By Terry Ryder.
Introduction:
It's all about resources and infrastructure, which means jobs, jobs, jobs
The places delivering strong capital
growth are the ones creating jobs.
They’re not the places on the coast where people go to
holiday or retire. They’re the places, often inland regional locations, where
industry happens and jobs are created. And right now, it’s all about resources
and infrastructure.
Here’s my simple formula for those chasing capital
gains ...
Resources + infrastructure =
JOBS
Growth happens where people go to access new jobs. It
seldom happens where people go to take a break from their jobs (holiday) or
where people go after quitting their jobs (retire). And, perhaps more
obviously, prices don’t rise where jobs are being lost and unemployment is
high.
To ram home this simple but powerful message, I’m
devoting this edition of the Quarterly Market Report to a theme based on the
two key jobs creators: resources and infrastructure.
National
Overview:
The infrastructure/resources regions will do best in 2012.
Western Australia’s exploding
resources sector has finally caught up with Perth’s residential property
market.
Vacancies are very tight and rents are rising, with
tenants queuing at inspections and some offering more than the asking rent to
secure accommodation.
This was inevitable. Last year we saw strong take-up
of CBD office space and warehousing premises, plus low vacancies in Perth’s
hotels – all consequences of rising employment and population growth inspired
by the expansion of the resources sector.
Now that has flowed through to residential property.
The Perth market has been in hibernation for the past four years, but has
finally awakened.
This is happening because the companies receiving the big
contracts from the miners are headquartered in Perth – and many of the mine
workers live in Perth and go to work as fly-in-fly-out (FIFO) personnel.
The federal inquiry into the impact of FIFO trends has
been told that it costs a mining company $100,000 per year more to accommodate
a worker in Port Hedland, as opposed to flying them in from Perth. This is
largely because the average Port Hedland house costs over $1 million and rents
for $2,000 per week.
So we have seen rising traffic through Perth Airport,
which is already well beyond the levels of the pre-GFC upturn in the mining
sector.
And it’s only just starting. A record $150 billion
worth of WA resources projects is expected to help the state grow at nearly
twice the rate of FY2011 for the next two years.
Despite what the media would lead you to believe, it’s
not all about WA. Queensland is also seeing massive action, South Australia is
rapidly emerging as the third big resources state, Darwin is abuzz with
prospects of becoming a gas hub of global significance, the Hunter region of
New South Wales has become one of the most dynamic economies in the nation, and
even Victoria is seeking to grab a slice of the action with plans to expand the
mining of brown coal in the Latrobe Valley.
This kind of resources action means billions of
dollars spent on new infrastructure, particularly rail links and export
terminals. Anywhere with an export port within cooee of the mining provinces
faces major expansion.
Any regional centre with a well-rounded economy and
some impact from the resources.
Feature topic:
If you want to understand
the current real estate climate, visit Gladstone
There is no more powerful example of
the impact of resources and infrastructure development than in Queensland’s
industrial muscle town, Gladstone.
Here there are projects worth around $100 billion
happening, half of which are now under construction.
They include LNG processing plants, three export port
expansions, new rail links, an airport upgrade (recently completed) and other
infrastructure.
Developers are busily trying to build new homes to
cater for the influx of thousands of workers, but because approvals and
construction take time, they are well behind the high level of demand.
Property prices and rents have risen in the past 12
months. The Surveyor-General recently released its assessment for land values
in Gladstone, recording an average annual rise close to 20%, with some sections
of the Gladstone market rising 35%.
Rent reviews for houses typically results in weekly
rents rising $100 or more.
The key factor is that this process is only just
starting. The overall scope of current and committed developments in Gladstone
entails 27,000 construction jobs, many of them still to come. More projects
will come to Gladstone in the future, as a result of everything that is
happening now.
Bechtel, the giant US family company which manages
resources projects, is responsible for all three of the LNG processing
facilities currently under way on Curtis Island, just off Gladstone.
It has established a workers village on the island
where around 1,000 of their construction personnel are living. Eventually 6,000
will be living there. These sorts of facilities are important to overcome the
peaks and troughs of workforce numbers in places like Gladstone, given that the
jobs in building a processing plant are more than the jobs in running the
facility once completed.
To consider the kind of real estate impact we can
expect in Gladstone from the upcoming surge in jobs, let’s look at what happened
to Gladstone during an earlier boom phase. Before the GFC in 2008, Gladstone
had around $20 billion in new developments on its books, creating new jobs and
rising demand for accommodation.
The property market rose strongly from 2004 to 2008,
delivering four consecutive years of double-digit price growth, including
30%-plus in 2007. In five years, Gladstone’s median house price rose from
$230,000 to $390,000. The long-term growth rates of the various suburbs in
Gladstone range from 12% to 17% per year.
If $20 billion in new projects generated that kind of
real estate reaction, imagine what $100 billion will do.
Gladstone currently has a shortage of everything that
matters: residential property, office space, industrial property, hotel rooms,
hire cars and skilled workers.
