Plans to transform one of Rotorua's oldest buildings into an upmarket spa hostel have been put on hold after it proved too expensive for the Australian developers.

Pukeroa Oruawhata Group announced last August it had signed an agreement with The Friendly Group, owners of the Greenhouse Backpackers & Jazz Hostels, to redevelop the Lakehouse Hotel into Greenhouse Rotorua.

However, the Australia-based company has now pulled the plug on the development, saying it was too expensive.

The plan was to transform the 1870s building into a 250-bed spa hostel providing good quality hostel accommodation together with a unique geothermal bathing experience.

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Under the agreement, Pukeroa Oruawhata Group was to retain ownership of the underlying land but the complex was to be planned, built and run by the joint venture.

The Friendly Group owner Ron Lazarovits told the Rotorua Daily Post yesterday the project had simply proved too expensive on a very difficult site.

"It was just too much money."

Mr Lazarovits said they always wanted a facility that would include the Maori culture and the site was attractive because of the geothermal bathing aspect.

"It had to have something special ... without that it is just more beds in an oversupplied market."

Mr Lazarovits said he was disappointed the project had not worked out because he had admired the people he was working with and what they were trying to do. "At the end of the day it didn't stack up as a business case."

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Pukeroa Oruawhata Group's Peter Faulkner said the project was on hold after the Australian company "effectively withdrew".

Mr Faulkner said the company was working through the reasons but overall cost was a major factor.

Work was to have started by now, however all that has been done was early demolition work which saw the 1960s lounge bar flattened.

The Lakehouse Hotel, built in the 1870s, was bought by Pukeroa Oruawhata in 2007.

Mr Faulkner said Pukeroa Oruawhata would concentrate on the major redevelopment of the Rotorua lakefront on the 11ha it owns stretching from QE Health to the Government Gardens entrance.

Once that had progressed it would revisit the Lakehouse development.

Mr Faulkner said for the time being the Lakehouse would continue to be used for long-stay accommodation.

What was planned:

* 250-bed spa hotel

* Unique geothermal bathing experience

* Work was expected to start early 2016