New developments in the collapse of Decmil Construction NZ highlight how one falling domino can endanger struggling building firms throughout the country
The liquidator of collapsed building firm Decmil has launched arbitration proceedings against another construction company, as ripples spread through the industry.
The Reserve Bank says there is a risk interest rate increases and house price falls will lead to "a large decline" in construction sector activity. "In such a scenario, we would expect to see more developer insolvencies and a large number of incomplete or cancelled projects," it says in its monetary policy statement. "This would result in a steep decline in residential investment."
The bank's monetary policy committee says the growing delay in accessing key building materials is significantly slowing activity, and increasing the financial risks associated with construction. "These delays, cost pressures, and associated uncertainty could limit the conversion of building permits into dwellings, exacerbating the pressure on housing supply."
Workforce shortages and problems such as Fletcher Building's freeze on Gib orders have contributed to soaring building costs: construction and other housing-related prices have made the largest contribution to domestic inflation in the past 12 months, rising far faster than the Reserve Bank anticipated.
"Builders are facing challenges often associated with construction booms. Strong demand has exceeded supply capacity for materials and closed borders have made labour shortages worse. The price of building a new house has been the largest contributor to non-tradables inflation in the past 12 months."
The bank correctly anticipated Stats NZ data yesterday which showed the first drop in residential building consents since 2019. "The combination of high construction costs, higher interest rates and house price declines will make it more difficult for housing developers to achieve their required return on investment," the monetary policy statement says.
Standalone houses lead drop in building consents
"Developers will also find it increasingly difficult to secure pre-sales on new projects. As a result, we expect that the flow of new consents will begin to slow. Much of the strength in recent consent data is likely a lagged effect of housing market strength in the second half of 2021, as consents have been taking longer than usual to process."
That's been confirmed with new Stats figures showing 50,583 new homes consented in the year ended April 2022 – the first dip in consent numbers since 2019. The number of multi-unit home building consents rose to 25,687, but the overall numbers were dragged down by 24,896 stand-alone houses – down from 25,383 in the year to March.
And new Stats NZ experimental data, released yesterday for the first time, reveals an even greater slowdown in actual construction.
“With prices coming off a bit, and the issues with some property developers trying to sell off the plans, and funding from banks being conditional on how successful they are at doing that, this comes together as an environment that can be challenging, and can result in these exaggerated cycles of boom and bust – which ideally we wouldn't have because we need to keep building houses.” – Paul Conway, Reserve Bank
From when building consent is first issued, it's now taking an average 455 calendar days to complete the construction of new dwellings to the point of final inspection. And it's taking 519 days to get code compliance certification – that's nearly a year-and-a-half to build a house.
The ANZ Business Outlook construction intentions survey warns of a 38 percent decline in residential building plans for the next 12 months, but is more upbeat about commercial construction which it expects to pick up 24 percent.
But that will be tempered by financial troubles right across the construction sector, in residential and commercial.
The collapse of Wellington construction company Armstrong Downes Commercial, which went into liquidation last week owing $9.2m, is hurting many of its 320 unsecured trade creditors.
And Decmil Construction NZ owed $130m to unsecured creditors when it went into liquidation.
Decmil Australia has washed its hands of its New Zealand subsidiary, when it was put into liquidation in April 2020 after the cancellation of a $195 million prison-building contract. "Decmil has not had any interaction with former Decmil NZ activities for nearly a year, as it's squarely in the hands of the liquidator Avior Consulting," said Decmil Australia communications consultant Cameron Morse.
The New Zealand company lost its contract to install nearly 1000 Chinese-made prefabricated cells at five prisons including Rolleston in Canterbury, Tongariro near Turangi, and Waikeria in Waikato.
Days to key milestones from date building consent is issued
A new report lodged with the Companies Office reveals liquidator Dermott McVeigh, from Avior Consulting, has filed a counterclaim against creditor VAE NZ Ltd. He says the value of the counterclaim exceeds VAE’s claim in the liquidation. "The dispute is currently in a formal arbitration process, with the resolution likely some months away," he reports. "If the arbitration is successful, the company may be able to access performance bonds valued at $360,000 previously granted by VAE."
