18
Examination of witnesses
Lee Rowley, David Bridges and Edward Jezeph.
Q90 The Chair: Good morning and welcome to this meeting of the House of Lords Built Environment Committee. This is our final evidence session related to our inquiry into modern methods of construction. Our witnesses today are Lee Rowley MP, Minister for Housing, David Bridges, Chief Investment Officer at Homes England, and Edward Jezeph, Senior Manager at Homes England.
My name is Daniel Moylan and I chair the committee. I am not intending to introduce each member of the committee at this stage. We will do that when they ask their questions, but they have nameplates in front of them, so that you know who is here in the room. Could I ask members and witnesses to keep their questions and answers fairly brief, so that we can get through the material that we want to cover fairly efficiently? Having regard in particular to the fact that the Minister has other demands on his time today, we will want to try to dispose of things fairly efficiently, as I say.
On this occasion I will ask the first question, and it is really a plea for help. We embarked on this inquiry knowing that, as long as 10 years ago, everyone was saying that modern methods of construction were the way forward. They were going to be more efficient, that they would produce homes more cheaply, and that they would address the already apparent structural difficulties in the labour force, with an ageing labour force—something that has been brought into acute focus as a result of Brexit, with the vanishing of the Polish plumber and all those things that kept the industry going.
It was bound to take off, and market forces should dictate that, because industry should be driven by those circumstances. Yet we find that major investors are withdrawing, like L&G, one or two major firms have gone into administration, and the idea of full-scale, volumetric modular construction appears to be in retreat. We wanted to try to understand that, and I am not sure that we really do, even at this stage in our inquiry.
So the question for the Minister, and indeed for his companions from Homes England, is this. When the Government backed this idea, what were the Government hoping to achieve? Do you feel that you have achieved it? If not, why we are still seeing the great majority of homes in this country being built using techniques that would have been perfectly recognisable in the 18th century, if not earlier?
Lee Rowley MP: An easy question to start with. Thank you. It is good to see you all, and thank you for inviting me here today. I should preface my remarks by saying that I have been in post for three and a half weeks, so I will defer extensively to the experts of my left and right. It would be helpful for them to come in on this in a moment.
I was not in post when the aspirations were set to look at MMC and, when it was codified into the manifesto commitment, to support MMC in the 2019 election, which we won. As I understand it from talking with colleagues and officials in the department, the intention was to broaden out the range of methods by which we could build properties; to ensure that we were building better properties, given that we all know that we have a challenge with quality in certain parts of the sector; and, hopefully, to get the kinds of cost efficiencies that the chair referred to in the opening question.
Has that been achieved? Not yet, and I say that as an amateur rather than an expert. There is a process. We are clearly in a work-in-progress phase, and that process has not been the smoothest with, as you indicated, the removal of some people from the market. That is not unexpected in a process where capitalism should support, primarily, most of what has been done.
What are the reasons for that? First, it is partly due to economic circumstances. We have been through relatively changeable economic circumstances, particularly through Covid. Covid cannot be blamed for everything, but it has had an impact here. Secondly, there are a set of deeper questions that we need to answer—I am very keen to see the outputs of your discussion—which are about how we make this work and how we make it wash its face in the long term. As you indicate, this should be a virtuous circle, and it has not got there yet. So part of what I will do while I am in post is to try to impact that from a ministerial perspective. Colleagues who have been in post for much longer than I have, and certainly for longer than four weeks, will be able to give you a much better answer.
David Bridges: Shall I give let us call it a market context, and then add Edward in to talk about the real specifics of the sector? There has been an awful lot of positive progress in the sector. It is really easy to have your attention pointed to the challenges and the failures in the sector, but let us also celebrate the successes.
As the Minister pointed out, if you go back 10 years and think about what we have been through, particularly in the most recent past, contractors who have had years to build resilience have sadly gone under during this period. These are businesses with very high fixed costs that did not have time to build resilience or to build the output and demand chain that they needed to, and that faced into the Covid hiatus and the level of housing demand. Over the last year and a half, that has been particularly pronounced. Borrowing costs are going through the roof. There is massive build cost inflation, which again flows through to them. There are material and labour shortages and planning delays.
The Chair: All of that is true. We understand that it has been a very difficult market in the last year, but all these factors affect traditional housebuilders as well.
David Bridges: Yes, but they have had that chance to build the resilience on their balance sheet and on their P&L which these businesses may not have. But, as I say, there is an awful lot of positivity that one can refer to, which Edward might like to pick up on.
Edward Jezeph: Absolutely.
Q91 The Chair: Could you put this in the context of the Government’s 5S strategy? It is an advance on most government strategies, because it has five elements as opposed to three: scaling up, standardisation, safety and assurance, soft levers, and stimulating the market.
