HM Government – Written evidence (MMC0024)
The Government considers supporting the MMC sector a priority. MMC provides an important opportunity to improve the quality of new homes, deliver more energy efficient homes, reduce construction waste, improve productivity and help address the shortage in construction skills. New technology and innovation have improved productivity, quality and choice across a range of sectors, and the Government wants to see the same happen in housing.
The Government believes the potential benefits of MMC have not yet been realised because the sector has not reached scale. We are focused on removing barriers to growth that will support the sector to increase demand, reduce cost and enable it to grow organically. DLUHC and Homes England (HE) have had a joint-MMC strategy since 2021.
The “Five-S” Strategy:
(1) Scaling up: Mandating greater use of MMC in DLUHC/HE programmes. This will contribute to the development of more volume certainty of MMC housing, allowing the sector to increase capacity and generate greater economies of scale. This in turn could help make MMC more cost competitive.
(2) Standardisation: Facilitating the development of a universal specification for key components and design elements to facilitate interoperability, and therefore reduce supply chain risk and deliver economies of scale.
(3) Safety and assurance: Demonstrating the safety of MMC technologies and ensuring that Building Regulations keep pace with innovation. Research is being undertaken into the safety characteristics of volumetric MMC systems.
(4) Soft levers: Ensuring MMC is championed in non-financial measures.
(5) Stimulating the market: Making funding available to a limited number of MMC manufacturers, with the allocation of funding linked to order books, and provided to support working capital requirements ahead of payment receipt.
Our interventions are therefore focused on tackling challenges such as the lack of standardisation across the industry; the difficulties in obtaining warranties and insurance; providing a consistent demand pipeline and access to finance.
Housing Associations and private sector actors play an important role in increasing the use of MMC by stimulating a pipeline of demand for MMC manufacturers, embracing the technology in their own housing projects, and providing access to their warranty and financial products.
Our support for sector includes:
2. There are no specific building regulations regarding MMC, even under the Building Safety Act 2022. We have heard this makes it difficult for insurance providers and surveyors to assess risk and value. Does the Government have plans to introduce building regulations specific to MMC in the future?
All buildings are required to conform with the functional requirements of building safety regulations, regardless of construction method. Building regulations are performance based and set outcomes that need to be met but do not set out how these outcomes must be achieved.
Insurance, warranty and mortgage products are available to the MMC sector and there are a number of MMC focussed assurance schemes such as the Build Offsite Property Assurance Scheme (BOPAS) and NHBC Accepts to enable the sector to access those products. A MMC home which has a new-home warranty will typically be able to secure a mortgage.
However, we are aware that the inconsistent technical standards required by different providers and issuers can act as a barrier. We are therefore progressing work on a British Standards Institution (BSI) publicly available specification (PAS) for offsite manufacturing to introduce a consistent set of minimum technical standards. This is a government convened industry-led process, guided by the BSI with extensive industry engagement throughout. Stakeholder engagement has highlighted the necessity of a broad scope for the PAS, covering both process and technical specification. The new technical standard will cover the design, and assembly of MMC homes, with the PAS also addressing the overarching theme of compliance throughout the process. This is looking at standardising invisible technical details and interfaces within MMC systems, it is not seeking to standardise or restrict the design or architectural vernacular of the home. The PAS is intended to provide consistency of definition to technical performance assessments of MMC whilst still allowing providers to compete on non-technical aspects of service delivery. We expect this to be published by the end of 2024.
3.MMC-delivered buildings are said to be more energy efficient and have lower levels of embodied carbon. Does the Government intend to use the Future Homes Standard to drive MMC-delivered building methods and, if so, how?
The Government is committed to meeting its target of net zero emissions by 2050 and recognises the important contribution that the energy efficiency of buildings has to make in meeting it. In 2025 the Government will be introducing the Future Homes Standard, which will ensure that new homes produce, on average, upwards of 75% less CO2 emissions than those built to the 2013 standards.
The Future Homes Standard will be set in performance terms without prescribing the specific construction methods, materials or technologies to be used, which means that housebuilders will have the flexibility they need to innovate and select the most practical and cost-effective solutions for their developments. We encourage developers to adopt innovative construction approaches that support the delivery of highly efficient homes. MMC can provide site efficiencies, reduce waste and result in lower carbon emission over the lifetime of the building.
