Resource Town Investing – Risk VS Reward
Mining towns have undergone phenomenal growth over the past decade on the back of the resources boom. With investment levels in projects now softening, growth is returning to more sustainable rates.
Positive property yields in these towns remain at 9% upwards – still among the highest in the country – however, the market volatility has left some mining town investors concerned that their cash flow and capital growth is at risk.
Here are five things Resource Town investors should consider:
- Your property’s yield compared with the market
It is important to remember that falling rents in resource towns are coming down from high levels after a period of rapid – and unsustainable – growth. Even with median rents at lower levels, they are still generating extremely high yields relative to the rest of the market. Certainly, they are outperforming the national average which is currently around 4% for houses.
- Your yield compared with other income-generating investments
Compare your yield with that of other income generating assets. Average yields from stocks for example are currently around 4% or 5%, with the top dividend-yielding shares around 7-8%.
- Your capital growth versus the rest of the market and other investment options
Like rents, house prices have also softened in some mining towns, which are entering a period of correction after years of huge growth. Pilbara towns have outperformed the national market over the past decade returning 18% on average per year compared with the national average of around 6.5%. The share market has delivered around 5.5% growth pa on average over the last 10 years.
If you have enough equity in your current portfolio to purchase another property then consider using it to diversify. Any reduction in your cash flow stream as a result of reduced rent from another property can be offset by a smart investment into another high yield area.This also applies to capital growth. The current market is actually producing some excellent opportunities to maximize returns by buying in to recovering markets at lower values. Cash flow and capital growth is still very achievable if you do your research and seek the right advice. South Hedland and Newman have both maintained steady growth over the past 12 months and Moranbah is also recovering. As growth slows in some towns, it will skyrocket in others, where new industries, such as LNG, are moving to the forefront.
- Reviewing your property manager, interest rates and the tax benefits you are eligible for
All three can have a significant effect on your cash flow. A good property manager experienced in the local market will ensure you achieve the maximum rent and secure quality, long term tenants. Those that have established relationships with large corporates will also help minimize vacancy and negotiate the best possible rent.
With interest rates hitting record lows, there is also the option to refinance and reduce your interest payments, and taking advantage of all tax benefits available to you at tax time, such as depreciation, will also ensure you get the most out of your property.
BHPB CEO paints positive picture for investors
Encouraging comments from BHP Billiton’s CEO along with the release of two research reports on the Australian resources industry, have provided a positive outlook for the sector and the performance of mining town property markets.
Challenging sentiment that Chinese demand for iron ore is waning and prices are on a downward trend, BHP Billiton CEO Andrew Mackenzie was optimistic last week regarding China’s ongoing demand for iron ore, following a meeting with China Premier Li Keqiang.
Amid media reports that Chinese steelmakers are reducing their output, forecasts of oversupply and a projected falling iron ore price, BHP was reassured of China’s continued growth through urbanization and ongoing need for resources.
At an event in London last week Mr. Mackenzie said: “There was a very clear signal, as far as [China Premier Li Keqiang] was concerned, this is the only way China’s success can continue on a relatively unbroken path of increasing urbanization.
“[Li Keqiang] said ‘I do reassure resources industry we do need more’.”
With China being the biggest importer of Australian iron ore, this is positive news for the industry, and the Pilbara towns that support it.
The BHP CEO Remains upbeat about the medium to longer-term balance between the supply and demand of bulk commodities, particularly iron ore, a key component in the development of steel.
At the same as his comments, the Port Hedland Port Authority released data showing exports of iron ore to China from Port Hedland – a strong indicator of Chinese industrial activity – surged 21 percent in May, from April, to hit a record high. The port is used by BHP, Fortescue Metals Group and Atlas Iron.
Year-on-year, total shipments were up 24 percent with total iron ore exports expected to exceed 200 million tonnes this year.