Edward Jezeph: Broadly, MMC is already a commercial success in other sectors. Modular is frequently used in hotel deliveries and student accommodation, so we see it as a commercial success in many areas. We are really talking about the residential sector, where we are also seeing successes in the private rented sector. You have spoken with Vision Modular Systems. Its towers in Croydon are a good example of the commercial success of private industry doing this on its own with private capital and making a success of it. Recently, we have seen a wave of growth in the low-rise single-family housing market, which is a new model of delivery for modular. It has been a challenge to make that a commercial success during the period of economic disruption with Covid and the commercial challenges.
To talk to the strategy, the scaling up is about supporting the growth of the sector in using the resources of Homes England, predominantly our affordable housing programme, to encourage the growth in MMC delivery, broadly across all seven categories but specifically in the modular and panelised cat 1 or cat 2 context. Standardisation, safety and the Government’s soft levers are important elements for addressing the barriers. That is alongside stimulation, which is our selective investment in manufacturing capacity. It is a supply and demand, a push and a pull, of the sector, filling those factories with orders but also supporting them with their capacity and capability to deliver those homes.
Q92 The Chair: How are you measuring this success?
Edward Jezeph: Looking at the policy benefits of MMC—the productivity, safety, quality, speed of delivery and energy efficiency—we see this borne out in many of the examples that have already been delivered in other sectors of the economy, but also, most recently, with some of the modular manufacturers: indeed, some of the ones that have been challenged. L&G Modular Homes, for example, delivered EPC A homes as standard, built from cross-laminated timber.
The Chair: You are telling me why it is a good idea to build modularly. That is not in dispute. My question is about rollout and actual delivery. How are you measuring it? I ask this, because you have seven levels of modular construction. Most people, I think, see a very big difference even between 1, which is volumetric, and 2, which is panelised. We went to a construction site; it was very impressive, and we are grateful for those who entertained us that day, but they were all saying that this is more expensive than traditional housing methods. This leaves us completely baffled.
So my question is what you count as modular, given that you have such a broad range, 1 to 7, and how you measure your success, particularly in the residential market. We appreciate what you have said about the commercial sector and student housing. I think we understand that.
Edward Jezeph: The site you visited, Spencer’s Park, is one of Homes England’s sites. It is part of our research project, led by Atkins, UCL and BRE. That is looking at eight sites, about 1,500 homes, with 15 KPIs for the performance and delivery of those schemes. There is a mix of modular and panelised solutions alongside traditional. That is looking at the benefits that those schemes deliver so that we can see whether those benefits are borne out in reality and whether they are consistently borne out. That will be a long-term project. It will take six years to deliver, but that will give us an evidence base where we can measure those benefits materially.
To your point about strategy, looking at the proportion of the output of our programmes, our land, our affordable housing programme and our levelling-up homebuilding fund, that will be the measure of successful delivery of those programmes, and the evidence base will be through that land research.
Lee Rowley MP: The immediate evaluation metric is the percentages that are in the affordable homes programme until 2026. That, I think, is the specific deliverable which the Government have put into the public domain and which they need to hit, even with all the challenges from the economic circumstances. I am not outsourcing policy to you, but I would welcome your views on how, over the next few years, we fit a frame around that that is broader than those specific KPIs.
Forgive me if I am referring to the wrong thing, but your point about this making economic sense in this part of the sector is absolutely right. It has to make economic sense over time. I come from a particular part of the party and a particular part of politics. I can make a case for subsidy for a period of time, and I think we should do that, on the basis that this looks like it will broaden the range of things that we are able to build.
I can also make a case that there is a natural limit to traditional build methods, which we were perhaps getting towards in the last few years when we were at the highest number for 30-odd years. We do not know where exactly that is and how you change it, but if you want to move to the next incremental level to get close to the 300,000 or wherever, you will need to bring in some other stuff. I can see a strong case on both, but there has to be a frame around this that says that, ultimately, if we will subsidise it for a period of years, eventually that subsidy runs off, or we are clear that it never will and then we can take political decisions around it. In your report, I would welcome, from your experience, your judgment on what that frame should be.
Q93 The Chair: Thank you for that. We will pick that up and perhaps talk to officials and to Homes England about that. There is one final question from me for Homes England. In your annual report you refer to a new MMC strategy. What is this and when do you think you will publish it?
Edward Jezeph: The MMC strategy has existed in various forms since 2021. Before 2021, Homes England and the department had their own separate MMC strategies, which looked very similar. They came together in 2021 as our first strategy together. It has progressed from that time and there are now multiple documents that form the strategy as we continue to update that strategy, responding to the various policy developments and the market context.
At the moment, we are not planning to publish that report, because it is multiple documents. It was not a strategy that was intended to be published in its current form. We talk publicly about the MMC strategy. That is why it was in our annual report. In our written response we have laid out those five Ss of that strategy, which is the body of the content of that strategy.
The Chair: But we are not allowed to see it.
Edward Jezeph: It is multiple documents. It is not a single thing. It is a strategy that has continued to be updated. It is a living document that responds to the emerging market conditions.
The Chair: We are quick readers.