The Government will be publishing a technical consultation on the Future Homes Standard shortly.
4.What is the role of Government in ensuring the construction workforce can adapt and deliver MMC effectively? What are you currently doing to address construction skills shortages?
The Government recognises how critical it is for industry to access a labour market with the right skills and training. The Government is increasing funding for apprenticeships across all sectors, including construction, to £2.7 billion by 2024-25. This funding will continue to support apprenticeships in non-levy-funded employers, often SMEs, where Government will continue to meet 95% of apprenticeship training costs. The Government has also commissioned an independent review, led by Mark Farmer, of the Industry Training Boards that are responsible for skills and training for the construction sector.
5.When did the Government’s MMC Working Group and MMC Taskforce most recently meet? Could you please provide an update on their work to improve access to insurance and finance for homebuilders using MMC.
The MMC working group was launched in December 2017 led by Mark Farmer, to address barriers to assurance, insurance and finance for MMC homes and in 2020 members of the group signed a Memorandum of Understanding to work towards a shared minimum standard, noting that further Government intervention may still be needed. The MMC working group had achieved its objectives and did not reconvene. DLUHC subsequently brought forward proposals for the BSI PAS. The Department also published the 2019 standardised definition framework for MMC classification created by the MMC working group. Ministers and officials meet regularly with the sector to consider what support is required to tackle barriers to growth. The Government announced an intention to create a Modern Methods of Construction (MMC) Taskforce in March 2021. Since then, the MMC landscape has evolved with the formation of collaboration groups such as Building Better and the Offsite Homes Alliance. These independent organisations are supporting Local Authorities and Housing Associations with their MMC delivery ambitions. Additionally, two industry trade bodies – the Offsite Alliance and Make Modular – have taken a leading role in becoming professional advocates for the sector. The industry has also seen the emergence of specialist MMC advisors, who are providing consultancy to clients new to MMC. There is also increasingly a wider range of procurement routes for Housing Associations and Local Authorities to choose, this has resulted in more adopters and informed clients.
These developments and other interventions to support the sector has subsumed much of the work the Taskforce was envisaged to deliver. In line with stakeholder feedback, we do not believe it necessary for the Government to convene a Taskforce at this stage given the industry-led approaches being adopted.
Homes England
6.In what ways, and through which programmes, is Homes England supporting the growth in the use of MMC?
Homes England is supporting the growth of MMC through a number of housing and land programmes.
The £11.5 billion Affordable Homes Programme will deliver thousands of affordable homes for both rent and to buy across the country. Homes England have responsibility for delivering £7.4bn of this investment. The programme is split into two elements- strategic partnerships and continuous market engagement. The strategic programme element includes a mandate to deliver 25% of homes using MMC and 10% of remaining delivery will use MMC.
The £1.5bn Levelling-Up Home Building Fund will help diversify the housing market, helping small and medium sized firms to build more homes, encouraging growth in innovative techniques such as MMC and supporting the Government’s Levelling Up priorities. The programme will support SMEs to build up to 42,400 homes, unlock housing capacity of c2,000 and unlock MMC capacity of c7,300 homes.
Homes England’s Single Land Programme and the Land Assembly Fund, mandate MMC housing delivery where viability permits. This mandate is included within the sale contracts on all disposals for sites with capacity for more than 50 homes.
DLUHC and Homes England continue to consider how future housing delivery programmes can support the growth of the MMC sector and better housing outcomes.
7.Several Category 1 MMC companies have folded or been closed in the past 18 months. In your view, as an organisation involved in this sector, why is this the case and what are the potential repercussions? a) In your assessment, is it realistic to believe Category 1 MMC companies will form a substantial portion of housing development in the UK given the sectors almost total collapse?
MMC is an innovative sector and as the sector continues to develop and evolve, we are seeing some Category 1 firms succeed whilst others struggle. This is common in a young and growing industry. Category 1 MMC is especially challenging, particularly in the wider economic climate which has reduced housing demand and increased the cost of borrowing. It requires significant upfront investment in a production facility and requires a consistent pipeline of demand to utilise this capacity. In the recent Category 1 withdrawals we are aware of firm specific challenges that affected individual firms’ ability to reach break-even such as planning challenges, quality control and ability to raise funding.
