The century-old idea of ​​sustainable housing is facing difficulties

The idea of ​​using pre-assembled components in building homes is not new at all.

According to experts, modern versions of modular housing supported by technology promise a faster and more sustainable solution to the housing crises. But the sector has seen better adoption in some countries than in others where it has failed to expand – such as the UK

Prefabrication has existed in many forms, from the defenses used by William the Conqueror in his invasion of England in 1066 to Sears' mail order houses in the United States in the early 1900s.

A century later, entire modules could be built in factories and then combined to create homes in just weeks. Speed ​​is just one advantage modular homes offer over traditional construction, a key factor in countries like the UK that still face a shortage of affordable housing.

The fact that modular housing is also manufactured in a controlled factory environment means less waste is generated, while also leading to more energy efficient homes. Andrew Shepherd, managing director at British modular developer TopHat Communities, told CNBC that the company's plant has not sent “any waste to landfill” in the past three years.

Building entire departments in one location also means fewer delivery trips to sites, Shepherd explained. A 2022 report from industry group Make UK Modular highlighted that 80% fewer moves would be needed for development sites with modular buildings.

Another study by academics at the University of Cambridge and Edinburgh Napier University, published in 2022, found that building modular homes could lead to a 45% carbon reduction. This refers to the emissions generated by the construction process, including making and transporting materials.

Despite these benefits, the sector has experienced a number of setbacks in recent years, and remains relatively nascent in the UK and US.

In January, it was reported that British company Modulous had entered liquidation after failing to find a buyer. In the UK last year, Elk Homes collapsed, while Legal & General moved to liquidate its modular housing factory. One of the most notable failures in this sector was US SoftBank-backed Katerra, which filed for bankruptcy in 2021.

Jonathan Pinksy, professor of sustainable business at King's College London, highlighted that part of the challenge for modular builders is that they first have to spend money on building a factory to build the modules and then need to put projects into action to pay for that investment.

This is even more difficult when combined with headwinds that have also affected the broader construction sector, including rising energy costs and interest rates, as well as a cost-of-living crisis in many countries that has led people to postpone home purchases, he noted.

“And if you then cannot profit from a market that is actually rising, but is falling instead, the problem is simply that [firms] “They can't get their money back fast enough, and then investors lose confidence in the business model,” Pinksy told CNBC.

Pinkse was one of the co-authors of research published last year, which highlighted some of the issues limiting the use of modular, also known as factory-manufactured 3D modular (volumetric) homes, as the most advanced form of modern modular construction (MK).

Susan Peters, who also co-authored the research and is a research associate at Alliance Manchester Business School, told CNBC that the wider construction sector is a “very difficult business” with a higher volume of failures than other industries. Provisional data from the UK Insolvency Service, published in January, showed that the construction industry saw the highest number of insolvencies of any sector in England and Wales in 2023, with 4,371 companies going bankrupt. This equates to approximately one in five bankruptcies.

Likewise, Daniel Patterson, director of government affairs at Make UK Modular, said the modular housing sector had faced a “series of unfortunate events”, with the industry only essentially launching in the UK in its current form in 2016/17. Companies then need about 18 months to build factories, meaning it wasn't long before the COVID-19 pandemic hit, along with the economic headwinds that followed, he explained.

Perceptions based on previous versions of prefabrication were another problem, according to Richard Valentine Celce, head of European research and consulting at Savills Research.

In the UK, there's a “hangover from the 1960s of prefabrication and the kind of connotations of low quality, things that don't last and all sorts of negative effects of that from the post-war building boom,” he told CNBC. “.

In addition, he said that “the construction industry is quite a conservative beast and finds it very difficult sometimes to change, think forward and innovate unless they are forced to do so, which has led to somewhat flirting with new approaches but not some kind of sweeping change towards Delivery using modules.”

Sweden and Japan are the two countries mentioned as leaders in the field of prefabrication. Savills Research highlighted in 2020 that 45% of homes in Sweden were built using off-site construction. In Japan, it said MMC was used in the construction of 15-20% of new homes, although that still equates to between 150,000 and 180,000 homes per year.

In comparison, the Make UK Modular report published last year said that more than 3,000 modular homes were built in the UK annually, although there is capacity to build five times that number. Meanwhile, a 2023 McKinsey & Company report said that less than 4% of current housing in the United States was built using modular methods.

In Sweden, one of the major players in this space is BoKlok, which is jointly owned by construction company Skanska and home and furniture company Ikea, and has been around since the mid-1990s.

Sweden is also “not a country where you can build 12 months a year,” Shepherd noted.

“Their winters are very harsh with limited daylight, so there is an incentive to look at alternative construction to keep people working all year round and deliver homes at the required size,” he explained.

In Japan, there was also a difference in the approach to residential buildings, Valentine-Celce said. “In Japan, the value of a building depreciates over about 30 years, so by the end of that you tear it down and rebuild it because it has no value,” he explained, making new construction methods beneficial, since deliveries of new homes are higher.

Given these examples, could approaches such as modular units help address the shortage of affordable housing in the UK?

The current UK government aims to build 300,000 homes a year, but 234,400 homes have been built in 2022-2023. Keir Starmer, leader of the UK's opposition Labor Party, has pledged to build 1.5 million homes over a five-year period if his party is elected.

“That means 300,000 homes a year, and there's no chance of that happening unless some sort of different approach is adopted,” Shepherd said.

Looking to the future, Valentine-Celce said he was “optimistic” in his outlook on the modular sector. “I think we'll probably see uptake again in the next five to 10 years,” he said.

However, he believed that greater adoption of other types of MMC, such as panel solutions, was more likely, but believed that “modules will form part of this new delivery mix.”