Lee Rowley MP: I think it is reasonable of the committee to say that the Government should have a clear statement of their intent.
The Chair: We found it difficult to find clear statement of intent. We were looking for that, because we could hold you to it, if you see what I mean.
Lee Rowley MP: I will certainly take that away over the coming months and see whether we can provide that for the next time the committee looks at that.
Q94 Lord Best: You have invested quite a lot in MMC and lost quite a lot of money. I could not find the figures as to how much you have invested and how much you have lost, but we are into some quite big millions of losses. What lessons have been learned from these failures? What are you going to do differently in the future? Ilke is obviously the big case study. I think you lost £60 million in your investments there. What are you going to do differently next time that will avoid that?
I will throw out a couple of suggestions that other people have made to help you start on this. One is to avoid category 1, which is possibly the best form of MMC but the most difficult to pull off, it seems. Another is to avoid companies that are doing the development as well as the manufacture, actually buying sites and developing them themselves. There may be other things. Have you learned lessons from these really quite substantial losses?
David Bridges: I will answer your question, but, to give a bit of context, those sit in a couple of funds. Homes England’s objective is to intervene where there is a market failure and to try to go where private investment will not, but also to catalyse private sector investment. If you look at the numbers on those, there were a lot of others that were in around us.
Your numbers are absolutely right on Ilke. We loaned £30 million in the first tranche and another £30 million following. The total number that we fully provided for is something like £68 million, including rolled-up interest, so it is a significant loss and not something that we are happy with, certainly in terms of the impact on the sector and the individuals. The Urban Splash[1] investment was something like £27 million loaned by us and a £3 million equity investment. We did not recover the £3 million equity investment. We were able to recover the £27 million that we loaned, so the loss on that one was very minimal.
In the context of the overall funds, we have been set an objective of recovering at least 70% in the worst market conditions in the short-term fund, which is what we loaned out of for Urban Splash, and at least 75% in the long-term fund, which is what we loaned and invested out of in Ilke. We are well above those numbers. Just to give some context, those funds are delivering very strongly. They are delivering more outcomes than were originally envisaged, which is a very positive story.
Lord Best: You did not mention L&G.
David Bridges: No, we have not invested in L&G. We had no exposure.
Lord Best: It went its own way and lost its own money.
David Bridges: We had conversations with L&G, but we chose not to and were not able to invest in that case.
You will have seen that we recently announced a £15 million loan to TopHat, which is a category 1 volumetric manufacturer. We have a number of things on the blocks at the moment. We are working with larger players to drive them down the MMC route so that they create some of that pull‑through and the demand for the wider sector.
In terms of lessons learned, I will refer you to Edward at some point. It is interesting, is it not? As I say, our objective is to intervene where the market will not, where we think there is a justifiable objective to be achieved. In some ways, not investing in category 1 feels like stepping back. As you said, it is the thing that can probably deliver the greatest benefit. It is something that we understand and need to bear in mind.
One lesson that is referred to in a lot of our feedback on those two investments is to invest in something later in its gestation period. Again, that feels slightly counterintuitive in terms of the role that we are seeking to play. We are broadly in that space. Edward and I probably get approached twice a month by nascent MMC manufacturers. In most instances, we say, “You need to reach the point at which we feel comfortable in investing public money there”.
A lot of our due diligence processes and so on was actually very good, but we continue to learn from that. We use very strong professional advisers, such as PwC, EY and BDO, to get involved. This was not something where we relied wholly on our judgments.
One lesson would be that the combination of equity and debt that we had with Urban Splash was probably challenging. Let us try to stick to the one lever so we have that clarity of focus. Those are a few of my pieces. Edward, is there anything that you would add to that?
Edward Jezeph: You commented on avoiding cat 1. Looking at the policy benefits of cat 1, that is where some of the big impact is in policy terms. In terms of where the market is already operating, the other categories of MMC, like bathroom pods in category 5, are already a great commercial success. It does not need government support. Category 2 is a very stable, mature market. Most of the companies there are 30 years old, but they are doing rather basic cat 2 rather than more advanced closed panel with factory enhancements, with insulation and windows installed.
So Cat 2 is about maturity and bringing the sector, in its advancements, along that journey. Cat 1 is already a commercial success in other sectors of the market, and we are trying to see it become a success in that residential space, also recognising that, having created the demand side of the strategy in the affordable housing programme, we needed the capacity there to deliver that demand from that affordable housing programme.
The other question you commented on was the integration of manufacturing and developing. That is quite interesting, because manufacturers like Ilke and L&G came to become vertically integrated developers as a later strategy. Ilke bought a team out of a housebuilder to secure land and become a land-led developer because of the challenges of securing customers and the pipeline at the scale it needed for the ambition of that business.
Likewise for L&G, it also started directly acquiring land. That was not where it started as a business; it is where it came to as it went through that business journey of trying to get the scale of orders it needed to support the manufacturing scale it was looking to achieve, recognising that it had to become its own customer and demonstrate its product and delivery capability. That would bring comfort to the wider marketplace to start ordering.
