Katie Gilmartin.

Q64 The Chair: Good morning and welcome to this evidence session of the House of Lords Built Environment Committee, in which we are pursuing our inquiry into modern methods of construction. Our witness today is Katie Gilmartin, head of business development and innovation at Platform Housing Group. My name is Daniel Moylan and I chair the committee. I will not introduce other members of the committee now, but rather when they ask their question. In any event, you will see that they have a name plate in front of them so that you know who they are. Two of our members, Lady Thornhill and Lady Cohen of Pimlico, are joining us remotely today, and you can see them on screen.

These sessions are normally very interesting and have a tendency to overrun. Part of my job is to ensure that members and witnesses are fairly crisp in their answers. Unless we are being very dim, there is normally no need to repeat things because a full transcript will be available after the session, so your evidence will be on the record just by being said once—if I may say so. With that, we will start our questions.

Q65 Baroness Thornhill: Good morning, Katie, and a really warm welcome. We are particularly interested in your perspective, which is why you are on your own, so to speak, today. I have a rather broad question, so focus it how you wish. Do you actually want to deliver more MMC homes across your portfolio? If so, what is stopping you? If not, why not?

Katie Gilmartin: Good morning. What a question to start with. Thank you so much for having me. Platform is one of the largest housing associations in the country, with a really ambitious development programme. We have a target of 1,600 new homes, starting this year. That is our target for the next few years, ramping up to 2,000 new homes.

We take our responsibility in tackling the housing crisis very seriously. We see the housing crisis as being made up of two parts: first, the availability of homes, and, secondly, the quality of homes that are being built and that our customers are living in. Our priority across that programme is quality, first and foremost. It is about energy efficiency, building homes that our customers can afford to live in comfortably, and the resilience of that pipeline.

You have heard from other witnesses to this committee that there are challenges in the labour market in terms of the availability of labour to deliver traditional construction methodologies. We see MMC as a route to tackling all those issues. We see it as a route to tackling the labour shortage crisis; we have seen the shift of that labour into factories, and a diversification of that labour force in those companies.

We have also seen that, using MMC, we can deliver homes that are much more highly performing in that they are much more thermally efficient: we look at things like U-values—the ability of a home to retain the heat that is generated; we look at things like air tightness—not leaking heat. We have seen that some MMC manufacturers are much more able to reach the levels of performance that we are looking for via their construction methodologies in factories through those quality control settings. It is a really important part of delivering on those quality ambitions.

You asked whether we want to deliver more MMC homes across our portfolio. The answer is yes. We are not doing more—we will explore this more—broadly because of cost and financial limitations, which I know the committee has heard about from other witnesses.

Baroness Thornhill: The social housing regulator has spoken of the downgrading of the financial situation of housing associations, V2 becoming the new normal, and of over a dozen housing associations struggling financially. Do you fear that this will lead to more short-term thinking in the sector, which is probably ultimately to the detriment of MMC? I wanted your take on that specifically.

Katie Gilmartin: I am not familiar with regulation specifically. I am aware of the regulator’s comments that you refer to. We are seeing more down regulations on financial viability. We have also seen other RPs saying that they will take the hit on the V1 down to a V2 so that they can continue to deliver homes. We have also seen other housing associations opting to develop fewer homes, because they know that it will impact negatively on their financial viability.

As I am sure you will know, housing associations are under an enormous amount of pressure to address their existing assets in terms of retrofitting and remediation, so there are a lot of pressures. I would be careful to conflate moving away from developing with moving away from MMC directly. I would not say that, as a result of difficulties with sustaining financial viability, housing associations will move away from MMC. I think we will see a moving away from development more broadly, if that is a strategic decision that those housing associations have taken. From Platform’s perspective, it is not a choice that we have taken. We will continue to grow our development programme wherever we can, ensuring that financial resilience and MMC play a key part in that. We will not be moving away from it.

Baroness Thornhill: That is really helpful. Thank you.

Q66 Lord Berkeley: Welcome. What is the experience of your customers, the residents, not just living in MMC homes but the negotiations and cost of obtaining them? Are they comfortable and delivered on time? If the customers had a choice, would they prefer living in an MMC home or would they rather have a traditional one? What are the pros and cons?

