Powerhouse of the Iron Ore Boom

Transcription

1 positive positive property property report report ISSUE 8 Newman: Powerhouse of the Iron Ore Boom

2 Introduction The Crawford Property Group Crawford Property Group are your positively geared property experts, specialising in cash flow earning property Australia-wide. Positive Property is now the investment vehicle of choice and offers many benefits including; passive income, high rental returns and the ability to build a successful portfolio much quicker! Crawford Property Group are your positive property destination & can help with market knowledge, education, property selection and management of your new investment property. What are you waiting for, explore our site and start your investment journey today. Search our positive properties, accurate market information, market updates, success stories, best financial options and the right advice.

3 Contents Newman...4 Overview...4 Population growth - Newman...5 Property market...6 Dwelling constraints...7 Future growth Focal point of $9bn in infrastructure projects...7 Civil infrastructure projects - $70m in health and sports facilities...8 $192bn infrastructure boom for the Pilbara...9 Pilbara has Australia s largest concentration of infrastructure projects...9 Booming Pilbara population...9 Highly paid FIFO workforce...11 Future Vision Pilbara Cities Strategy...12 Australia s largest property boom...12 Constrains on new housing supply has amplified the property boom...13 $1.2bn government response to build liveable cities in the Pilbara s...14 Pull back in projects will actually prevent property oversupply...15 Housing historically neglected by mining companies...15 Pilbara Cities ambitious initiative to normalise property market...16 Dwelling construction has never been rapid and planning is a lengthy process...16 Infrastructure project delays will make funding residential projects very difficult...18 But demand for new dwellings will continue unabated...18

4 Newman Overview Newman is an inland town in the Pilbara region of Western Australia, located 1,186km north of Perth and 456km south of Port Hedland in the Shire of East Pilbara. Established originally as a mining company town in 1968 by a subsidiary of BHP to support the local iron ore mine, Mt Whaleback, the town has become the iron ore town of the Pilbara with a population of circa. 6,000. Today, Mt Whaleback is the largest open cut iron ore mine in the world being over 5km long and 1.5km wide with over 100Mt of iron ore extracted from it and six other satellite mines. These mines surround Newman and the iron ore is transported to Port Hedland on the privatelyowned railway. Newman BHP Billiton s Orebody 24 iron ore mine lies 10km from Newman. In November 2011, BHP announced a US$822 million investment deal for development of Orebody 24 which will increase its production to 170Mtpa, and will also service the Roy Hill project. This mine represents the last of the large low phosphorous ore bodies in Australia and would employ over 3,500 workers. The town serves as the East Pilbara service town of mines in a radius of hundreds of kilometres, including FMG and Rio Tinto mines to the north of the township. Newman

5 Population Growth - Newman While Newman is certainly the smallest of the big three Pilbara towns, it s well on its way to becoming a major regional hub. Its current population rests at around 6,000 permanent residents but this is set to more than double to 15,000 under the Pilbara Cities initiative and strong demand from China for iron ore. Newman is expected to grow to 8,000 by 2015 and then reach 15,000 people around Chart 33: Newman forecast population growth Photo: Whaleback Mine World s largest open cut iron ore mine

6 Property Market Newman has been the strongest performing property market in the Pilbara region, with a ten year average growth of 32% per annum. This extraordinarily high average growth rate has been driven by the severe shortage of accommodation with Newman regularly experiencing zero percent vacancies. Over the last year, Newman has also had the best median price growth rising 14.7% to reach a median price of $802,000 in June. Chart 34: Median House Values Newman Rents are also strong with the median house rental being $1,800 in June, representing an indicative gross rental yield of around 11.7%. Vacancy rates have risen slightly but are still very low at 2.0%. Chart 35: Vacancy rate Newman