David Bridges: The due diligence on the pipeline is fundamental. How robust is that? Is it too concentrated? That could be a critique of a couple of those situations. Really understanding that pipeline is fundamental to the DD process.
Q95 Lord Faulkner of Worcester: What is the split between grants and loans when you are investing in these companies? You presumably never expect to see a grant back, but do you hope to be repaid loans?
David Bridges: Yes, we do. As I say, there is a minimum baseline of that 70% or 75%, but we are actually delivering over 90%. If we get a criticism, oftentimes it is that potentially we are a bit too risk averse in the round. We do not provide grant directly to these organisations. We provide grant to the registered providers that are creating the pull-through.
Lord Faulkner of Worcester: Can you explain that a bit?
David Bridges: We provide a housing association grant to deliver affordable homes. Within the confines of our current affordable homes programme, the 2021 to 2016 programme, we have two categories of suppliers we talk to. One is what we call the strategic partners, and we have a large framework agreement with them to deliver significant numbers. Our specification there is that 25% of their delivery would be through modern methods of construction. Then we have what we call continuous market engagement.
Chair: Can you specify which category in the categories 1 to 7?
Edward Jezeph: The affordable housing programme—both the CME, or continuous market engagement, side and the strategic partnership side— supports all seven categories of MMC. The strategic partnership side is where the partners at housing associations bid into that programme.
That bidding process has a scoring system effectively to get the best value for the taxpayers’ money. In that scoring system, we said that all seven categories of MMC are good. However, we created what was described as band 1, which was category 1 modular, category 2 panelised or pre-manufactured value of 55%. That was to encourage other types of innovation that did not fit neatly into category 1 or 2 typologies. That brought the focus of the programme to where we believe the support was needed and delivering those policy outcomes.
Q96 Lord Carrington of Fulham: Carrying on with what we have been discussing, the problems in how you make this industry financially viable, we have had evidence from both sides—from manufacturers and housing associations—that probably best categorise it as a chicken and egg problem. You have a product that is capital intensive at its start and very expensive to get running, and you have people trying to buy that product with money allocated to them by grants from you, by other statutory bodies and by other systems that housing associations are funded by, which are myriad, but they are constrained as to how much they can pay.
The manufacturers do not have the volume to get the price down, so they cannot produce at the price that the housing associations can afford. Indeed, one housing association said to us that it was cheaper for it to build in an 18th century manor than it was to buy certainly category 1—it also said category 2—product.
There is clearly a problem here, which, as I understand it, you have tried to solve by funding the manufacturers, which then go bust on you. I am talking really as a banker. If I was lending money to this, I would not have touched it with a bargepole. You have to find a way of getting through this. The purchasers cannot do it. The manufacturers cannot do it. The way you are funding it at the moment is just losing money.
Do you have a solution to this chicken and egg problem? Do you have a way to get the manufacturers up to volume in order to get the unit price down, given the initial capital cost, or do you find a way to get the housing associations to justify paying over the odds for houses in the short term, with the anticipation that, in the long term, they will get cheaper housing but not now—in other words, not in the electoral cycle that we are looking at? Somebody will write a wonderful newspaper article saying, “Housing associations are paying well over the odds for luxury housing when they ought to be paying two-thirds as much to have them built in the traditional manner”. How do you solve this problem?
Lee Rowley MP: The description that you are giving is roughly where the policy is at the moment. Where it is financially viable and there is a business case, support will be given to those to grow the market and to grow the supply. As has been indicated, there are a lot of rejections through that, but, ultimately, where there is a case to do that, we have done that and we are doing that.
Covid and the unexpectedly turbulent economic times of the last 18 months to two years have either moved some of those business cases to the right or have blown some of those business cases. In the broader context of Homes England—I am not suggesting that you are saying this—we have to decide conceptually and philosophically whether we want an arm of the state to be in this area. If we do, we set it thresholds. Some of that stuff will work and some of it is not. That is the risk calculus that we make.
It is reasonable for the state to be in this area, so we are trying to do that and trying to stimulate demand with effective subsidy through the housing associations in the short term. That cannot continue for ever. We are saying that, over a longer period than the political cycle, that makes sense in order to get to a better place in time. I came back to the frame, as asked by the Chair, because we will need to fit an overall view of it across that for the 2020s to see where we get to.
It is difficult to prove the counterfactual, but I wonder what this conversation would have looked like if the turbulence of the last 36 months had not occurred. We would probably be in a different place. I have no evidence to prove this, but we probably would not have big-scale failures and we might be able to see an incremental move in that direction. Again, it is difficult; you cannot remove that variable from the discussion, in the way that you often cannot, but that is where I would go and where we need to get back to.
