ISSUE 5
POSITIVE
PROPERTY
REPORTREPORT
POSITIVE
PROPERTY
2012
ISSUE 5
2012
Pilbara Boom Towns
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ISSUE 5
2012
POSITIVE PROPERTY REPORT
Introduction
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ISSUE 5
POSITIVE PROPERTY REPORT
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Contents
Summary . ....................................................................................................................... 5
China regains its economic crown............................................................................... 6
History repeats as China regains its crown........................................................................................ 6
Industrialisation – the fall and rise again China................................................................................ 6
Urbanisation is creating the largest economic boom in history................................................ 7
Urbanisation is driving the commodities boom for iron ore and LNG................... 8
The Great Urban Migration....................................................................................................................... 8
Urbanisation boosts commodity prices.............................................................................................. 9
Iron ore in high demand.......................................................................................................................... 10
LNG to power tomorrow’s urbanisation..............................................................................................11
Pilbara – Heartland of Australia’s iron ore and LNG boom..................................... 13
The economic powerhouse of Australia.............................................................................................13
Iron ore exports set to double in five years......................................................................................14
Pilbara LNG to increase three-fold to make Australia an LNG super-giant..........................15
$192bn infrastructure boom for the Pilbara..............................................................16
Pilbara has Australia’s largest concentration of infrastructure projects................................16
Booming Pilbara population...................................................................................................................16
Highly paid FIFO workforce....................................................................................................................18
Future Vision – Pilbara Cities Strategy......................................................................19
Australia’s largest property boom........................................................................................................19
Constrains on new housing supply has amplified the property boom................................. 20
$1.2bn government response to build ‘liveable’ cities in the Pilbara’s....................................21
Pull back in projects will actually prevent property oversupply.......................... 22
Housing historically neglected by mining companies.................................................................22
Pilbara Cities ambitious initiative to normalise property market............................................23
Dwelling construction has never been rapid and planning is a lengthy process..............23
Infrastructure project delays will make funding residential projects very difficult..........25
But demand for new dwellings will continue unabatted............................................................25
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POSITIVE PROPERTY REPORT
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Contents
Port Hedland................................................................................................................. 26
Overview........................................................................................................................................................26
Population growth – targeting a population of 35,000 by 2025............................................27
Property market – the largest property boom in Australia.......................................................29
Dwelling constraints...................................................................................................................................31
Future growth – $59bn to drive largest phase of growth on the horizon...........................32
Civil infrastructure projects - $1.1bn of investment.......................................................................32
Karratha......................................................................................................................... 34
Overview........................................................................................................................................................34
Population growth – 75% increase by 2025.....................................................................................35
Property market – Market set to lift again........................................................................................37
Dwelling constraints..................................................................................................................................38
Future growth – $35bn in iron ore and LNG projects..................................................................38
Civil infrastructure projects - $771m to deliver improved amenities......................................39
Newman..........................................................................................................................41
Overview.........................................................................................................................................................41
Population growth - Newman...............................................................................................................42
Property market..........................................................................................................................................43
Dwelling constraints................................................................................................................................. 44
Future growth – Focal point of $9bn in infrastructure projects............................................. 44
Civil infrastructure projects - $70m in health and sports facilities.........................................45
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Summary
The report details why the best days are ahead for the Pilbara iron ore and liquefied
natural gas (‘LNG’) boom towns of Port Hedland, Karratha and Newman and how the
recent pull back in expansion plans for BHP Billiton (‘BHPB’) and Fortescue Metals Group
(‘FMG’) are actually good news for property investors.
Over $192bn in infrastructure projects are planned and committed for the Pilbara region,
with $12.3bn under construction in Port Hedland, $12.5bn in Karratha and $6.6bn in
Newman – the equivalent to all previous infrastructure spending in the last decade.
