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by Terry Ryder - creator of hotspotting.com.au
It's all about resources and infrastructure..
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.
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 sector is going to experience growth and high demand for real estate.
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.
Melbourne and Victoria:
Latrobe Valley decision will pitch Victoria into the Resources Revolution
Victoria has been a remarkably strong performer as an economy and as a property market over the years, given that it doesn't have the resources impetus that other states get.
But there are prospects for that to change, with the April announcement that the State Government plans to increase the mining of brown coal in the Latrobe Valley.
The State Government will promote development of the state's brown coal reserves, with plans to open up new coal opportunities. It proposes a tender for new allocations of Latrobe Valley brown coal, to be finalised by the middle of next year.
A number of mining companies have put their hands up to take significant chunks the coal rights on offer. Coal technology firm Exergen says it will bid for up to 1 billion tonnes of brown coal for export to Japan and India and for use in a new demonstration power plant. Another firm, Australian Energy Company Limited, is seeking up to a billion tonnes of coal for export as briquettes and for a fertiliser project
Meanwhile, Latrobe City Council has welcomed the decision to allow HRL's proposed dual-gas fired power station to establish at full capacity. In a decision handed down in April, the Victorian Civil and Administrative Tribunal overturned the Environment Protection Authority's restricted project approval, allowing the company to construct a 600mw plant near Morwell. The EPA had approved a reduced 300mw version of the plant last year, which will "gasify" brown coal to generate power with relatively cleaner black coal equivalent emissions.
This suggests a brighter future for towns like Traralgon and Morwell, which some feared would decline because the carbon pricing scheme would kill off the coal-fired power stations in the region. It appears rumours of their death have been greatly exaggerated.
Another strand of Victoria's bid for a bigger slice of the economic action is plans to increase its export infrastructure. Melbourne is to get $1.2 billion container port at Webb Dock, at the top of Port Phillip Bay, which will increase handling capacity to up to $100 billion worth of trade a year and create 2,500 jobs.
There also plans to develop a major facility at Western Port and to lift the importance of the Port of Geelong by transferring the car import-export business there.
Victoria certainly needs some oomph from export sectors like resources because one of the traditional cornerstones of its economy, manufacturing, is struggling. Victoria has become "the employment drain of the nation", shedding 1,000 jobs a week since the middle of last year. The state lost 27,700 jobs in the six months to the end of February.
As one example, Toyota sacked 350 workers at its Altona plant in Victoria in April. It is another blow for the car industry in Australia, which increasingly relies on government subsidies to remain viable.
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.
Property Market Report - August 2010