Fletcher Building warns 'very challenging' convention centre rebuild will exceed insurance cover by $150m

Friday, 16 December 2022

Firefighters containing the blaze at SkyCity's convention centre in October 2019. (File photo)

Fletcher Building warned rebuilding SkyCity Entertainment’s fire damaged international convention centre in Auckland will cost it $150 million more than its insurance cover.

“Disappointingly and really despite the good progress on site, we now expect that post-fire rebuild costs for the Auckland convention centre to exceed the insurance proceeds,” Fletcher Building chief executive Ross Taylor told reporters on a conference call on Friday.

“This has resulted in us taking an additional $150m provision for these costs.”

The construction company was contracted in 2015 to deliver the convention centre, but a fire in October 2019, just six to nine months from completion, caused extensive damage which has delayed the project and escalated costs. Fletcher Building now expects the project to be completed by early 2025.

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Smoke pours into the damaged SkyCity convention centre from above before a flare up takes hold of the collapsed ceiling on Thursday. (First published in October, 2019)

The project has had a controversial history. A 2013 deal between the government and SkyCity gave the company permission to operate more pokies and gaming tables in exchange for building the centre – a deal critics said came at the expense of problem gamblers.

Originally slated for completion in February 2019, the project had already faced several delays and cost overruns in the years before the fire.

A Fenz investigation report released in April 2020 found the fire was accidentally started when a roll of waterproof material being fitted to the roof was “momentarily exposed” to a gas torch, causing the roll’s cardboard inner to smoulder and develop into an intense fire.

Taylor told reporters that while the fire obviously damaged the roof and the top levels of the building, water had damaged plant and equipment all through the building and then “set off a huge mould issue” in the hot and humid summer weather.

“It took us about 18 months just to get the mould under control and the demolition done because all the work had to be done by people in full hazard gear, full bodysuits with breathing apparatus. So it was a very, very difficult start,” he said.

An artist’s impression of SkyCity Entertainment Group’s international convention centre.

Taylor said all demolition work was now complete, remediation of the steelwork was well advanced, roof installation had begun and the first two car park levels were now completed and expected to be handed over to SkyCity later this month.

“However the unfortunate combination of the unique complexity to rebuild, the Covid delays, and higher than normal cost escalations have meant that as we have progressively got our arms around the rebuild it has now become clear it cannot be completed within the insurance levels that are in place,” he said.

Cost inflation had impacted labour, trade and materials, he said.

Taylor said Fletcher Building had lost money on the “very challenging” project.

“It will be a long journey and a hard journey for us, but I do think we will leave the city and the country with a pretty nice facility,” he said.

Fletcher Building expects to include the $150m provision in its financial statements for the first half of its 2023 financial year, with the cash impacts expected to flow over the remaining two years of the project.

The centre was one of several big projects with cost blowouts that prompted the construction business to withdraw entirely from bidding for any further vertical work in New Zealand in 2018, turning its focus instead to infrastructure and roading where risks and margins were more attractive.

Taylor said the company had reconsidered its position on vertical work in 2020 but the risks and margins “made no sense”.

“We won't get back into it, at least while I'm running the business anyway,’ he said.

Fletcher Building reiterated its forecast for operating profit of at least $855m in the coming year. The forecast excludes significant items such as the convention centre provision.

Taylor said house prices and margins in Fletcher’s residential and development division were 10-15% below the market peak in late 2021, which was in line with the company’s expectations, while sales rates were about 20% below the company’s target.

“House sales volumes remain lower than plan, with strong customer visitation levels into Fletcher Living show-homes, but with lower conversion rates,” he said.

“In certain developments, we have therefore slowed our build rates, and we have not been taking on new land for some time, to ensure we manage working capital tightly.”

Shares in Fletcher Building closed down 2.6% to $4.86 on the NZX on Friday. The stock has lost 29% this year.