There are also challenges such as a market perception that MMC homes are more expensive to deliver than traditionally built homes. Economies of scale will help over time, but this view also ignores the savings that are realisable over the lifetime of the product through energy efficiency, lower ongoing maintenance costs and faster build out which is one of the reasons MMC is increasingly being adopted by the affordable homes and build to rent sectors.
The balance sheet strength of Modular manufacturers can act as a barrier to growth. Customers are sometimes reluctant to place large orders with manufacturers who are not yet profitable, in-case they cease operating before or during the manufacturing process. Larger manufacturers can use Advanced Payment Guarantees to protect customers with larger orders although this can result in increased working capital requirements for manufacturers who then need to find additional funding to finance the manufacturing of the housing order. The Government’s interventions to increase standardisation across components and technical standards will help to mitigate the risk around firm failure for customers.
Category 1 MMC manufacturers can be vulnerable to any delay or stoppage, such as delays around planning approvals or completing ground works on site, due to the large overheads these businesses carry. Covid-19 restrictions shut and then reduced manufacturing capacity in their facilities and they have also been impacted by the broader macro-economic backdrop. This includes high inflation causing rises in material prices and interest rates which have increased mortgage costs and reduced development viability which has impacted profit margins.
Whilst there have been some high-profile firm failures there are also a number of firms succeeding in both Category 1 and 2 MMC and the sector is also attracting investment from the traditional volume developers. Where a business has failed, the innovation started continues in many cases with other modular business benefitting from the experience and expertise staff are able to bring from previous ventures. Overall, the modular sector has grown and continues to grow at a fast rate.
8.What was Homes England’s involvement with Ilke Homes, Urban Splash, L&G Modular Homes and Caledonian Modular in the months preceding their collapse or closure and was there a discussion about provided investment? A) Where public money had already been invested, what involvement did Homes England have in board decisions following their investment and, in the run, up to the collapse of the businesses? B) How do you assess good value when considering making such investments and what would you have considered a successful outcome?
Homes England has regular engagement with a wide range of stakeholders including MMC manufacturers and developers. Homes England made two investments from the £4.5bn 2015 Home Building Fund which directly supported modular manufacturers Urban Splash House and Ilke Homes. This programme closed to new commitments in 2021 and has achieved a financial recovery rate in-excess of its initial target.
Ilke Homes
In November 2019 Homes England announced a £30m investment in Ilke Homes to accelerate the delivery of the pipeline of homes and develop the capacity and sophistication of the MMC manufacturer. This investment also supported Homes England’s Strategic Partner, Places for People, which had invested in Ilke Homes and announced a JV to deliver homes through MMC.
Due to the business plan’s delivery and profit forecast shifting, in part due to the impact of the global pandemic, Homes England increased its debt facilities by £30m to £60m (excl. interest). This was subject to a further £30m of new equity being invested alongside our loan facility.
The business traded until June 2023, by which time over £176m of equity had been invested in the business alongside Homes England’s loan facility. Part of the business is now in liquidation; limited recovery of the Homes England’s debt facility is anticipated. Our investment supported Ilke to build more than 1,400 new homes.
Urban Splash
Urban Splash is a successful housing and regeneration business founded in 1993, which continues to trade. Urban Splash House Holdings Ltd which traded as “HoUSe by Urban Splash” was a business that acquired the former SIG modular business and was demerged from the Urban Splash Group to become an independent modular housing business. In May 2019 Homes England and Japanese manufacturer Sekisui House invested in the business alongside other private investors. Sekisui House is one of the world’s leading housebuilders and a pioneer of MMC with 5 factories. Last year Sekisui House built c.40,000 homes, 93% of the homes sold were net zero carbon.
Homes England invested £3.1m of equity, equating to a 5% shareholding, alongside a £26.9m debt facility secured against land and assets for housing delivery. Shareholders subsequently reinvested a further £15m into the business, Homes England did not reinvest. The modular business traded until May 2022. Post close down, Homes England fully recovered its debt facility but not the equity. Homes England’s equity investment and debt facility was alongside c.£74m of private investment.
L&G
Homes England has had and continues to have regular dialogue with L&G modular throughout its operating period. Homes England was made aware of L&G modular’s challenges in early 2023 and spoke regularly with the leadership teams of L&G modular and L&G Capital throughout the period leading up to the business wind-down announcement in May 2023. The announcement cited challenges with planning which were due to delays on four major pipeline projects, which would have led to the factory being empty and the business incurring greater losses due to the fixed overheads.