Mr Mackenzie also reiterated the global population growth forecast – expected to rise by as much as a third by 2050 to more than 9 billion – and the projected Chinese growth rate of 7 per cent per annum over the next five years, saying,
“Only if we deliver steady, sustainable growth in commodities – from steelmaking, through to metals, energy and energy transfer, to food – can we be sure that by 2030 the global middle class could grow to 5 billion, up from 2 billion today.
“Popular opinion is that our industry is fundamentally unsustainable because the world, they believe, is running out of resources,” he said. “Popular opinion is wrong.”
The comments follow two recent reports released by US research group Wood Mackenzie and the Australian Bureau of Resources and Energy Economics (BREE) which also support a positive outlook for Australian resources.
US research consultancy Wood Mackenzie says it expects resource sector investments in Australia to peak in 2013 at $85 billion, dominated by spending in gas, followed by iron ore and coal. The high investment levels will be sustained over the next three years, surpassing the previous three year period.
Regionally, it says Western Australia and Queensland dominate, making up 83% of total capital expenditure in 2013, driven by large gas and iron ore projects. Investments in iron ore will push resource sector investment in WA to record levels. Committed capital spend for the seven LNG projects that are under construction will ensure that investment remains high for the next three years at least, particularly in WA and Queensland.
The BREE report ‘Resources and Energy Major Projects – April 2013’, stated that over the past 10 years, around 390 resources and energy major projects have progressed to the ‘committed stage’ (i.e. they have passed final investment decision with many now in construction) with a combined value of $394 billion. $268 billion in projects are still under construction and not yet complete.
113 projects have been ‘publicly announced’ with a combined planned capital expenditure spend over the life of these projects of between $121–171 billion. At the feasibility stage, the stock of planned capital expenditure is estimated at $232 billion from a total of 174 projects.
While 100 per cent of projects never progress to completion, it indicates a strong pipeline of future activity and paints a positive picture for investors regrading the sustainability of the nation’s resources sector and its associated property markets.
Tom Price opens up to property investors
The mining town of Tom Price in WA’s Pilbara has seen house prices increase 19.3% per annum on average over the past decade while its median rent is now at $2,300 per week, according to REIWA, placing it as the highest of all the Pilbara towns.
The doubling of its population to 5,400 in just six years, as a result of the integral role it plays in Rio Tinto’s and FMG’s iron ore operations in the region, along limited housing supply has put immense pressure on its housing market.
But while its performance has been consistent with other regional towns in the Pilbara, it has not garnered the same level of attention.
With 92% of the town’s residential housing is owned by Rio Tinto and a lack of new development (until 2011, there had been no new no land releases in 40 years) investors have had fairly restricted access to this lucrative market.
However, recent land releases have now opened up opportunities. Given its large rental market (86% of the population rent their home), zero vacancy rate and Rio Tinto’s and FMG’s significant new and expanding projects nearby, investors are standing up and taking note.
Rio Tinto intends to expand its iron ore operations in the Pilbara, investing about US$20 billion in the next five years (requiring over 6,000 employees) to facilitate a planned ramp up of production to 360 million tonnes per annum (mtpa), an increase of more than 50% of its current capacity.
The expansion includes a major investment in infrastructure at Rio’s Nammuldi mine, 60km north-west of Tom Price, which will increase production capacity from eight to 23mtpa, creating almost 1,500 construction jobs and secure ongoing employment for more than 700 people.
Recent news further enhanced the town’s prospects as an ongoing hot spot with Rio receiving approval from the Environmental Approval Authority to further expand its Western Turner Syncline hub, just 20km from the town. Western Turner Syncline has just ramped up capacity to 15mpta but the execution of these recent plans would see it double capacity to 32mtpa. While these plans are still in their early stages, it suggests significant growth ahead for the company’s Pilbara operations.
The fact that Rio’s Pilbara operations are the lowest cost in the region’s iron ore industry, indicates the mining giant is well positioned to deliver on these additional expansion plans.
