Cladding costs totalling £150m send Lendlease into the red

Lendlease remained in the red last year as the cost of remediating unsafe buildings in the UK wiped out the savings made by its restructuring the previous year. 

In its results for the year to 30 June 2023, the Australian firm posted a pre-tax loss from continuing operations of A$238m (£122m) – an even heavier loss than the A$177m (£90.5m) recorded the previous year. 

The losses, which came despite income rising 16% to A$10.2bn (£5.2bn), were largely attributed by chief executive Tony Lombardo to “non-cash losses in relation to industrywide retrospective UK Government action on UK residential buildings”. 

Lendlease recorded a provision of A$295m (£151m) for cladding remediation, up from the £114m it predicted at its interim results in February, with a note in its results statement explaining how the business had signed the government’s cladding remediation contract in March “so as not to be subject to significant trade restrictions”. 

The company had been one of 11 to miss the original deadline to sign the pledge. 

It has established a dedicated team to reviewing its exposure to the new building safety regulations and the firm’s current understanding is that its liability currently relates to 59 buildings. 

It claims 58 of these blocks were developed by Crosby, a company it acquired in 2005 to enter the UK residential market. None of these buildings are currently owned by Lendlease. 

The business says it has been in “initial contact” with some of the building owners to establish the cost of remediation, which has been used to extrapolate the required provision. 

This was priced at A$200m at the end of 2022, but an additional provision of A$95m was added on 30 June 2023 to account for market cost increases and updated information received in respect of the portfolio. 

“This provision does not include anticipated recoveries from third parties, including insurances and supply chain,” the company noted, adding that Lendlease was working to “maximise” third party recoveries. 

As well as the cladding provision, losses on property revaluations were also cited as a drag on the firm’s results. 

Revenue in the construction business hit $7.2bn, up 9% despite a decline in European activity. 

Lombardo said the firm had “rightsized” its construction workbook through the year to “generate more predictable returns” and continued its “disciplined cost reduction approach” after FY22’s major restructure. 

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It anticipates that its current cost saving actions will generate pre-tax cost savings of more than A$150m (£77m) annually, with roughly A$60m (£31m) set to be realised in FY24. 

“A disciplined approach to cost management is especially important in the Construction segment where a recent spate of insolvencies demonstrates the risk inherent in this traditionally low margin segment,” he said.  

“To improve profitability and reduce future risk, we’ve made the decision to no longer undertake certain types of work, for example residential build to sell, and remain selective in our customer portfolio.” 

The report went on to explain that Lendlease will only bid on external construction projects with a value of more than A$150m (£77m). 

The company’s backlog revenue for construction stands at around A$8.7bn (£4.5bn), down roughly 17% year-on-year.