Q97 Lord Greenhalgh: This question is driven by your comment about the seven categories that form the Government’s view of how you segment modern methods of construction. Minister, it is quite hard to see how you pick winners in something that is very complicated and nascent. It is quite hard to imagine you being great investors when there are so many opportunities to fail.
This is a loaded question. Surely we should focus much more on the ideological—sorry, not ideological; we are not very ideological on this committee, because we are all-party—we should focus much more on the regulatory barriers, because markets move very differently, not just in the office market, where a lot of modular and modern methods are used, but in residential. I do not even know whether you are Minister for Social Housing, because it is normally balkanised in the department and there is a Minister for this, a Minister for leasehold and a Minister for housing.
Frankly, I never understood, in my time in local government over 16 years, my time in City Hall over four years and my time as a Minister for two and a half years, why we have different regulations for people who live under the same roof. Ultimately, we want quality homes, and yet the regulations are so different that a Berkeley that wants to take a market-led approach cannot make it work. What are we doing about improving regulations? Where is the drive to simplify them? Where is the energy?
Lee Rowley MP: Your first point is a perfectly reasonable point. The question that the Government of the day have to ask is whether we are in this place at all and whether we are picking winners in any way, shape or form. That is effectively, in part, what a subsidy via Homes England does; it is choosing, via a set of thresholds and conditions that we are subsidising, whether it is MMC or anything else that Homes England is doing.
We could pull out of that. It is a perfectly reasonable ideological position to have. It will have consequence, as you know. That is clearly not where the Government are. Lots of these decisions have been taken. The affordable housing programme is 2021 to 2026, so we are now getting towards the latter part of the programme. A lot of the decisions that flow from it to do with the number of houses built and type of houses that they are, have already been taken. It is perfectly reasonable, but I do not think that is the Government’s approach. In terms of regulation, I am very happy to look at all that.
Lord Greenhalgh: You accept that construction is a process to build something. You talked about the pull-through from Homes England, which is essential to build out places. The role of Homes England is incredibly important. I am not disputing that you pick the parts of the country where you can maximise development value and that you are a bank so you can do all this. I am not knocking that. I am just asking, “Why back the process?” The state will always have a role. It just seems the wrong way to put the cash.
Lee Rowley MP: You cannot fully differentiate the two, right? The state is involved in between 10% and 20% of all housebuilding in this country. If the state has skin in the game but then removes itself from 10% to 20% of housebuilding in this country, the state has—
Lord Greenhalgh: Hang on a minute. It pays. At the end of the day, the state is paying for someone to build in 10% to 20% of the cases. That is what it is really doing. It is not really about whether the state itself is doing it.
Lee Rowley MP: I think we come from a similar ideological position on some of this stuff, conceptually. My point is that you are either in or you are out. If you are in, it is legitimate to have a view and to ask, “How do you shape?” You have to be careful, proportionate and reasonable on that. I probably would not want to go as far as some people on this committee or outside of this room, but there is a shaping element. If you are going to get to a place where you run out of the ability to put bricks in the ground, because there is a natural capacity limit to that at some point, but you still need to build more houses—in the right places—you have to look at other ways to deliver that in the long term.
Q98 Baroness Thornhill: Given that you have answered the official question in various other ways, I will segue from that tangentially into the relationship with RSLs. I agree with you, Mr Bridges, that we have heard lots of positive things. With the great need for more social and affordable homes, it is generally understood, cross-party, that we have to build more at scale and volume, and quickly. I saw this as a good way of getting some of these homes on the ground for the most vulnerable and needy.
If you believe that and feel that, what is actually going on in the RSL sector? Do you count this as a success? Are they chomping at the bit? Is it easy for them to bid? Are there sites available? Can you give us an assessment of that from the RSL perspective? In other words, what are the barriers? We have heard about the financial capacity. What is stopping this being the win-win situation that we would all want to see?
David Bridges: To some extent, I will say that there is an element of win‑win that is being proven in the numbers. As I said, we have set that 25% for the strategic partners. Although it is very early, it is late in the programme in some ways. This is people bidding for funding and then you have to build out, so delivery will be until 2029. Early indications are that we are seeing people going above that 25% number. That is a positive that they are seeing the advantages.
The challenges in the sector are well rehearsed. We have all the stuff around interest rates. We have the capital costs of coping with decency, decarbonisation and fire safety. We have the impact of rent settlements and so on. The general mood music in the sector is that a significant number of housing associations are saying, “We need to focus on our standing stock and not move into development at this point or stretch ourselves on development”. Our role is to try to nudge people on the right side of that line so that they will deliver. We still have a huge level of engagement from the RPs with their desire to move forward so long as the financials work. To the earlier question on the grant side of things, blended grant should be able to cover that split between traditional construction and modern methods of construction. It should work from that perspective.
There is so much that one can say on this. I do not sit here being fantastically pleased that we had those losses, but put them in context. Urban Splash was 1.35% of the spend in that fund. Ilke was 3.5% of the spend in the long-term fund that it came from. The vast majority of our supply-side stimulation is for more traditional housebuilders and more traditional delivery partners. That is working very well.
