Prince William and Kate, the Princess of Wales, visit a modular home in Cambridge.

When Kevin McCloud, presenter of hit property TV show Grand Designs, went to the typically English town of Tunbridge Wells last September, it looked like a potentially revolutionary moment in Britain’s housing industry. One that might reverberate in Australia.

McCloud was there to watch Rob and Kate Harris demolish a semi-rural 1940s bungalow and replace it with a prefabricated, modular two-storey home. Once the old place was demolished, the company Boutique Modern trucked in the new one, built entirely in its nearby factory.

The various modules came already kitted out with their kitchen and bathroom fittings, and Boutique Modern’s team slotted it all together in just a couple of days. The new owners were impressed with the result, as was a rhapsodic McCloud.

It seemed like modular housing’s long-heralded escape from its redoubts in Sweden and Japan was at last beginning.Modular housing has for some years been touted as the answer to the British construction industry’s labour shortages and net-zero challenges – and experts have advocated a similar solution for the housing supply squeeze in Australia.

Three years ago, estate agency Savills Research predicted modular construction’s share of British new-build housing would double to 20 per cent by 2030.

Prince William and Kate were even photographed visiting modular houses built in Cambridge to tackle an affordable housing shortage.

But early last month, the industry’s aura of evolutionary inevitability hit a setback. Legal & General, which had positioned itself as the industry’s front-runner by setting up a big factory in the northern English town of Selby in 2016, had to shut up shop.

Having invested a reported £182 million ($348 million) and hired almost 500 people, the business had racked up cumulative losses put at £176 million – leaving L&G little choice but to withdraw and lick its wounds.

Mark Farmer, CEO of Cast Consultancy and a committed advocate of modular housing, admits the closure was a blow.

“A story like that, it makes waves and it will have affected people’s perceptions. There’s a lot of naysayers out there. They’re all sitting there rubbing their hands, saying ‘told you so’,” he said.

“What’s happened to L&G is probably a good reflection of the struggles that anyone has – whether it’s Legal & General or an SME startup – trying to change an industry that just hasn’t been changed for decades, if not hundreds of years.”

Savills’ Richard Valentine-Selsey said his agency’s forecast for the take-up of modern methods of construction (MMC) was now looking a bit optimistic.

“We will get to that sort of level, but it’s just going to take us longer to get there than we thought two to three years ago, because the sector hasn’t taken off as quickly as we thought,” he said.

Australia watching

Some pioneers are still ploughing ahead, most prominently the modular housing company TopHat. It has backing from Goldman Sachs, is building a second factory, and in April signed a deal with top-three British house-builder Persimmon.

TopHat managing director Andrew Shepherd says his company wants to grow incrementally – a contrast to L&G’s apparent willingness to dive in head-first.

And he says TopHat’s model is already attracting curiosity Down Under, where the challenge of building enough affordable housing is just as pressing as it is in Britain.

“It’s a nascent industry here, and I’d say it’s even more a nascent industry over in Australia,” he said.

“But there’s definitely keen interest in what can be done over here in the UK and the replicability of that back home for you. We’ve seen huge interest from Australian contractors and Australian manufacturers over the last few months, asking ‘what have you learnt?’.”

Cast Consultancy’s Farmer has just returned from a trip to Sydney, where he was looking at a NSW government modular construction project involving school buildings.

“As in the UK, I saw part of the market really hungry for change. But I also saw a mirror image of the UK’s behavioural issues, the resistance, the vested interests not wanting things changed. And that nervousness, just the nervousness about change.”

Psychological barrier

It might seem surprising that an industry with an ageing, expensive and short-handed workforce – particularly in trades such as bricklaying – might resist innovations that could drive huge efficiency gains.

The hesitancy is especially strange because modular housing can more easily accommodate the new green building regulations – covering areas like insulation, for example – that are only a couple of years away.

But as TopHat’s Shepherd tells it, these structural dynamics are being trumped by simple psychology.

“The people that are making the decisions on how to do construction on construction sites, they’ve got 30 years of muscle memory in doing things traditionally,” he said.

One of his biggest jobs is to walk the industry – “the mortgage market, insurers, contractors, developers, planners and build-to-rent investors” – into the modular “journey”.

“It is not going to happen overnight. It is steps. We’ve worked with customers delivering almost proof-of-concept, delivering smaller schemes to get them more comfortable.”

Persimmon’s investment in Shepherd’s company is primarily aimed, at least initially, at securing supplies of some of TopHat’s modular components, particularly its 3D-printed brick cladding, rather than buying full-scale, or “volumetric”, modular homes.

Farmer said this now looked like the best way forward. “I think the learning from L&G is that to do the whole thing in one go is a big step initially, it is high risk. You need to know your manufacturing, you need to have that demand there,” he said.

“Whereas if you have a more distributed, diversified offer with different types of manufacturing – pods and panels mixed up, giving more versatility to your customers – then you’re likely to have a more certain demand market. I can see the house builders going down that route over the next decade.”

Supply side

But if there’s a case on the supply side, what about demand? The question is whether consumers are equally as conservative as developers when it comes to factory-built housing.

“In the UK, if you go back to postwar, there are some relatively negative connotations around prefab building,” said Valentine-Selsey.

“That has left a public perception, completely incorrect, that the current system is delivering something that is inferior in some ways to the traditional bricks and mortar that everyone knows and loves.”

Shepherd suggested that younger buyers were more interested in the price and environmental sustainability of a house than its construction method.

Still, even if TopHat tees up the demand side as well as the supply, it would be just a drop in the sparsely filled bucket that is the British housing industry.

TopHat’s new factory will supply 4000 houses a year. Demand in Britain is more like 300,000 houses a year. A modular revolution would need a lot more companies with a lot more factories.

“We’re not trying to deliver the 200,000 houses that are already built every year. Those are already happening. It’s the next 50,000 that really suit the modern methods of construction,” Shepherd said.

It remains to be seen how quickly the idea will catch on. The Harrises’ new house in Kent will not be to everyone’s taste. But for the industry, that hour of Grand Designs fame remains a moment to savour.

“Whenever you see programs like the one Kevin did a few months ago, on Grand Designs, that’s a massive opportunity to show the public what is possible,” Farmer said.

Source: Financial Review

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