Located 70km north of Tom Price, the Solomon Hub is FMG’s next major project and the largest iron ore start-up in Australia. The Fire-tail and Kings deposits are the first stage of the project and are currently under construction. When complete, they will produce a total 60mtpa of ore each year.
The Solomon Hub is the lowest cost operation in FMG’s business and has significant expansion potential.
The expansion of Solomon and development of Western Hub, an FMG project just 20km from Tom price would see thousands of additional construction and operational workers brought to Tom Price.
As well as investment into industry, the town has also received a $20 billion civil infrastructure upgrade as part of the government’s Pilbara Cities initiative which has dramatically upgraded the town centre, and sporting and community facilities.
Pressure on housing is likely to continue as any further land releases and residential developments are unlikely to create an oversupply given the projected workforce growth and housing shortfall.
According to a report by Regional Development Australia, Tom Price had a dwelling shortfall of 259 homes in 2012 and will require a total of between 271 and 471 new homes by 2015. Only 37 residential lots were released in 2011 and further releases are yet to be announced.
Encouraging news for investors seeking to build and diversify their property portfolios, by identifying the next WA Hotspot.
Unlock Your Equity with Home Renovations
Property renovations have grown in popularity over recent years, as people have sought to boost the value of their homes by undertaking internal lifestyle upgrades.
The same trend is also occurring in the property investment marketplace, with astute investors purchasing older style properties, with the view to increase the overall capital value of the property and its rental yield.
This growing popularity of home renovations is underlined by ABS figures which show that last financial year the value of home renovations in Australia totaled over $6 billion. On average, a staggering $100 million is now being spent every week nationally on home renovations.
In States such as Western Australia and Queensland, home renovations are now becoming big business. Last financial year, nearly $600 Million was committed to home renovations in WA alone and over $1.2 billion in Queensland.
Over recent years, a growing sum of renovation spending has been focused in the mining towns of Queensland and Western Australia, due to the direct connection between the capital value of the properties and their rental returns.
In the Pilbara region of Western Australia, for example, more than $40 million was committed to home renovations last financial year while nearly $20 million was committed by investors in the Gladstone region of Queensland.
Astute property investors can add substantial capital value to older style properties in mining towns, especially if homes in the area are undervalued, run down or rented below the market.
Certain mining towns can be ‘Equityville’ for investors, as low cost cosmetic home renovations can quickly boost rental returns and therefore the underlying value of home.
However, investors need to undertake their research carefully before considering buying a property in a mining town for home renovation purposes.
Building costs are historically much higher in mining towns than metropolitan areas, so home renovators need to set a realistic budget and ensure they appoint reputable contractors. Local agents on the ground can assist in this process.
In addition, it’s important to undertake a suitable renovation that appeals to the towns leasing market and therefore maximizes the full rental potential of the property. Again it is important to understand that the requirements of tenants in mining towns can be very different from tenants in larger cities.
I recommend starting with a smaller more affordable property that requires just cosmetic improvements, such as new carpets and/or internal repainting. In more established mining towns such as Port Hedland, Karratha or Gladstone, there is a wide selection of older style apartments and homes that lend themselves to these types of low cost renovation projects
Renovation properties or “Value-add” investments as they are known are a fantastic option for investors looking to get an instant equity foothold in the positive marketplace. While some purchasers may wait years to realize strong capital growth, savvy investors can realize the same goal in a much shorter period, by taking advantage of the renovation opportunities.
100 Billion Reasons to invest in Gladstone
With over $100 billion in infrastructure projects planned or under construction, the city of Gladstone in Queensland can be aptly described as a super infrastructure location for property investors.
Infrastructure investment has historically been a key driver in property values because it results in a rising demand for homes as well as higher living standards. For example, the massive new infrastructure investment in Gladstone is predicted to create a demand for an estimated 8,100 new dwellings by 2018.
Gladstone is now a key hub for the growing energy sector in Queensland and as a result is attracting massive overseas investment both in coal and LNG.