7 Dwelling Constraints The Newman property market has been essentially land locked due to prolonged native title issues, with the main people group (the Nyiuyapari) yet to reach separate agreements with FMG and Hancock Prospecting several years ago and only most recently with BHP Billion. Specifically, in August, BHP Billiton reached an agreement with the Nyiyaparli people which will allow a rapid upgrade of BHP s output from about 120 million tonnes of iron ore a year to an anticipated 350 million tonnes by The Nyiyaparli people have consented to all present and future BHP operations on their land, granting approvals in and around Newman and the eastern Pilbara. The BHP deal provides for a minimum and maximum stream of benefits in a productionbased payment system, guaranteeing a long-term income stream. The Pilbara Cities blueprint is forecasting a demand for 832 dwellings in Newman by 2015 however analysis of the pipeline of dwellings to be constructed between to 2015 indicates that only 781 will be constructed, leaving the market to continue to experience housing shortages. Future Growth Focal Point of $9bn in Infrastructure Projects With the huge Whaleback and Orebody 24, mines and its role in the assortment of smaller mines, Newman already has a very strong economy leveraged completely to iron ore prices. The planned projects look to expand existing developments, build a power station and service new and existing mines. Table 6: Planned and Committed Infrastructure Projects - Newman

8 Civil Infrastructure Projects - $70m in Health and Sports Facilities Newman has $70m in targeted civil infrastructure project expenditure, with the state government committing to a major sporting upgrades and the current opposition promising to spend $40m on a revitalisation project for the township. Table 6: Civil Projects Newman

9 $192bn Infrastructure Boom for the Pilbara Pilbara has Australia s Largest Concentration of Infrastructure Projects Since the early 2000s, the commodities boom has seen the number of confirmed and proposed infrastructure projects in Australia grow by almost five fold. Today, these combined projects are worth a staggering $554 billion. Throughout the last six years, Western Australia has enjoyed the lion s share of infrastructure projects related to the recent commodities boom principally due to the Pilbara, Indeed, out of the staggering $286 billion in projects as of, over $192bn linked to iron ore and LNG projects in the Pilbara. Newman Chart 17: Confirmed and proposed infrastructure projects, $bn Source: Bureau of Resource and Energy Economics; Omega Investments Booming Pilbara Population The commodities boom has already seen some $30bn in new and expansion projects completed over the last ten years in the Pilbara, which has created an immense population boom. Indeed, after 20 years of a marginally declining population, the Pilbara has experienced circa a 40% or 16,000 person population explosion in the resident population over the last decade from 39,000 to 55,000 people. However, the inclusion of transient fly-in/fly-out (FIFO) and construction workers, today s population is actually closer to 75,000.

10 As impressive as this population boom has been, the pipeline of $192bn in infrastructure projects is forecast to see the Pilbara experience continue with strong population growth over the next decade. While the permanent population is expected to increase by approximately 5,000 people by 2020, the overall increase is expected to be approximately 25,000 when FIFO and project construction workforces are included. Consequently, the Pilbara s population is expected to increase from approximately 70,000 today to 95,000+ by Chart 18: Pilbara population Historical (Excluding FIFO and Construction Workers) Chart 19: Pilbara population Forecast (Including FIFO + Construction)