The findings of this report include that by 2025:
•The global economy will grow by $50 trillion – double its size today
•China will become the largest economy in the world, as the greatest urbanization in
history occurs
•The urbanization of China (and other emerging countries) will create unprecedented
demand for iron ore and LNG
•$192bn in iron ore and LNG projects are planned to be constructed, including over
$30bn actually under construction today
•Both iron ore and LNG exports from the Pilbara will nearly triple, which will see
approximately 25,000 more of Australia’s highest paid workers come to the Pilbara
•The Western Australian government’s $1.2bn Pilbara Cities initiative will have
transformed the Pilbara’s communities from frontier towns to livable cities through
massive investment in health, education, utilities, roads, and other public amenities
over 160 individual projects
•The chronic housing undersupply in the Pilbara (that has seen rents increase by 9 to
12 times in ten years) is impossible to resolve in the next five years and a demand/
supply equilibrium is many, many years away
•The numerous residential developments proposed for the Pilbara face very difficult
funding environments post-global financial crisis and the recent scale back of BHPB
and FMG projects will mean many projects will now fail to sure financing and never
commence
•The $30bn of ‘locked in’ infrastructure projects will nearly double the number of
dwellings required in the Pilbara by 2015, exactly at the same time that projects to
increase supply are shelved
•Port Hedland’s population will increase by 84%, while Karratha will increase by
59% and Newman by 83%, on the back of $59bn, $35bn and $9bn respectively in
infrastructure projects
•At least $1.1bn in civil infrastructure projects will be undertaken in Port Hedland, with
$771m to be spent in Karratha and $70bn in Newman
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China Regains its Economic Crown
History Repeats as China Regains its Crown
Over the last two hundred years, the economic history of the world has largely been
written by ‘the West’ – a collective of developed countries led by the United Kingdom,
the United States, Germany, Japan and South Korea. But before the West, there was
China.
The inventors of the compass, gun powder and written communication wore the crown of
the world’s economic kingdom for some 1,700 years and after 300 years of slumber the
Asian dragon is roaring again.
Industrialisation –
the Fall and Rise Again of China
The advent of the industrial
revolution broke Chinese economic
dominance, with steam power and
the production line enabling products
to be rapidly produced at a cheaper
cost. Over 150 years the first country
to industrialise, the United Kingdom,
doubled its per capita GDP and
the general standard of living of its
population.
The next two major economies to
industrialise - the United States and
Germany - achieved this feat much
faster at 53 and 65 years respectively.
The 1950s to 1990s then saw the US
and Europe dominate approximately
half the world’s GDP.
Chart 1: Global Share of GDP, %
As we know, history has a way of repeating itself. Industrialisation marched on to Asia
with Japan and South Korea, who took just 33 years and 10 years respectively to double
their standard of living.
The mid-1990s then saw China astound the world as it too industrialised, doubling its
standard of living within a mere 12 years. Indeed, over the 20 years to 2010, China’s share
of the global economy tripled from 5% to 15%.
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Urbanisation is Creating the Largest Economic
Boom in History
The growth of the last 100 years will be eclipsed by the next 25 years, with the global
economy forecast to double in size. This corresponds to a growth of around $50 trillion
US dollars and represents the largest economic boom in history.
By far the largest contributor to this growth will be China, which is forecast to capture
28% of all future growth. This is triple the growth of the United States and Canada, and
seven times that of Western Europe. While the last 100 years have been marked by
industrialisation, over the next 25 years the primary driving force will be urbanisation.
Chart 2: Global economic growth between 2010-2025 (100% = US$50 trillion)
The dramatic impact of industrialisation and urbanisation in China is visually best
demonstrated by the growth and change of Shanghai, China’s largest and most modern
city over the last 20 years.
Photo: Shanghai City –
20 years ago and today
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Urbanisation is Driving the Commodities
Boom for Iron Ore and LNG
The Great Urban Migration
While the world’s rural population is
forecast to stay constant at around
three billion over the next 20 years,
the United Nations’ Department
of Economic and Social Affairs is
forecasting an increase of 1 billion in
the number of people living in urban
regions.
The most dramatic growth in
urbanisation is occurring in China.
Global management consultants
McKinsey & Company are forecasting a
migration of nearly 255 million people
from rural regions into Chinese cities
over the next 15 years.