Katie Gilmartin: Platform is at quite an early stage of MMC delivery, so we do not have extensive feedback from customers who are living in MMC homes. From previous experience in the industry, however, we have found that, by and large, customers will be most interested in the performance of the home. Mortgageability and insurability will be critical for people living in homes they have bought, of course. For our customers who are renting, paying either social rent or affordable rent, we find that the priority is affordability, being able to keep it warm.

Broadly speaking, provided that a home is insurable, that it has that warranty, if customers are buying it or are a shared owner and can get a mortgage, they are broadly agnostic about construction methodology. We have come quite a long way. I did some work on my first MMC project in 2017-18. Most people who responded to a YouGov survey that we did at the time pointed to a shipping container when they thought of a modular home. That has evolved hugely. Now, banks are much more on board and insurers are much more comfortable, so, broadly speaking, customers have gone on that journey as well.

Lord Berkeley: You mentioned insurance and mortgages. We have heard other evidence from people sort of questioning that and saying that it is more expensive for MMC. Is that your experience, or do you feel that obtaining a mortgage and/or insurance is competitive?

Katie Gilmartin: I am neither a mortgage expert nor an insurance expert, so I preface my response with that.

Lord Berkeley: I am talking about what the customers think. They must have told you.

Katie Gilmartin: We are not seeing retail mortgages costing any more based on the construction methodology. I could not comment on the insurance perspective.

The Chair: What do you mean by MMC? We have been given a table showing seven grades of MMC, and at the top of it is “volumetric modular”—the whole house arrives in a number of boxes, essentially. Further down the scale, there are things that are more like factory practices than major transformative change. We hear that housing associations—RPs—provide MMC homes, but we would like clarity on how much of that is at one end of the spectrum and how much of it is simply counting things that are listed at the bottom end or in the middle. We will not get a satisfactory answer today about the table, but what are you talking about?

Katie Gilmartin: I should probably have answered this question up front. When I refer to MMC, I am referring to what would be in Cast Consultancy and Homes England categories 1 and 2. Broadly, I am referencing a panellised or SIPs method of construction, or a fully volumetric construction. The vast majority of traditional construction now incorporates category 3 pre-manufactured roof trusses; they are currently on almost all our projects. For categories 6 and 7, we see the development of those processes on-site. So when I talk about MMC, I am talking about what you might call—stretching the definition of “modern”—non-traditional mass construction that largely happens in a factory.

Q67 Lord Best: You are hoping to build 1,600 homes a year. If you built 25% of those through MMC, that would be 400 homes a year. Will you achieve that? Is that realistic and in prospect? You would already have most of those lined up if it was going to happen.

Katie Gilmartin: Are you taking the 25% from the Homes England AHP?

Lord Best: Yes, your partnership with Homes England.

Katie Gilmartin: It might be worth me clarifying the affordable homes programme requirement relating to MMC. The 25% refers to all categories 1 to 7. Within that 25% we have a further stipulation, negotiated in our strategic partnership, that relates to categories 1 and 2 specifically. We are not looking at delivering that 25% of the 1,600 homes. It is worth noting that those 1,600 homes are not all funded directly by the affordable homes programme; some of them are funded outside it.

That said, due to the wider adoption of panellised methodologies by some of the plc housebuilders, we are seeing opportunities to deliver panellised timber frame construction on many more schemes than we would have been able to see historically. It is now becoming an option on a lot of projects. People are coming to us for traditional opportunities, and the housebuilder says, “We could put this timber frame through a factory”. The fact of the matter is that that costs more, so we cannot always take up that opportunity. This year, we have 250 homes that will meet the category 1 and 2 definitions. For next year, we have already identified over 400 homes that will meet them and which are in contract and ready to go, with the option to flex on some other pre-identified schemes where the housebuilder may put them through the factory.

Lord Best: So you do some of that anyway, even if it was not a requirement from Homes England.

Katie Gilmartin: Yes.