Caledonian Modular
Homes England has not been involved with Caledonian Modular.
a. Where public money had already been invested, what involvement did Homes England have in board decisions following their investment and, in the run, up to the collapse of the businesses?
Homes England had no involvement in the business decisions of either Urban Splash House or Ilke Homes.
b. How do you assess good value when considering making such investments and what would you have considered a successful outcome?
All investment and funding decisions made by Homes England are undertaken in accordance with Managing Public Money. These decisions are governed by Homes England’s Investment Committee; a sub-Committee of the Homes England Board and attended by DLUHC, HMT and the IPA. To support decision making, Homes England undertakes assessments on projects in the form of quantitative analysis (undertaken through criteria-based assessment) and written qualitative analysis in its decision papers. This ensures that risks are appropriately identified and where possible mitigated as part of the assessment process on approval and to ensure that the proposed investment’s risk profile meets the agency’s risk appetite. During the term of our investment, an appropriate monitoring and control regime is in place to ensure that emerging risks are identified at an early stage and proportionate action is taken. Ultimately this work is overseen by the Homes England Board, through both its Investment and Audit, Assurance and Enterprise Risk Committees, with escalation routes into DLUHC and Ministers should they be required.
These assessments, combined with the due diligence, focuses on a project’s strategic and economic merits as well as delivery confidence. This aligns to the HMT Green Book methodology, where the value for money is based on a range of factors. Narrowly on the quantitative assessment, this involves a Value for Money appraisal, underpinned by a Benefit Cost Ration or Net Present Social Value / Cost; an assessment on the project’s alignment with the strategic objectives of the fund; and a deliverability assessment. The assessment criteria are tailored to the differing products (such as supporting MMC manufacturers) and alongside the qualitative analysis, provides decision makers with confidence that the proposed projects align with objectives and ambitions of the funding, and offers value for money.
Success can be measured against a programme’s primary and secondary objectives, alongside Homes England’s Strategic plan objectives and in the case of MMC, against the joint DLUHC/Homes England MMC strategy. There are also interlinking benefits, where the support for MMC manufacturers through the 2015 Home Building Fund, creates housing deliver capacity which can then benefit the 2021 Affordable Housing Programme’s MMC delivery ambitions.
Homes England’s 2015 Home Building Fund business case had an agreed risk capacity. Homes England set tolerances and monitor the risk associated with category of financial interventions and each individual intervention through an Expected Credit Loss analysis, alongside an associated Recovery Rate for the programme. An assessment framework enables the mix and quantum of interventions to be flexed within the agreed risk capacity and managed at a portfolio level, to enable the programme to be agile and responsive to market and policy developments.
The scale and potential of both MMC investments made to date have been transactions which have required Homes England involvement at an early-stage, high scale, and high risk in order to gain the high policy rewards that are possible. This risk has been calculated within the approved risk envelope of the programme. This programme closed to new commitments in 2021. Based on completed and in-flight investments the programme is forecast to achieve a financial recovery rate in-excess of its initial target.
9.Has the requirement within Strategic Partnerships to deliver 25 per cent of homes using MMC resulted in growth in the MMC sector? a) Of those homes which utilise MMC could you please provide a percentage breakdown by category of MMC? b) What is the average pre-manufactured value score of homes funded by the programme?
The MMC mandate within the AHP Strategic Partnership Programme has brought significant focus to the MMC sector and provided it with a significant pipeline of demand.
A.Of those homes which utilise MMC could you please provide a percentage breakdown by category of MMC?
Homes England will publicise this data once available.
B.What is the average pre-manufactured value score of homes funded by the programme
PMV is a new concept with which the industry is developing a familiarity. Pre-Manufactured Value (PMV %) is the financial proportion of a construction project's Gross Construction Cost derived through manufacturing.
PMV data will be collected for the AHP however as the AHP is still in the deployment phase data on delivery and PMV is not currently available.
10.With Housing Associations becoming more dependent on cross-subsidy models and therefore less counter-cyclical do you still consider the AHP a useful tool in driving consistent demand for MMC?