11 Highly Paid FIFO Workforce As impressive as the population growth has and will be, the more important factor for the Pilbara economy has been exactly who constitutes the new population. The Pilbara is a vast area, twice as large as Victoria but with a very sparse population and no idle workforce. The growth in people has therefore been predominantly FIFO workers (including those associated with the construction of projects). The fact that the new population are FIFO workers is very important, as these workers are the highest paid in Australia with a recent report by Suncorp also illustrating the immense salaries FIFO workers attract. The mining industry is by far the highest paid profession in Australia (and the Pilbara the highest paid workers in the mining industry!). Chart 20: Average Wages by Industry, Commonwealth Bank research also shows that salaries in Australia s northwest are on average 62 per cent higher than the national average and 78 per cent higher than that of all workers. Of the top seven salary payment regions identified by Commonwealth Bank, Karratha and Port Hedland in the Pilbara secured the top two. Not surprisingly, recent 2011 census data by the Australian Bureau of Statistics revealed that the median household income in Port Hedland was a whopping $146,000 meaning that something like a quarter of households are likely earning in excess of $200,000! For instance, an employee at one of Rio Tinto s various Pilbara operations will be paid more than $120,000, plus superannuation as an entry-level truck driver with no mining experience. A mobile equipment operator will get at least $140,000 a year, and if you are looking after general maintenance - a tradesman - you will earn upwards of $120,000 to $160,000, while a supervisor or foreman can earn anything between $135,000 and $230,000. Train drivers are paid $200,000 or more and experienced managers get $250,000-plus performance bonuses built into their salary packages!

12 Future Vision Pilbara Cities Strategy Australia s largest property boom The commodities boom and surge in the Pilbara s population over the last 10 years have seen unprecedented property booms that dwarf any other area of Australia. Over the last decade, the average compounded annual growth rate for median house values has been 14.5% in Karratha, 19.2% in Port Hedland, and 32.0% in Newman. These growth rates compared are more than two to four times the national average of 6.9% and well above the strong Perth average of 10.1% Not surprisingly, the median house value of the Pilbara towns tower above capital averages. Chart 21: 10-Year Average Annual Growth Rates Median House Values Pilbara vs Capital Cities, $ Chart 22: Median House Values Pilbara vs Capital Cities, $

13 Rents are also spectacularly high for the Pilbara, with Port Hedland and Karratha holding prime positions amongst the top five regions in Australia by median house rents at $1,900/week and $1,600/week respectively according to RP Data. Chart 23: Top Five Regions in Australia for Median House Rentals, $ Constrains on New Housing Supply has Amplified the Property Boom Outside of the surging population of highly paid workers (which in itself would naturally create a property boom), there are natural and industry constraints to the construction of new housing in the Pilbara that have amplified the extent of the property boom. These constrains include the presence of major industry, flood plains, native title issues, limited labour, and ineptitude by government. For instance, Port Hedland, located on the coast is immediately bounded by a huge salt mine to its east and the vast iron ore holding facilities for the numerous export berths to the west. Vast flood plains also make nearly 80% of potentially develop-able land off-limits for construction. The hot and arid, degree centigrade year round conditions coupled with tropical cyclones also make the Pilbara environment a very harsh and relatively unattractive region of Australia to live. This has naturally constrained the number of people traveling to the region and locals will freely acknowledge it is the very large wages the major miners offer that bring the majority of people into town. This has caused severe shortage of workers for the construction of new housing and exorbitant labour costs are associated with the building of new houses all factors which have limited new housing supply.

14 $1.2bn Government Response to Build liveable Cities in the Pilbara s The development of over $30bn in projects over the last decade caught State and Federal governments well and truly by surprise. Consequently, while thousands of workers have come into Pilbara towns there has been no corresponding investment into the health, education and general public amenities that are required to support such growth. This has created severe strain not only on property prices but also led to complaints from long term locals that the boom has passed the Pilbara towns by despite record profits. Locals complain that the towns have lost some of their heart and only catered for FIFO workers (not that property investors are complaining with a doubling in property prices every three to four years though!). It was therefore with great fanfare in November 2009, that the Western Australian government announced $300m in funding and an ambitious new Pilbara Cities blueprint. The plan being to transform the regional cities of Port Hedland and Karratha, and the townships of Dampier, Newman, Onslow and Tom Price, into vibrant, attractive and liveable cities. In August 2010, the Pilbara Cities Office was formed to utilise and coordinate the significant Western Australian government funds attached to the Royalties for Regions initiative (being approximately 25% of all state mining revenue). These funds are to provide new schools and TAFE s, hospitals and medical centres, leisure and entertainment facilities and shopping and retail precincts to Western Australia s iron ore communities. Fast forward to August and the funding committed to the Pilbara Cities has escalated to $1.2bn. Growth plans have now been prepared for Port Hedland and Karratha to becoming large regional cities of over 50,000 people by 2020, and Newman to grow to a communities of over 15,000 people. The Pilbara Cities strategy focuses on four key areas to accommodate the current and future growth: Infrastructure: Water, waste water, roads, energy, ports and mariners Community projects and engagement: Educational, health, community and indigenous facilities Economic diversification: Industry development, supply chain development, business attraction and development, and transformational projects Land availability and development: Land preparation, planning, developer attraction and retention, and housing The $1.2bn dedicated to Pilbara Cities has been invested in some 160 individual projects, which have begun to deliver tangible change to the Pilbara communities.