The high cost of renting houses has become the No.1
local issue, particularly for households who are not working in the
resources-related projects, where the big wages are earned. It was a core
factor in the recent local government elections and also the Queensland state
election.
The issue is unlikely to improve any time soon, given
that projects that are committed but not yet started – including another
massive LNG facility, a steel mill, port expansion, a power station and a
nickel plant – entail investment totaling $25 billion and another 11,000
construction jobs.
Last year, Gladstone’s median price rose almost 20%
while prices continued to go backwards in Queensland locations such as the Gold
Coast, the Sunshine Coast, the Whitsundays and Cairns.
Over the past five years, Gladstone house prices have
increased 65%, compared to 14% on the Gold Coast, 6% in the Whitsundays and 33%
in Brisbane. Gladstone unit prices have grown 77% in five years, while they
have gone backwards in Cairns, the Whitsundays and the Fraser Coast, with
virtually no growth on the Gold Coast or the Sunshine Coast.
Vacancies are negligible in Gladstone, competed to 3%
or 4% in Noosa, the Gold Coast and Hervey Bay.
Brisbane and
Queensland: Challenging Perth and WA as the boom centre of Australia
Media, in its simplistic way, tends
to portray the Australian economy as “Western Australia booming” and the rest
struggling. That scenario overlooks many things, including the considerable
challenge being mounted by Queensland for the title of No.1 boom state.
WA is generating unimaginable riches through iron ore
and liquefied natural gas. Queensland is on a similar path through coal and
coal seam gas.
To quantify Queensland’s contribution to the Resources
Revolution, mining companies are spending $35 billion on new export facilities
alone. Bowen, Mackay and Gladstone are the key venues.
Until recently, Queensland had two major mining
provinces – the Bowen Basin and the North West. Now it has four, with the Surat
Basin near Toowoomba and the Galilee Basin near Emerald doubling the scope of
the state’s mining sector.
The two main pistons of Queensland’s economic recovery
are the nexus between the Surat Basin and Gladstone, and the one between the
Bowen and Galilee Basins and Mackay/Bowen.
The Surat Basin is where the bulk of the coal seam gas
is being extracted, before being piped to Gladstone for processing and export.
This is creating rising real estate markets in Gladstone, Toowoomba, Chinchilla
and Roma.
The Bowen Basin and Galilee Basin coal precincts are
seeing expanding activity, with new rail links being built to the main export
facilities near Mackay and Bowen.
Indian companies are big investors here. One is
spending $10 billion on its coal mine, new rail link and multiple export
terminals.
Pretty soon there will be three or four new rail lines
being built across the state, as well as a dozen new export terminals. This is
serious infrastructure building.
Brisbane will feel impacts in multiple property
markets. The take-up of CBD office space and industrial premises started to
accelerate last year and there will be gradually-rising demand for housing this
year and beyond. As is always the case, the companies winning big contracts
from the miners will have headquarters in the state capital, while many of the
mine workers will live in Brisbane and go to work on the fly-in-fly-out basis.
There are all sorts of repercussions for the mining
towns – like Moranbah and Dysart in the Bowen Basin – but often the biggest
economic and property outcomes are experienced in the capital city.
The recently-defeated State Government led by Anna
Bligh was unpopular for all sorts of reasons, but one positive thing it did do
was facilitate considerable development of new infrastructure. Brisbane
currently has the Airport Link road/tunnel project well advanced, as well as
the Northern Busway, the Ipswich Motorway upgrade and the Royal Children’s
Hospital project – each a multi-billion-dollar enterprise.
Rising confidence within Queensland has been enhanced
by the defeat of an unpopular state government and a Premier seen as being
untrustworthy and ineffective. Time will tell whether the public’s faith in new
Premier Campbell Newman is well-placed, given his own track record for broken
promises and evasion of tough questions.
Conclusion:
Yes, resources are a fundamental factor – but don't rush to mining towns
Mining and associated infrastructure
is the strongest of the pistons driving the national economy and its property
markets – but don’t rush out and buy real estate in a mining town.
That’s unless, of course, you understand the risks and
are willing to trade that for the prospects of high rental returns and capital
growth.
Recent events at Dysart in Queensland’s Bowen Basin
provide the perfect illustration. Dysart has averaged annual growth in its
median house of 31% per year – yes, 31% a year – over the past decade.
Double-digit rental returns are available on houses because rents are so high,
thanks to demand from mining companies and their workers.
But then, in April, everything took a surprise turn.
BHP Billiton, after 18 months of disputes with unions, spat the dummy and
announced it was closing down the Norwich Park coal mine. If it’s serious
(rather than using the threat as a negotiating tactic) 1,400 people will lose
their jobs – although some may be re-assigned to other mines in the area.
That seriously changes the market dynamic in Dysart.
Anyone who recently bought a rental property in Dysart at the median price
(close to $500,000) would be feeling a little sick right now.
The safest way to exploit the Resources Revolution as
property investors is to buy in substantial regional centres that benefit from
the mining sector but don’t depend on it – places like Toowoomba and Mackay in
Queensland, Muswellbrook in the Hunter Valley of NSW, or Geraldton in WA.