The AHP presents a vital tool to deliver affordable housing throughout the housing and economic cycle. Whereas affordable housing delivered through Section 106 obligations has a greater exposure to the market cycle, the AHP can continue to deliver and if necessary, have its funding parameters adjusted to respond to market conditions given its ability to deliver counter cyclically. The MMC mandate in the AHP is intended to bring focus to the benefits of delivering housing through MMC and it is hoped that successful delivery of affordable housing through MMC, will catalyse further MMC delivery independently and beyond the MMC mandate.
11.In its 2019 response to the Commons’ CLG Committee, the then MHCLG confirmed that Homes England would be required to report annually on the share of housing completions they have supported which use MMC. This remains one of the organisation’s Key Performance Indicators. Can you please explain why this information is not yet available and when you will be in the position to publish the information?
12.Stakeholders in the finance, insurance and warranty sectors have called for a comprehensive database on MMC materials and performance in homes. Homes England committed to collect data on MMC in its Strategic Plan 2023-28. Can you please provide access to the dataset? If it is not available, can you provide an update on the progress to publishing it?
13.In the Government’s response to the CLG Committee’s report into MMC the Government stated that Homes England would monitor the share of housing starts it has supported using MMC and the share of total investment it has provide to MMC-focused projects. Could you please share this information from when you began collecting data to the end of the 22/23 financial year?
We have answered questions 11, 12 and 13 together as they all relate to Homes England’s data collection on MMC. DLUHC and Homes England are working together to capture more detailed MMC data across our programmes. These will demonstrate the impact of Homes England’s MMC delivery as part of the joint HE/DLUHC MMC Strategy, inform future MMC policy interventions and MMC targets for programmes. These include DLUHC’s new public MMC Completions metric, the IPA’s cross-government construction metrics, the MMC requirements within the 2021-26 AHP alongside Homes England’s Strategic Plan MMC KPI. In Spending Review 2020, DLUHC committed to create a new MMC metric measuring supported housing completions funded by Government. Homes England, GLA and DLUHC programmes will contribute to the new MMC metric which will be published publicly quarterly. Homes England has been working closely with DLUHC colleagues in shaping this metric. Homes England’s 2018 and 2023 Strategic Plan both contained an MMC KPI (KPI 9 and KPI 10 respectively). These KPIs were defined as the “Share of supported [housing] completions using Modern Methods of Construction (MMC).”. While Homes England does not have an organisational level MMC KPI objective, programmes such as LAAC and the 2021-26 AHP have had specific MMC targets embedded within them. Programmes such as LU-HBF and Homes England’s Land disposal programme also support the delivery of MMC homes. To enable Homes England to meet these reporting obligations, Homes England’s Digital team is developing updates to our internal systems as part of the Agency’s wider Evolve digital transformation programme. One of our systems has been successfully updated to capture housing completions against all 7-categories of MMC, however further work is ongoing to develop data reporting capabilities and processes to audit and verify the data captured.
14.How much funding has been granted to local authorities through the Accelerated Construction Programme and, as a result of this funding, how many homes have been delivered using MMC?
£137.1m has been granted to local authorities through the Local Authority Accelerated Construction programme. The programmes objectives were to support local authorities bring forward homes at pace and using modern methods of construction (MMC) on their predominately brownfield land. LAAC grant funding was provided for enabling infrastructure ahead of the housing e.g. site remediation, utilities upgrades, and contains obligations for delivery at pace greater than the local market average, and the deployment of MMC in the delivery of subsequent homes. In 2018 the programme was initially envisaged as a £450m programme split between Homes England (£350m) and the GLA (£100m). The programme was sized based on Expressions of Interest from Local Authorities which established an initial pipeline of funding opportunities.
Due diligence was commenced on this pipeline focusing on viability and deliverability within the funding parameters. Through the due diligence and contracting process there was an attrition of projects, recognising the funding challenges of delivering advanced MMC housing solutions on challenging Local Authority sites. Homes England's programme contracted £137m to deliver 9,969 MMC homes, the programme was launched ahead of the 2019 MMC definition framework. All homes delivered through the programme will use some element of MMC, within categories 1-5 of the Government’s MMC definition framework, published in 2019 (https://www.gov.uk/government/publications/modern-methods-of-construction-working-group-developing-a-definition-framework).
November 2023