15 Pull Back in Projects Will Actually Prevent Property Oversupply Housing Historically Neglected by Mining Companies Historically mining companies have planned everything for their new projects except the housing requirements for their workers the first thing needed, the last thing considered is the industry truism. The Pilbara is a clear demonstration of this philosophy of mining companies wanting to spend their money on projects and not unproductive housing. While the Pilbara s population has risen by more than 40% in the last decade, and this rise has been even more dramatic in the townships of Port Hedland, Karratha and Newman populations (which have surged by 46%, 83% and 50% respectively). In this time BHP Billiton, Rio Tinto and other miners have shown very little interest in building new dwellings instead relying on single mens camps. The result has been that median rents that have risen by 1,200% in Port Hedland and Newman, and 950% in Karratha one of the clearest examples of a failure for supply to meet demand anywhere in the Australian economy. Chart 24: Pilbara Median Rents 2002 to Indeed, the Pilbara Cities Office estimated in that there were 3,878 new dwellings required to bring the Pilbara housing market into equilibrium, being: 1,531 dwelling short fall in Karratha; 1,402 dwelling short fall in Port Hedland; 282 dwelling short fall in Newman; 511 dwelling short fall in the remainder of the Pilbara

16 Pilbara Cities Ambitious Initiative to Normalise Property Market In the face of this dramatic oversupply came the $1.3bn Pilbara Cities initiative, with its grandiose visions of delivering thousands of dwellings by 2015, such that the vacancy rates of 0-1% in Port Hedland, Karratha and Newman would normalise towards 8%. The WA Government envisaged some 7,085 dwellings being constructed by The ambitious targets and proactive action by Landcorp (the government land authority) to make land available for development has encouraged numerous developers to announce they will be coming to town including the Hilton chain, which are intending to open the first five star hotel in the Pilbara. For the first time in the Pilbara s history, it looks like hundreds of new dwellings could be built. Dwelling Construction has Never Been Rapid and Planning is a Lengthy Process The target of 7,000 new dwellings by 2015 is a totally unrealistic assumption given the fierce competition for labour and limited accommodation, which means that finding the thousands of construction workers to build the thousands of dwellings will be near impossible when BHP Billiton, Rio Tinto and FMG (and their deep pockets) also need the same workers to build their projects. This mining industry vs housing industry tension has long existed in the Pilbara. Looking at the Pilbara Cities target of 2,950 new dwellings for Port Hedland by 2015 looks near impossible when one considers the construction of dwellings over the last 48 years. Chart 25: New dwelling constructions Port Hedland ( )