The Port of Gladstone is Queensland’s largest multi-commodity port and the fifth largest multi-commodity port in Australia. It is now the world’s fourth largest coal exporting terminal with coal making up 70% of the total exports from the port. To help cater for the increasing level of coal exports from Gladstone, approval was recently given for the $2.5bn Wiggins Island Coal Terminal Stage 1 project.
In addition to coal, Gladstone is also the centre of a rapidly expanding LNG industry. LNG emerged as a major industry in the city in 2010 with the approval of BG Groups’ $20bn Queensland Curtis LNG (‘QCLNG’) project on Curtis Island, across the harbour from Gladstone. A few months later in January 2011, Santos approved its $18.5bn Gladstone LNG (‘GLNG’) project also on Curtis Island.
This was followed with Origin approving the first stage of its $23bn Australia Pacific LNG (‘APLNG’) project in July 2011 with the second stage further approved a year later. It is estimated that the potential of Gladstone’s LNG industry is capital expenditure totalling $70 billion and thousands of new jobs.
For investors taking a long term perspective of the property market, it is important to understand why Gladstone is attracting such a large level of investment and why it will continue in the future.
International companies are now pouring billions of dollars of new investment in Gladstone because of the surging demand for energy in the world – a demand which will continue well into the future.
This trend has been underlined by the latest predictions by the International Energy Agency (IEA) in its 2012 World Energy Outlook Report.
The IEA predicts that global energy demand will grow by more than one-third over the period to 2035 with China, India and the Middle East accounting for 60% of this increase.
Over the coming two decades, there be ongoing challenges to meet this growing world- wide demand for energy and that is why key energy hubs such as Gladstone will continue to attract the large infrastructure dollars and projects.
For investors seeking property in an established location, offering mining town rental returns in a lower risk environment – Gladstone should be given serious consideration during the coming year.
WA Resource Sector Bucks Trend & Grows By $12 Billion
The latter half of 2012 has seen an unprecedented amount of bad publicity surrounding the resource industry in Australia.
However, when one takes a closer look at the state of our country’s largest income stream, the Western Australian economy continues to show signs of strength and growth.
Of particular importance was the Deloitte Access Economics quarterly investment monitor for the September 2012 quarter which shows that total planned or existing investment in Western Australia stands at $281 billion – an increase of $12 billion over the past year.
These figures underline the fact WA’s resources sector is not a boom and bust economy but rather a growing sector which is often misunderstood.
Deloitte director David Rumbens said WA’s economic future based on these investment figures seemed assured for some time to come.
“Even with few new approvals, resources projects under way will keep construction activity in the West humming along at heightened levels for several years yet,” he said.
The reality is that short term fluctuations aside, the growing demand for our resources from both China and India will continue to power the WA economy for many decades to come. For example, The World Bank still foresees China overtaking the US as the world’s largest economy by 2030, if it maintains an annual growth rate of 8 per cent.
While a large amount of the recent negative publicity has focussed on the European economies, it is important to remember that Australia’s economic fortunes are tied to Asia.
One simple figure puts this into perspective – by 2025 or just over 10 years, it is estimated that there will be 221 cities in China with a population of over 1 million, whereas today in the whole of Europe there are just 35 cites with this population.
Overall, it is expected that 350 million Chinese will migrate into cities by 2025 with over 103 million having already made the move since 1990. As a direct result of the expansion of Chinese cities, it is predicted that 50,000 skyscrapers (+30 stories) will be built – the equivalent of 2 Chicago’s every year during this period.
In addition it’s important to consider the continued industrialisation of India which has a population of 1.2 billion people. Over the next decade the demand for steel is expected to soar in India and this will help to underpin the demand for resources such as iron ore.
The Western Australian Iron ore region is already beginning to see increasing activity by Indian companies in the resources sector and this trend is set to increase over the coming decade.
The Pilbara Region offers more than the average mining town, with astute positive property investors gaining the opportunity to participate in what will become the counties greatest resources era experienced to date.