VAE NZ is a heating and air conditioning company, which began operating in New Zealand in 2016 after winning the mechanical services contract with CPB Contractors for the Christchurch Hospital Waipapa Building.
Since then it's worked on Te Pae Christchurch Convention Centre, Haere-roa University of Canterbury Students' Association Building, the new Dunedin Hospital inpatient building and, critically, on rapid deployment prisons alongside Decmil.
The company's general manager, Ben McCullough, would say little on the dispute. "VAE NZ is currently in arbitration with the Decmil liquidator to recover our performance bonds," he confirmed. "As the matter is before the courts, we have no further comment at this stage."
It's not the only building firm battling to get its money back from Decmil. Stanley Construction has been owned by the same Matamata family for three generations back to the 1920s, and grew to employ 100 staff, but in 2019 it too went into liquidation. Its liquidator, Damien Grant, said the company was owed $1.3m in the Decmil collapse.
And site security company Intercept (2019) Ltd has gone into liquidation, saying it was owed $14,959 by Decmil. Short of cashflow, it kept ploughing money into an unprofitable patrol division while defaulting on its taxes.
And the Wellington construction company Armstrong Downes Commercial went into liquidation last month owing $9.2m to 320 unsecured trade creditors.
The High Court ordered Decmil's liquidator to put the company's last $3.3m in a retention fund, managed by receivers, to make it available to settle creditors' claims when the liquidation is completed.
One creditor that has stepped out of the pictures is the Department of Corrections. It had initially claimed $64m against Decmil, after the prisons contract was cancelled because of concerns about the quality and pace of the work. Decmil countered that it was owed payments for four months' work that had been completed, or was the subject of wrongful deductions.
In the end, Corrections and Decmil reached a confidential full and final settlement to end their dispute with no money changing hands. A footnote in Corrections' annual report reveals the department held on to $16.4m, which was transferred to the new contractor to complete Decmil's modular cell-building programme.
Alastair Turrell, Corrections' deputy chief executive for infrastructure and digital assets, confirms the department concluded the dispute about the rapid deployment cells project last year.
"All eight units have now been completed under the alternative arrangements we implemented after the Decmil termination," he says.
The programme was completed within the approved funding of $436m. "The new units provide flexibility across our network to manage prisoners and ensure that they are in the most appropriate accommodation to support their education and rehabilitation needs, which will in turn increase their access to employment."
Education Ministry Te Puna Rangatōpū hasn't been so fortunate as to extricate itself. The ministry is still in discussions with Decmil's liquidator over how much it's owed, after Decmil shut down leaving the construction of five schools unfinished, and in three cases not even started.
Scott Evans, the ministry's infrastructure hautū, says building projects at Te Huruhi School and Waiheke High School were completed by their sub-contractors. Decmil was also due to carry out some remedial work at Kauri Flats School. That work also was completed by another contractor.
“In the lead-up to the liquidation, we became aware of some of the financial challenges Decmil was facing and began working with them to achieve a managed exit and handover of the Ministry projects they were involved in," he says.
“We had two further contracts with them for design work related to projects at Orewa North West Primary School and Scott Point Primary School, but we exited both contracts before they were placed into liquidation and we were able to engage alternative providers to undertake the construction works associated with these projects. “Construction work at Scott Point Primary was recently completed, while the work at Orewa North West is underway. The Ministry remains a creditor in the liquidation and we are involved in discussions with the liquidator to agree the final account.”
Reserve Bank chief economist Paul Conway says there is an unfortunate "boom-bust nature" to New Zealand's construction industry.
"There's signs of pressure in the construction sector, currently, with a number of construction firms going into liquidation," he tells Newsroom. "Some of those quite small firms sort of tend to just spring up somewhere else down the track. For all the construction firms that are going into liquidation, there's a lot that are still there doing what they're doing. So I think that volatility is maybe at the margin.
"With prices coming off a bit, and the issues with some property developers trying to sell off the plans, and funding from banks being conditional on how successful they are at doing that, this comes together as an environment that can be challenging, and can result in these exaggerated cycles of boom and bust – which ideally we wouldn't have because we need to keep building houses."