17 In the last 48 years, there have only been 11 years in which more than 100 new dwellings have been built in Port Hedland with a peak of just over 300 dwellings achieved in The picture over the 20 years to 2008 is even more compelling new dwelling constructions have averaged about 25 dwellings per year and only on one occasion exceeded 100 dwellings. However, the Pilbara Cities target is for 2,950 dwellings by 2015 or 590 dwellings each year from This is clearly unrealistic, as less than 600 properties were sold in Port Hedland (including South Hedland) in the 12 months to June and the vast majority of these were existing not new dwellings. In the past, obtaining planning approvals for new dwellings has been a relatively lengthy process, thus delaying the delivery of new supply to the market. It is not unusually for full planning approvals (including a building licence, so you can commence construction) to take developers two years to obtain. A recent development that is also slowing the process down is the legislation of a completely new Building Act (which particularly covers the numerous medium and high density proposed development for the Pilbara towns) which was introduced on 1 April. According to the Urban Development Institute of Western Australia, the new Act has resulted in the delay of $300m in residential construction projects across the state. This has been because all new approvals now have to meet much higher standards for planning, engineering, green star rating etc. While this might result in better buildings, it has made the planning application process much more complex and lengthy. This will naturally have flow effects to slow the rate of approvals for Pilbara developments. A perfect example of this works is Karratha, where a target of 2,850 dwellings or 570 dwellings per year between 2011 to 2015 are hoped to be achieved under the Pilbara Cities initiative. Looking at the actual building approvals granted between 2007 to 2010 and the forecast approvals for 2011 and 2013 (according to the Shire of Roebourne, where Karratha is located), the total amount of approvals will be only 1,844 dwellings. Chart 26: Karratha Dwelling Approvals

18 Assuming that 100% of seven years worth of approvals are built by 2015 (with most construction have a two year time frame from approval ie, 2014 and 2015 approvals will not be built), this still leaves a short fall of 1,006 dwellings! And the harsh reality is that 100% of approvals are never built each project has its own challenges, the foremost now being the ability to raise debt, obtain equity investors and secure presales before developments can commence construction. So, the actual short fall for Karratha will far exceed the base case deficit of 1,006 dwellings. Infrastructure Project Delays Will Make Funding Residential Projects Very Difficult Post Global Financial Crisis (GFC), developers have found that obtaining debt funding one of the traditionally easier areas of developing has become extremely difficult and very lengthy. The European currency crisis has also sparked bank lenders to tighten their lending criteria to a much more conservative approach. The recent announcements by BHP Billiton that it would defer its decision on the $20bn Outer Harbour expansion and that FMG would be reducing the scope of their planned expansion, is having a very chilling effect on banking institutions. The delay, and reduction in the pipeline of infrastructure projects will affect medium term (as the miners already have billions of current projects underway that will run for two to three years) demand for dwellings but will actually significantly reduce the number of new dwellings built as developers fail to secure bank funding and equity investors shy away from large, risky developments. The net affect will be a reduced dwelling supply, making the ambitious Pilbara Cities targets even more unrealistic. But Demand for New Dwellings Will Continue Unabated Over the near to medium term, billions of infrastructure projects in the Pilbara will continue to see the region s population swell thus placing even more demand on property markets already suffering years of shortages. In fact, between 2010 to 2015, the number of built dwellings required for the Pilbara will nearly triple from some 13,000 to 24,000. Table 2: Forecast housing demand across the Pilbara

19 Biographies Crawford Property Group Ryan Crawford has been involved in the property investment industry for over 10 years, making the transition from successful investor to real estate professional. Developed in 2008 Crawford Property Group was created to provide an innovative solution to real estate investing in the Pilbara and Australia-wide. With their core focus on positive investment property and wealth creation, Crawford Property Group has fast become the network of choice when choosing to invest in positive property. From the dynamic website to their smart investor list, Crawford Property Group are dedicated to providing the most up to date information and properties in positively geared hotspots Australia-wide. Ryan is a firm believer in the positive power of real estate investing and offers his service and advice as a seasoned investor, with a sizable portfolio in the Pilbara and throughout the state. Ryan is the CEO of the Crawford Property Group. Flynn De Freitas is Principal of Omega Investments, a boutique firm specialising in residential property investment in regional mining towns. Utilising his training and experience as a former management consultant and investment banker, he has developed an extensive knowledge and understanding of towns exposed to the commodities boom.

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