To the Minister’s point, there are policy pieces that I will definitely turn to the Minister on. Our piece is to manage within the constraints and the swim lanes that have been set for us. We are getting some very positive results. I saw posted on LinkedIn a couple of weeks ago that a company, ModPods, is moving into a 350,000 square foot facility. Interestingly, it has built very much on a stepwise basis. TopHat, which we are dealing with, again has built very much on a stepwise basis. It is moving from a relatively confined factory set-up to a much larger factory set-up in Corby, Northamptonshire.
As I say, there are lots of successes in the sector. My number one piece is that early indications, and they are early indications, are that people are going above that 25% number, which says that they see the benefit in speed of delivery and so forth.
Edward Jezeph: Looking at the market conditions, there is a challenge in the risk perception and board decision-making in RSLs going, “What allocation are we going to put towards MMC? What type of MMC do we want to deliver? How does it fit within our existing supply chain and contracting relationships?” Having seen some recent failures in the marketplace, that creates a great deal of nervousness.
That is where Homes England plays an important role bringing confidence to the sector, because we are not changing direction or giving up on the category 1. We see the benefits, and we believe that it is a commercial success because we see it in other sectors of the economy. Therefore, we want to keep supporting our partners, but we are not unaware of those challenges. On the cost challenges, you need to value the benefits. If a home is delivered more quickly, is an EPC A, is more sustainable and has lower bills, you need to factor that into your financial assessment. That requires a broader decision-making matrix.
Baroness Thornhill: I want to push you a little more. We heard from TopHat that there are a lot of myths about MMC. How much does that factor into an RSL board that is sitting and making decisions if it is hearing, “It’s this and you can’t get insurance. These are the building regs”? How much do you see your role as trying to myth bust for the RSLs about MMC and take a proactive role in saying, “It’s not this” and putting that more positive story out there?
David Bridges: Edward referred to the MMC research commission that we have done at a number of sites and a number of deliveries. That is partly to get the evidence base. I mentioned one joint venture that I have been involved in setting up. We are not ready to go to market yet, but I hope we will be soon. One key area that we have asked them to focus on is getting the evidence base.
For information, my background is that I ran a mid-size housebuilder until January of last year. I have always had the viewpoint that one big challenge here is that you have this mispricing of the subcontract trades, which have a lack of knowledge of the fully integrated costs of running with modern methods of construction. I worked in an organisation where we used a complete replacement for the classic brick and block, large-scale blocks that were much quicker to fit. The speed of installing versus a classic brick outer was hugely reduced, and yet people were pricing it more heavily because it was the fear of the unknown. Your point is really well made; we have to give people and the Government as much help as we can in the form of evidence to take that fear of the unknown away.
Lee Rowley MP: To come back to the point we were talking about a few minutes ago, it is one reason why I think it is proportionate for the Government and Homes England to be involved for a reasonable period. My first visit as Housing Minister, when I was in the role the first time, was to a site in Milton Keynes. I cannot remember the exact percentage, but I looked at MMC. The site it was on was primarily non-MMC, but by doing that repeatedly and regularly you give familiarity to geographies, to customers and to the system as a whole to make sure it is clear that these properties are just as nice, useful and efficacious as any other. That process needs to be gone through.
The Chair: Could I ask the witnesses to focus on the question of what in practice you think can be done to make this a success, on the assumption that you want it to be a success? We understand market context. All this is being transcribed, so, as I usually say to our witnesses, unless we are being particularly dim, it should not be necessary to repeat anything.
Q99 Baroness Cohen of Pimlico: This has been a very interesting meeting so far. We have heard that making energy efficiency and net-zero requirements more stringent for new homes would incentivise greater use of MMC and deliver more future-proofed homes. Do you have any plans to bring forward the future homes standard, which you have committed to introducing in 2025?
The background to this is that my late father said that architects always had to be their own customer and built, on ground provided by government, what we would describe as category 1 houses. The whole thing arrived in a van. You could put it up in the morning and have the foreman make a cup of tea on it by lunchtime. Somehow, volumetric category 1 does not seem to be greatly favoured, yet it is very quick and pretty easy. I would be glad to know why that is not working for anybody.
Lee Rowley MP: In the spirit of brevity, yes, we still intend to bring forward the future homes standard. We intend that to be very imminently. I cannot give you a date. We recognise that it has taken longer than was expected, but we are intending to bring that forward. I covered that portfolio for many months. It is now with my colleague, Baroness Penn, but it is in an advanced state and will be brought forward.
My preference is, to Lord Greenhalgh’s point, that we try to set standards in these things which people, organisations and methodologies can try to meet, rather than saying that it must be X, Y or Z. I would want MMC to be a contributor, but I want the future homes standard to be successful whether it is MMC or traditional building.
