative and resistant to change, making it difficult to innovate unless forced to do so. As a result, the industry has flirted with new methods but has not undergone a wholesale change towards delivering using modular.

Leaders in modular

A 2023 McKinsey & Company report stated that only 4% of the current U.S. housing stock was constructed using modular methods, despite a 2022 Make UK Modular report indicating that over 3,000 modular homes were being built annually in the U.K., with capacity to build five times that number.

Since the mid-1990s, BoKlok, a major player in the Swedish construction industry, has been jointly owned by Skanska and Ikea.

Shepherd emphasized that Sweden is not a country where it is possible to construct for 12 months consecutively.

To keep people working all year and deliver houses at the required volume, an alternative construction process is necessary due to the deep winters with limited daylight, he explained.

According to Valentine-Selsey, in Japan, the value of residential buildings depreciates over about 30 years, making it necessary to knock them down and rebuild them. This approach allows for the use of new building methods and results in a higher delivery of new homes.

Optimistic outlook

Could the use of modular methods help address the U.K.'s affordable housing shortage, as demonstrated by these examples?

The U.K. government aims to construct 300,000 homes annually, but only 234,400 were built in the 2022-23 fiscal year. Keir Starmer, the leader of the U.K.'s opposition Labour party, has promised to build 1.5 million homes within a five-year term if his party is elected.

If a different approach is not adopted, there is zero chance of 300,000 houses being built annually, according to Shepherd.

Valentine-Selsey predicted that the modular sector would experience growth in the next five to 10 years, stating that he was an optimist about the future.

He believed that other types of MMC, such as panelized solutions, were more likely to be adopted, but thought "modular will still play a role in that new mix of delivery."