Q68 Lord Best: In your extremely helpful evidence, which was very well put together, you said that the extra cost could be 35% to 50% more in construction costs. That means that you are getting compensation in the way the grants from Homes England are structured to make that worth while and to make it possible to spend so much more. Is that how it is working out?

Katie Gilmartin: That is definitely the case for volumetric opportunities, for which we are seeing very significant cost uplifts. That is why the opportunities that Platform is pursuing currently are all entirely category 2. Category 2 is also easier to deliver via pre-existing partnerships, under contracts that we have had already; it is just a shift in construction methodology. Volumetric is an entirely different process from beginning to end, so the costs of volumetric for us in the way we appraise and look at the viability of an opportunity are not workable. However, that is the intent with Homes England’s affordable homes programme, and the grant uplift offsets some of those additional costs.

The Chair: What about category 2? Is it cheaper?

Katie Gilmartin: It is cheaper than volumetric, but it is still noticeably more expensive than traditional methods.

The Chair: So you are saying that it is more expensive to you, as somebody who commissions new housing, to commission a timber-framed, panellised structure, which to some extent is built in a factory, and to erect it on-site, than to use the methods we have been using since the 18th century of having builders hanging around in fields and so on?

Katie Gilmartin: It is more expensive.

The Chair: That is so out of line with anything that sounds plausible or realistic that it deserves a word of explanation.

Katie Gilmartin: I am probably not the best person to explain why it is more expensive.

The Chair: You are probably not, but I thought you might comment.

Katie Gilmartin: My reflection is that the product is not the same. As I said at the beginning, we are broadly using MMC where we want to deliver a more energy-efficient, higher-quality home for our customers. We are getting enhanced new values and improved air tightness. In some instances, we are seeing notable programme delivery efficiencies.

The Chair: The programme delivery efficiencies should come through to cost. What goes wrong with projects is due to cost and schedule, and schedule programme efficiencies come back to cost as well.

Katie Gilmartin: They come back to cost, but I am talking about exactly what we are paying for the actual fabric of the building, the home itself. That does not incorporate grounds works, prelims or any of the other costs associated with a project. Comparing apples with apples, a bricks-and-mortar home built out in the rain and wind with bricklayers—if you can get hold of one—will not reach the same air tightness and fabric performance as a building that is made in a factory.

The Chair: I understand that.

Lord Best: It costs more, but we are getting more for our money.

The Chair: That is the argument. I want to understand why it costs more. I will repeat what you said: a house built using traditional labour, including bricklayers in a field—if you can find a bricklayer. That is the real cost. If you can find a bricklayer, you are paying three times as much as you would have paid somebody else, because that is what happens to wages when you have a shortage of skilled labour. It makes no sense how this can be cheaper if you can find a bricklayer. If you cannot find a bricklayer, the cost is infinite, because you cannot build it.

Katie Gilmartin: We are seeing what you would see in the emergence of any industry that is full of start-ups. Customers are paying for the overheads for the start-up costs of these businesses, some of which have set up enormous factories.

The Chair: It is taxpayers, essentially, not customers.

Katie Gilmartin: Sorry, by “customers” I mean the RP that is buying them. We are paying for the start-up costs, because we are in the start-up phase of an industry. You may say that some of these businesses have been around for decades, but some of them have opened enormous factories recently and are making huge investment in technologies, and, as with any manufacturing industry, we are seeing them pass the cost of that to customers, who may be the mavens or the early adopters.

The role that the affordable homes programme has been playing to date is plugging that gap, and the argument that many manufacturers have made—you have probably heard it in this committee—is that once we reach critical mass, critical scale, once those order books are full and the factories are full, we will see that scale start to tip and those average costs per unit come down. However, they are depending on us to fill those order books now, so it is a matter of who is willing to pay the increased costs now to support that happening.

The Chair: That is usually what shareholders do in a capitalist society, but we seem to have drifted a long way from capitalism.

Lord Best: I take two things away from this. First, without the help of government and Homes England pushing you to do your 25% or whatever, we would never have done the amount we have done and, in the future, will not do as much as we should do. So that is an essential ingredient. Secondly, you are going to steer clear of category 1, basically, and others like you will probably feel the same way. Is that fair?

