Production line to bottom line: why aren’t the sums adding up for modular?

The bad news on modular has been mounting up. The latest announcements have come a year since the high-profile collapse of House by Urban Splash – a tie-up between developer Urban Splash, large Japanese house builder Sekisui House and Homes England. 

So what to make of these latest developments? For watchers of this fledgling sector, the L&G and Ilke announcements have been a shock, but on reflection not necessarily a huge surprise.

Both L&G Modular and Ilke Homes have racked up huge losses every year since their launch. For some these have been seen as necessary start-up costs, while for others the millions being poured in had started to raise concerns.

Let’s look at how L&G and Ilke have fared financially.

L&G Modular

L&G launched its modular business in 2016 and since then the division has clocked up cumulative losses of £176m. The apparent demise of L&G Modular is arguably the more surprising of the two due to its parent’s adopted philosophy of patient capital – the idea of taking a long-term view on your investments. But clearly L&G felt that the risk had become just too much. L&G attributed its modular problems to well-documented planning delays and the impact of recent macro events such as COVID-19.

It all feels a long way from when the insurance giant first unveiled plans for the factory. At the time, L&G said it was spending £55m on building the factory, with plans to invest £500m in more factories across the UK.

However, there have been plenty of bumps in the road. In 2017, L&G Modular’s accounts showed that it booked an impairment of £27.7m on fixed assets, which that year added to an overall pre-tax loss of £46m.

Then in 2019, the firm said it was moving away from cross-laminated timber for its modular apartments and instead would use an alternative product based on a hybrid of concrete and steel frame. 

In September 2021, L&G Modular’s boss Rosie Toogood wrote that it had spent the past three years “refining our process – developing, testing and accrediting” at its factory in Sherburn-in-Elmet, North Yorkshire.

While it took some time to get its product right, even then it faced problems. In Bristol, a 185-home modular scheme was hit with delays over what L&G said were “on-site construction issues, including a problem with the foundations”.

Meanwhile, at L&G’s first standalone modular site in Selby, North Yorkshire, mould was an issue after modules were left exposed.

Ilke Homes

And how has Ilke Homes fared? For its part, Ilke has registered losses of more than £100m since its launch in 2017. At the same time, the firm has invested in its Knaresborough factory, building up a workforce of around 1,000 people. When it announced it was on the block earlier this month, Ilke said it had a 4,200-home pipeline and an order book of £1bn.

The company’s controlling shareholder is private equity firm TDR Capital, whose other investments include house builder Keepmoat Homes, retailer Asda (in partnership with the Issa brothers) and Pizza Express.

Ilke has received funds from a variety of sources. Most notably, it has taken £60m in loans from Homes England and sold stakes in the company to housing associations Places for People and The Guinness Partnership in return for investment.

On the Ilke situation, a Homes England spokesperson said: “We are aware that the business is seeking a buyer. We remain committed to working with ambitious and innovative partners to help diversify the housing market, increase productivity and deliver efficient and sustainable homes.” 

In 2019, a £100m deal with Places for People for Ilke garnered big headlines. When asked about the current progress of the deal, in a statement to Social Housing, a spokesperson for Places for People said: “Following the news regarding the temporary closure of the Ilke Homes factory, we are currently working to understand, support and minimise any potential impact on our customers and will provide them with an update as soon as possible.”

Ilke also has a string of deals with other housing associations and councils, including Riverside.

And last December, Ilke raised £100m with contributions from global investment manager Fortress Investment Group, plus TDR Capital and another existing investor Sun Capital.

A knock to the sector

So how much have these setbacks knocked belief in modular, heralded for a long time as a panacea for the housing crisis?

Ruby Giblin, a partner in the housing finance team at law firm Winckworth Sherwood, says the L&G and Ilke news will “definitely” knock confidence in the modular sector.

“Everybody is taking a step back,” she says. “People I have spoken to have said they’re not going to do experiments. Everybody is much more on notice.”

And Jake Snell, head of partnerships and innovation at Abri, who is involved with the NHF-backed group Building Better, admits that the news about the firms was a shock, which has led to a ripple effect around confidence in the sector.

But asked whether this means the dream is over for modular in the UK, he says: “Absolutely not. We are in a challenging time for our country. Brexit, inflation, land, phosphates and nitrates are holding up planning. And it’s not just hit the modular space. Development is a challenging place to be.”

Construction firms across the board have also been struggling, with the sector seeing the highest number of administrations of any industry last year, according to latest official figures.

As Mark Farmer, the government’s MMC champion, says: “We are in troubling times for the wider construction supply chain with insolvencies rising across the board, in both traditional and innovative delivery.”

However, Mr Farmer admits that some companies are more at risk than others, including modular firms. “Clearly some of those businesses that hold higher financial risk through investment in people and capital, including large scale modular housing, are potentially more exposed at the moment than those that sub-contract that risk away on a ‘stop-start’ basis,” he says.

The fact that L&G and Ilke had giant factories and a large workforce – in the case of Ilke around 1,000 staff – means that their fixed costs were significant.

Mike Ormesher, director of the Offsite Homes Alliance, whose members include 23 registered providers, also believes that modular housing will survive as a category. He points to the example of Goldman Sachs-backed TopHat.

“They’re delivering product to my clients and the homes are really nice,” he says. “They’ve worked with BoKlok [a joint venture between Skanska and Ikea] and they manage the process. They put people in the factory to help with the production and the planning, the processing and the programming.” 

With Ilke and L&G’s problems, all eyes have turned to TopHat, the most high-profile Category 1 survivor (Category 1 suppliers build fully volumetric modular housing in factories). The Goldman Sachs-backed firm has an 800-home capacity factory in Derby, but is expanding by building a second factory in Corby, Northamptonshire. The 650,000 sq ft facility is being touted as the biggest modular factory in Europe.

However TopHat has also registered significant losses since its launch. In its last reported full year, TopHat narrowed its losses to £19.4m and said it expects to make a profit within the next three years. It, too, has sought extra cash. In its latest round of fundraising in May, TopHat secured £70m. Of that, £25m came from FTSE 100 house builder Persimmon and £20m from insurance giant Aviva. It has also in the past few weeks signed a deal with large French house builder Nexity.

However, exact details of how the partnership will work in practice have not been disclosed. TopHat is due to file its latest accounts by the end of July but did not respond to Social Housing’s request for comment about its current financial position.