Q100 Baroness Warwick of Undercliffe: In a way, my question, which is about regulation because it has been mentioned by various members around the table, follows on from that point. We have had very mixed messages from the building control bodies, insurance companies, warranty providers and so on, as well as from registered providers themselves, housing associations particularly, about the possible changes to building regulations when you are looking at the risks associated with MMC.
Are you intending to change the regulations, or are you doing rather more than that in the decent homes standard? What is the plan in the department? One problem in all this is the uncertainty surrounding whether you will be able to benefit from MMC if you go ahead and build. That is something that Homes England must struggle with.
The Chair: Of course, the converse is that the insurers are right and that you are encouraging housing associations to build large quantities of homes that turn out to be more prone to fire than would be acceptable. It is your Hobson’s choice, really. It is not Hobson’s choice; it is somebody’s dilemma. I do not know.
Lee Rowley MP: Changing building regulations is a very long process and you are into a multi-year process. There are lots of demands on that process. I have been the Minister for that for a year and we have been talking about it very extensively over that year. You will have seen comments, without broadening the discussion, on LPS, RAAC and many other methodologies, all of which need to be considered.
We have handed that process to the building safety regulator because we recognise that it is important that there is a group of people who are looking at this very specifically. That process is moving; I meet with the BSR every month, but it is a long process. If we want to make progress in this area, we can look at what can be done with the building regulations, but I do not think that is the panacea.
The intent and focus at the moment is on bringing out a PAS—a publicly accessible standard—which is used in many other places, particularly as the underpinning for all the post-Grenfell building safety issues and remediation for cladding. So there is no reason why that could not work, and that is where we hope to get to by the end of next year in regulation. That is the programme of work. It is a very sensitive area. We have to be very careful and cautious with it, and always look at things and be keen to check, but that is the general approach at the moment.
Baroness Warwick of Undercliffe: Will that specifically reference MMC, or will it be much more general in relation to building?
Lee Rowley MP: I think the PAS is specifically for MMC. As we change building regulations, they tend to try, as far as they can, to be technology agnostic and set requirements and performance standards that need to be achieved.
Baroness Warwick of Undercliffe: I just share Lady Thornhill’s frustration, having had evidence from housing associations that they are very enthusiastic to work with this programme, because they see great advantages in the speed with which they can build, and yet there are so many barriers that they seem to have to jump over to get to that point. I wondered whether, when you were talking about the incentives that you have in place, the statistics or the outcomes demonstrate that your incentives are working, particularly in relation to categories 1 and 2.
David Bridges: As I say, these are very early signs, but at the moment they do.
Lee Rowley MP: To the broader question on guarantees, insurance and the like, we have regulations in this country. Buildings have to be safe. We are bringing in standards that will support that. It is fair to say that other sectors take different views—that is a source of interest and occasional frustration to me—without blowing this into a broader discussion, given time, on the cladding issues.
The insurance companies and I have been in long conversations about their approach there. Premiums have gone up significantly when, given all the work that has been done over the last six or seven years on building safety, those buildings are demonstrably safer than they have ever been, even if they are not as safe as we want them to be. The insurance companies, as I know—I watched some of it—will have to accommodate and take responsibility for what they are doing themselves. We have to try to work with them to get them comfortable in this area. Ultimately, the question is always what, over and above the requirements of allowing somebody to live in those properties, you want in order to feel comfortable.
Q101 Baroness Eaton: You have almost satisfied what I was going to ask. Do you think that all the things you have just suggested that you are doing will be enough to open up the market as far as insurance and warranties are concerned? Have you any proposals to refer to MMC and guidance in the approved documents, which might be a way of drawing more attention positively to MMC?
Lee Rowley MP: I will defer to colleagues, but I think a substantial number of guarantees and warranties have been issued over the last decade or so. Even if it is not working perfectly, it is working. We need to make sure that it works, in the same way that insurance is not working perfectly but works enough. We need to work closely with the insurance sector to work out where its comfort levels are on that.
Ultimately, the insurance sector will need to take a view on this. Insurers are, by definition, risk averse. That is the job they are in. Equally, that has to be balanced. I am very keen to talk to them more about it. My primary focus with insurers at the moment is on the cladding elements, but I would be very keen to broaden it to this as well.
Baroness Eaton: Other countries seem to manage this business with insurance and warranties successfully. Look at Germany and Scandinavia. It cannot be insurmountable, I would have hoped.
Lee Rowley MP: The fundamental challenge is that things like building regulations are essentially to support them being used safely, but part of safety is that you can remove yourself if it becomes unsafe, whereas insurance companies are there to protect themselves against large-scale losses from the loss of the asset. They are two slightly different exam questions, but they should not be, and are not, that far off. It should be possible to find a way forward that works.
Q102 Lord Greenhalgh: I will be crisp, Minister, because you have done a tremendous job answering most of the question I was going to ask. Given that the future homes standard is due in 2025, I think, we as committee are really keen to know when the Government are going to start consulting on this. It is not the fastest, most well-oiled machine that I have ever seen. In fact, I do not think it is very fast at all.