Katie Gilmartin: On your first point, I entirely agree. The role of Government and the Homes England MMC strategy affordable homes programme are fundamental in encouraging RPs to adopt and deliver more MMC. The other side of that, as I said previously, is that we are also delivering it outside of that programme. Because we are so focused on energy efficiency, that is a strategic driver for us. Could you remind me of your second point?

Lord Best: You will not go rushing into category 1.

Katie Gilmartin: We have not ruled it out. We do not have any category 1 locked into the programme because we have not found a viable opportunity. That is not to say we have not explored the opportunities. We are not averse to it; we are just struggling to make it work.

Q69 Lord Carrington of Fulham: I want to carry on from that last point. It has been touted that categories 1 and 2 MMC are the solution to providing 300,000 homes a year, as the Government’s target probably is. However, you are saying that none of it is there yet, and even with the factories starting to produce category 1 you would not be interested because the cost is still too high, effectively. That is what I understood you to say.

Could 300,000 be provided without MMC categories 1 and 2, because there is obviously a shortage of skilled labour? You mentioned brick layers, but plumbers are pretty hard to get too, and roofers are pretty scarce, as are drainage people, and getting connected to the water supply, and all the rest of it. Is this possible? When we talk of 300,000, are we in fantasy land unless somebody can produce affordable, cheap category 1 and 2 MMC?

Katie Gilmartin: You have highlighted how multifaceted the challenge is. One of the challenges is the availability of labour. I do not believe that we can deliver at the scale we need to be delivering at in the absence of categories 1 and 2. Category 1 is broadly more expensive, but the other challenge, and one of the main things I know this committee is exploring, is the fragility of that market. We look at two KPIs: how many homes that we have started on-site in any given year; and how many homes that we have completed.

The fragility particularly of the category 1 space at the moment means that we have probably had far more starting on-site over the last few years than have completed or that we will now see completed. The market is fragile and there are players who have sadly gone out of business. Their ability to deliver is narrowing, which is affecting risk perception and appetite in the client sectors. So we are certainly seeing a big shift. I know you have spoken to some traditional housebuilders moving towards category 2, because that is definitely the route to achieving that volume, but category 1 absolutely has a role to play as well.

Lord Carrington of Fulham: We have not written our report yet, so what we actually take from this is subject to the drafting of that report, but my take on it is that category 1 is a chicken and egg problem. They have gone out of business—they were probably undercapitalised to start with—because there was not the demand for the product, and there was not the demand for the product because the product was too expensive. So we are into this ridiculous situation where it is a product that everybody thought was going to solve the housing crisis, but it could never get past the initial hurdle of sufficient volume to bring the price down. Is that a reasonable summary of your reaction to this: that if category 1 was cheaper, you would use more of it?

Katie Gilmartin: Yes. That is a perfect encapsulation of the challenge that we are facing. I asked earlier whether we would have mavens or early adopters willing to pay that higher price so that we can achieve the economies of scale that any manufacturing industry requires to bring down the average cost per unit. Ultimately, most of those manufacturers’ clients will be housing associations. They are dealing with taxpayers’ money, and we have an obligation to spend and manage it responsibly and get value for money. That means that if we need to deliver 1,600 homes but we have a finite resource, we might be able to deliver more via category 2 that reaches close to the same energy efficiency and fabric performance.

Lord Carrington of Fulham: Thinking about the finance of that, if MMC category 1’s major market is going to be the affordable housing association/council housing market, which is the obvious one it will be used in in volume, the subsidy that has to go in either goes to the housing provider—the housing association, for instance—or goes to the factory to bring the price down. The choice the Government ought to be looking at is whether it is more effective to give the housing association more money so that it can afford to pay the initial premium on MMC category 1, or whether it would be better to give the subsidy to the factory—shareholder funds, effectively—to bring the price down so that housing associations could afford to buy it in their current budgets. Is that a reasonable assessment of where you think we are with this?

