Hedland & Newman

Central Queensland: The New Frontier for Positive Property

The trends that have characterized the positively geared property markets of the Pilbara boom towns can now be identified in the resources hubs of Central Queensland, providing investors with opportunities for portfolio diversification.

Over the past decade, the development of large resource projects, significant infrastructure investment, sharply increasing workforces, massive demand for accommodation and a severe undersupply of rental stock have caused both rents and house values in the Pilbara towns of Hedland, Karratha and Newman to skyrocket.

The Pilbara’s major iron ore and LNG projects are now in their operational phases. Housing markets remain strong and continue to deliver investors leading rental returns but growth is stabilizing to more sustainable trends.

In contrast, Gladstone, Central Queensland’s industrial centre is very much in development.  An established Alumina refinery has contributed to a healthy rise in house prices over the last several years, but its coal and LNG industries are still in their infancy.

Three LNG projects are currently in construction and another 14 infrastructure projects are in the pipeline (coal terminals, additional LNG and other mineral processing facilities). The value of these projects totals $105 billion – dwarfing Port Hedland’s $12 million, the Pilbara’s top town for infrastructure investment.

Moranbah is the Bowen Basin’s coking coal hub and services more mines than any other town in the country, drawing comparisons with Newman’s proximity to the Pilbara’s many iron ore operations.  Moranbah has also seen its housing market strengthen following the commodities boom.  It has $15 billion of approved and planned projects, including 14 coal mines to add to its existing 14.

While current and anticipated development in both towns is unsurpassed in Australia, investors will be aware of the softening of the market in recent months – a result of an increase in land availability and new residential development.

However, a combined $120 million in current and planned projects, a diversified long term commodities industry and projected population growth which is unlikely to be met with sufficient housing supply, they continue to make a strong investment case for the positive cash flow investor.

Stock market volatility highlights benefits of property investment

Greater confidence in the global economy has seen a sustained improvement in the Australian stock market over the last several months with the S&P/ASX 200 breaking through the all important 5,000 mark this month.

However, this positive development was followed last Thursday by the market’s biggest one day drop in nine months which saw more than $35 billion wiped off its value.

The market has since recovered but the ongoing volatility of the asset class and its hyper-sensitivity to global events highlights to investors the importance of balancing a portfolio with more stable asset classes.

Property, historically shown to be less volatile than shares, is a solid option. When the Australian share market crashed during the GFC, 54% was wiped off its value. In comparison, property values and rents overall remained relatively steady, with house prices falling less than 5% from peak to trough (RP Data).

The debate over which is the better performing asset class will always be a popular one but according to the ASX’s 2012 report on long-term investing, shares and property have actually produced similar returns over the last 10 years, when taking into account tax and costs. But property did come out on top.

It returned the lowest and highest marginal tax rate for the 10 year period with returns of 7.2% pa and 5.8% pa respectively.

Shares achieved 6.5% pa and 4.6% pa at the lowest and highest marginal tax rates, respectively.

Both assets have their pros and cons.

Shares are more liquid making it easier to access your cash if you need it. They can deliver more capital growth over shorter timeframes – but investors need to be aware that gains can be lost just as quickly.

Property on the other hand is less liquid but will typically deliver more stable growth. And as the sole owner, rather than part owner, as is the case with shares, you have complete control over the management of your asset giving you the power to improve it and increase its value.

Investing in the share market without the expertise of a financial advisor can also be challenging – many investors simply find property easier to understand.

Regardless of your personal preference and appetites for risk, what is key is a well researched strategy, a diversified portfolio to reduce risk and a long term view to ride out any booms and busts.

National Spotlight Falls on WA Property Market

Over the last several months there has been growing activity by Eastern States investors in the Western Australia property market.

These investors are now beginning to understand that on a national basis, Western Australia now offers some of the best rental returns and potential capital growth rates in Australia.

The growing confidence in the Western Australian property market was underlined by new figures produced by Australian Property Monitors. These figures revealed that during the December 2012 quarter, the median house price in Perth jumped by 2.5% which was the highest capital growth rate of any capital city in Australia except for Darwin.

It is also significant that Perth house prices jumped at a much faster rate than the national increase of 1.9% during this three month period.

This surge in Perth house prices recorded by Australia Property Monitors mirrors the latest figures produced by the Real Estate Institute of Western Australia which showed that the median house price in Perth rose by 3.3% during the December 2012 quarter.

Overall, Perth is now attracting media headlines as one of the property hotspots in Australia and as a result the value of house prices are expected to return to record levels within months.

Investors however should pose the question why are Perth house prices now beginning to surge?

The answer is quite simple – the WA economy is a mining economy and the Perth property market is now benefiting from the impact of the massive investment in the resources sector.

This impact is very apparent in suburbs surrounding Perth airport where there is now a huge demand for rental accommodation from fly-in fly-out workers with the consequence that property values in these suburbs are now beginning to surge.

While the potential capital growth of the Perth real estate market is beginning to impress investors on a national level, it is still being dwarfed by major mining towns in the Pilbara region.

For example, the latest REIWA figures show that in Newman, the median price of a home during 2012 surged by a massive 22.3% to $840,000. This was nearly four times the annual growth for the entire Perth property market during the same period.

Therefore, investors who are focusing on Western Australia during the coming year should understand that the overall economy is being driven by the resources sector and the best way to harness the maximum benefits from the resources boom is to invest as close as possible to the centres of mining activity – namely the major mining towns in the Pilbara.

These major mining towns such as Newman and Port Hedland continue to deliver investors double digit rental returns as well as the potential for very strong capital growth moving forward. 

New Infrastructure Investment Signposts Continued Confidence in WA Mining Towns

Property buyers can get a good forward indicator of future trends in mining towns by looking at investment in key support infrastructure such as airports.

Airports are now the life blood for mining towns as they are used to transport people, equipment and supplies to these remote regional areas.

It was therefore very significant that Qantas has just announced a major multi million investment in its Perth terminal to cater for future demand resulting from the resources boom.

Qantas has invested heavily in regional WA, having expanded QantasLink and Qantas capacity over several years and is now operating more than 280 return flights with 75,000 seats to regional WA every week.

According to Qantas chief executive Alan Joyce, the airline recorded double digit growth annually over the last five years in WA and believes growth will continue at a rate of 10% for the foreseeable future due to the resources boom.

As a result of this growth, Qantas is enhancing facilities in Terminal 4, its dedicated terminal at Perth airport, and from February, Qantas will expand its operations into the adjacent Terminal 3.

Looking to long term trends, Mr Joyce supports the need for a third – and second parallel – runway at Perth to handle rising future air traffic demand flowing from the growth in the resource sector.

With major companies such as Qantas now investing for future growth flowing from the long term expansion of the resources sector, it only makes sense that property investors should take their lead by investing in housing which is also a major support service.

In late 2012, property investors were bombarded with negative news about the end of the mining boom based on a slump in iron ore prices.

However, this slump only proved to be a temporary phenomenon with the benchmark price of iron ore now above US$140 a tonne.

Strong commodity prices will see a rebound in investment in mining regions during 2013. This trend is already underway with Fortescue Metals announcing that it will recommence expansion of the Kings deposit at the Solomon mine hub after it was suspended late last year due to low iron ore prices.

This increasing investment comes at a time when exports of iron ore from the Pilbara are already at record levels. Some 25.999 million tonnes of iron ore was shipped from Port Hedland during last month – the highest monthly trade in its history.

Therefore, the outlook for the Pilbara real estate market in particular, looks very positive as we enter 2013 and property investors in the region can look forward to rising capital growth rates and returns based on continued new investment in the region and support services.