Lee Rowley MP: We will start consulting very soon.
Lord Greenhalgh: Like tomorrow?
Lee Rowley MP: I do not know whether it will be tomorrow, but I hope that it will be very soon.
Lord Greenhalgh: Is it pre-Christmas or maybe after Christmas?
Lee Rowley MP: I hope it is within weeks.
The Chair: I think we have the only answer we will get, Lord Greenhalgh. Is there anything else?
Lord Greenhalgh: I think it has been marvellous.
The Chair: This is the question session. The praise session, the appraisal, comes afterwards.
Q103 Lord Berkeley: Minister, going back to your first answer in this session, you seemed to invite the committee to recommend KPIs to you as a way of measuring the success or failure of MMC. We also heard that you do not seem to have one strategy document; you have lots of them. Are you looking for the committee to give you strategy documents as well? Is this not normally for the Government to do and for us to comment on?
Lee Rowley MP: No, not at all. To give credit to the gentlemen sat next to me and their team, there is an enormous amount of work being done in the sector. I hope you can see that. The Government are trying to see whether they can stimulate a part of the sector that will work over the long term and wash its face. Those are both reasonable things to do.
Perhaps it is unusual, but I am genuinely keen to use your experience and knowledge over the last few months of having looked at this. You will appreciate that housing is an extremely big portfolio and I have not been able to get over absolutely every part of it in three and a half weeks. You are more experts than I am in this. If you have clear and strong views about how to take this forward, I would be very keen to hear them, because we can work that into the plan as we see fit in the coming months and years ahead.
Q104 Earl Russell: Could I come back briefly to the future homes standard? There are two key advantages to MMC. One is speed and the other is increased environmental standards. I was looking yesterday at the second infrastructure commission report, one way and another, and at the staggering amounts that the Government need to invest across housing and social housing in order to meet net-zero targets.
Where does MMC fit in your plans for the future homes strategy? How important are the increased environmental standards of these homes to your thinking on what you are prepared to do as a Government in order to support this sector?
Lee Rowley MP: Some 20% of the homes that will be built by 2050 have not yet been built. It is important that, where we can, we allow those homes to tread as lightly on the earth as possible, while making sure—this is the point of the consultation—that that framework is structured in a way that does not retard housebuilding and create a series of unintended consequences on the other side, where people in my constituency are priced out of getting homes because the barriers to entry and the costs are too high. That is a delicate balance to strike. It is one that the consultation and then the process to 2025 will work through.
You are right. This place decided in 2019 to move to net zero by 2050. That will cost a lot of money and will need to be taken incrementally over time, and we have 27 years to do it. The heat and building sector will be one of the most difficult to decarbonise, but there has been progress. It is down from over 100 million tonnes to about 88 million tonnes. There is a further way to do that. The future homes standard will contribute to a good proportion of that, but there is a whole heap of other things to do. Equally, we have to take this in a stepped way, and I know you will, as parliamentarians. There is only so much money in the system, there is only so much tax we can take, and we have to find ways to minimise that, because we have to take people with us on this journey.
Earl Russell: Do you see MMC as one of the tools in your armoury of the future homes standard in getting us towards net zero?
Lee Rowley MP: It could be. I know it is not usual for Ministers to say this, but let us focus on outcomes. The outcome by 2050 is that we want the 20% of houses that have not yet been built to tread as lightly on the earth as they can. We are putting subsidy into MMC, because we think that is a valuable tool to use, but that is the case it has to make over the coming years and decade ahead in order to demonstrate that it washes its face and contributes. We cannot subsidise for ever. If we subsidise for ever, it does not work.
Q105 The Chair: We have taken evidence about practices abroad, and for this purpose this includes Wales, where they are working with Daiwa House at scale to develop MMC-type approaches. We have heard that there is a flourishing market, flourishing supply, flourishing demand and very close collaboration—it is very often a zoning system rather than our planning system—between planning departments and developers. Panelised stuff that we look at is a bit narrow. They are often using steel systems, concrete bases, things of that sort, different construction methods.
How do you benchmark yourself against abroad? Do you see this as an area in which the UK in a few years’ time could be described as world leading?
David Bridges: Edward, you have a lot of experience overseas on this.
Edward Jezeph: Yes. The level of ambition in the UK is actually very good on an international level when you look outside of Japan particularly. Japan is by far the market leader globally. However, even then it is only about 15% of housing output in Japan. That is generally in higher‑value homes, so it is not the affordable or subsidised sector; it is a more high-end product for those who can afford it who are worried about earthquakes, so the regulations that support them drive that consumer decision-making. Sweden is more forestry industry-led, so it is about the resources that it has and the need to build quickly because of its climate conditions.
We see that MMC can be delivered at scale commercially in the residential space by those international comparators. We just need to bring it to bear in our housing market and economic context.
The Chair: We are very grateful to you. Thank you very much for your time.