Katie Gilmartin: Yes, that is exactly where we are. Ultimately, the affordable homes programme has been really valuable in subsidising those additional costs. Obviously, every housing association will have a slightly different methodology for appraising an opportunity, and how viable it is will depend on geography and a multitude of factors. The additional grant has been really useful; Homes England has pointed to the success of the affordable homes programme in driving more MMC homes than they would have seen previously. However, there are still many factories that are really struggling. The fragility of that market, because of the difficulty it faces, is compounding the risk aversion that housing associations are grappling with: it may be affordable and there may be subsidy in play, wherever in the formula that subsidy falls, but is this manufacturer a going concern?

Lord Carrington of Fulham: I understand that. What I am trying to get at is that the issue with category 1 MMC is not the product; it is the price and the funding.

Katie Gilmartin: Yes, exactly.

Q70 Baroness Eaton: Good morning. You have very helpfully given us clarity about the hurdles, the difficulties and the need for value for money, and the last point about it not being the product but the cost of it was really valuable. There is one area that we have not touched on, and perhaps you could help us with it. Is the current approach to project management and construction contracts in the housebuilding sector conducive to the delivery of MMC? If not, what would need to alter for it to be so?

Katie Gilmartin: I should preface my answer by saying that I am not a construction professional—luckily for me, I spend most of my time indoors. However, housing associations have been developing for decades and many will have a cookie-cutter approach to the contracts that they use and adopt, ordinarily a JCT design-and-build contract with a single contractor. Most of the project managers I work with will be able to tell you the programme delivery timings of a project just by knowing how many units there are and where it is.

We are not set up now with contracts ready to go on projects, but that is not to say that it is not work that we are willing to undertake. There are additional risks that we would want to address in those contracting mechanisms. I made a point earlier about market fragility. There are instances of projects that big volumetric players were delivering that are now half-delivered. You cannot finish a volumetric modular project in any other construction methodology—you cannot complete that home with a timber frame, a steel frame or traditional construction—so there is an exposure there and we need to think about how we manage it.

The payments are also slightly different and, as you would expect with anything manufactured in a factory, you are looking at making quite hefty deposits for those materials and then making stage payments. Ordinarily, you would be able to see the home coming out of the ground, out of the mud, on-site. There are very clear rules about how many bricks you get up and when you make a payment and so on. When it is in a factory, you do not have ownership of it because it is not on your site, so it is quite difficult to manage. Colleagues have been exploring how to manage payment risks with manufacturers that are slightly less financially robust or resilient than contractors that we are used to working with.

I do not see it as a barrier, I see it as a challenge, and we need to put our heads together. There are many examples of this being done successfully. I often reference the fact that the methods of construction have been modernised. There are many wonderful manufacturers across the country, regardless of which category they are in, but we need to modernise some of the other ways of working around that as clients, including contracts, management of payments and project management.

Baroness Eaton: Thank you. That was helpful. So it is clearly part of the challenge. Would that not have an effect on the cost?

Katie Gilmartin: It would not, strictly speaking, have an effect on the cost. It probably depends on your board, to be honest. We are lucky in that we have a pragmatic board. We have had opportunities like this where we have explored what those payment mechanisms and protections might look like and how we will mitigate the risk of that market fragility as far as possible. Again, this is entirely on a client-by-client and housing association-by-housing association basis.

Also, many housing associations will have an in-house delivery function: that is, they have those on-site professionals in the business already. A lot of them will have in-house professional services expertise. Ordinarily, we build the best team of professional services that we can identify on a project-by-project basis, so really it depends on the RP.

Q71 Lord Faulkner of Worcester: At the beginning, you talked about the perception of people who live in MMC homes. Do you find that people in MMC homes talk to people who are in non-MMC homes? If so, is there a contrast and compare process going on between the two of them?

Katie Gilmartin: We plan to do some qualitative and quantitative data-gathering research for a project that we are delivering right now in Lincolnshire. One project that we are delivering is category 2, but it has slight variations. You have probably heard the terms “open panel” and “closed panel” and the amount of work undertaken on each in the factory. The plan is to have an extensive research project to answer some of those exact questions, but we do not have it currently.

Q72 Earl Russell: On the chicken-and-egg issue that seems to be at the heart of this and which Lord Carrington asked about earlier, if you were in charge of housing policy, what would you do to overcome the bottleneck? Is it more government subsidy? What do you feel the answer is?

Katie Gilmartin: It is certainly subsidy. The grant funding via the affordable homes programme has been incredibly valuable. There is also something to be said for how we manage the risk of exposure that we as a client face if we are partnering with a start-up or a manufacturer with a slightly less robust financial performance. We do a lot of due diligence. We have a pretty high threshold when it comes to who we will work with, which can mean that there are a few manufacturers that we would not engage with. As I said earlier, there are incomplete projects following some players going under. When it comes to risk management, we would want to understand what the back-up plan is and how government can support us in identifying routes for completing those projects.

Q73 Earl Russell: Finally, on net zero, you have argued strongly in front of the committee today that the product is a better product and that its U-values are much greater. Should the Government be using that as an argument for putting more subsidy into category 1?

Katie Gilmartin: My personal view is that the largest benefit of MMC is enhanced performance, and that we need to focus much more on the performance of the new homes that we are building; otherwise, we are just saving up for a very similar future housing crisis.

Earl Russell: More energy costs for the owner of the home.

Katie Gilmartin: Yes, exactly. Fifty per cent of the homes that we build are for social or affordable rent, and people living in those homes are most at risk from the climate crisis and the cost of energy crisis. We need to be cognisant of this. When I talk about a home being affordable to live in, I do not just mean the rent; I mean the cost to heat it—

Earl Russell: The cost to heat it for a lifetime.

Katie Gilmartin: —yes, and the overall well-being of the person who is living in that home. Many manufacturers have anticipated and even pre-empted the future homes standard, which is due in 2025, so their product already meets or exceeds current building regulations and meets what we anticipate they will be in 2025. If we get a delay in that or there is a lag in the regulation requirement to improve energy efficiency, we again run the risk that they can be undercut by the rest of the market. We really need to focus on the energy efficiency and the benefits that the products bring.

Q74 Baroness Cohen of Pimlico: I have a short point arising from all this. MMC is more expensive. People buying or renting houses tend to look at the immediate costs, so you have to get those down somehow. I wondered whether that was the answer: that unless and until we can get the MMC costs down, it will not flourish.

The Chair: That is almost certainly true, is it not?

Katie Gilmartin: A point to make about the people buying the houses is that valuers currently do not give an uplift on the value of a home depending on the way it was built or its energy performance. There is currently no RICS guidance on whether a home that is EPC A-rated or net zero or has zero-bill accreditation is worth X amount more. So when you are looking at the formula, it will cost more to build, but you cannot sell it for any more on the open market, because the valuation—

Baroness Cohen of Pimlico: That is a very important point.

The Chair: Lord Berkeley. Just two seconds.

Q75 Lord Berkeley: I want to follow up on your answers to Lady Eaton about the contractual arrangements. When you are letting a contract—

The Chair: That does not sound like a two-second question.

Lord Berkeley: I have to put the question first, chair. Can you let two separate contracts—one for the foundations, if you can call them that, and one for the MMC—or is one a main contractor and the other a subcontractor, and what is the best way of avoiding such failures?

Katie Gilmartin: We would always prefer to have one contract so that there is one point of responsibility. That is probably where some of the challenges come, but I am not best place to talk about that, and the chair is looking at me, so I know that time is running out for this session.

Q76 Lord Best: Do you think that Platform, your housing association, is typical, or are you in the top 5% of the sector in the volume you are achieving, your own attitudes and the progress you are making?

Katie Gilmartin: We are in the top 10 of housing association housebuilders, but do not quote me on that; you would have to reference Inside Housing’s very good biggest builders survey. We certainly have one of the largest appetites in terms of delivery, and we are one of the largest RPs. I could not say what is typical about our set-up; many have in-house contractors and in-house legal teams. But our numbers are up there—we are definitely one of the most ambitious developers.

Lord Best: But you are not alone.

Katie Gilmartin: We are not alone, no.

The Chair: This is the end of what has been a very useful session. Thank you very much for your time and for the crispness of your replies.