This mass migration is expected to see
approximately 17 million people become
urban dwellers each year and will
require the creation of 37 new cities the
size of Perth to accommodate them.
Chart 3: Global urbanisation, billion people
Source: United Nations
Chart 4: Growth in Chinese mega cities
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Urbanisation Boosts Commodity Prices
The urbanisation of China, India and other developing nations carries with it a powerful
multiplier effect. As tens of millions annually transition from rural low-intensity
commodity lifestyles to the high-intensity commodity lifestyles that go hand in hand with
city living, demand for manufactured goods and imported resources.
This is in stark contrast to the last 100 years, where the benefits of industrialisation,
advancements in technology, free trade and increased productivity actually led to a near
50% decline in commodity prices.
Chart 5: McKinsey Global Institute Commodity Price Index (2000 = 100)
This trend has been sharply reversed by the rapid urbanisation of China, which has driven
commodity prices to an all-time high level. While these prices have moderated from their
highs and will decline as the urbanisation process slows, the ever-growing population
of China and the sheer volume of demand will keep prices stable at elevated levels for
decades to come.
“demand for... iron ore for steel
production – has skyrocketed.”
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Iron Ore in High Demand
The principal beneficiaries of the boom have, and will continue to be, bulk commodities.
These bulk commodities – thermal coal for energy, metallurgical coal and iron ore for
steel – provide the essentials for urbanisation and construction and are trading at 3 to 8
times their pre-boom levels.
Chart 6: Bulk commodity price forecasts
Source: Bureau of Resources and Energy Economics
Indeed, since 2000 China’s production of steel and its subsequent need for iron ore
imports has increased by more than 500%. In fact, China’s production of steel is currently
approximately equal to the rest of the world, at over 600 Mt a year. With 37 new cities
being built in China alone over the next 15 years, its steel production is expected to
continue to soar to reach a staggering 1.1bn Mt by 2025
Chart 7: Global steel production
Chart 8: Chinese Steel Production
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LNG to Power Tomorrow’s Urbanisation
As global energy usage rises, principally driven by China’s urbanising population, LNG –
seen as the cleaner alternative to coal and a safer option to nuclear power – is forecast
to represent 25% of global energy usage by 2030. In the Asian region, Japan today is
currently the main importer of LNG, whilst China is rapidly expanding its imports.
Asian LNG demand will be the
key driver to shift global energy
consumption towards LNG, with Asian
demand expected to rise by over
43% in the next five years – up from
approximately 160Mt to reach 230Mt
by 2017.
This has been the case since the
March 2011 tsunami in Japan, which
resulted in the world’s second most
serious nuclear reactor incident. In
May 2011, Germany announced it
would immediately shut down 8 of its
17 nuclear reactors and close the rest
over the next decade.
In May 2012, Japan announced it had
shut down the last of its 50 nuclear
power plants (two have since reopened).
Chart 10: Global energy consumption
Chart 11: Asian LNG demand
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The dramatic rise in Asian LNG demand forecasted by the Australian Bureau of Resources
and Energy Economics, over the next five years is actually considered a ‘base case’, given
it assumes Japan will eventually restart its operational nuclear reactors. This may well not
be the case, further fuelling demand for LNG.
Not surprisingly, this rapid increase in Asian LNG demand (which began in earnest in
2010) has also seen Asian priced LNG more than double over the last five years.
Chart 12: Asian LNG prices
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Pilbara – Heartland of Australia’s
Iron Ore and LNG Boom
The Economic Powerhouse of Australia
The Pilbara region spans the breadth
of central northern Western Australia
between the Tropic of Capricorn and the
Kimberley – an area more than twice the
size of Victoria at 508,000km2.
It is the economic powerhouse of Australia
that produces about 30% of Australia’s
GDP (at approximately $390bn in 2011)
from only 2% of the nation’s population.
The Pilbara also accounts for over 90%
of Australian iron ore exports and 69% of
LNG exports. Economically the Pilbara’s
supreme position is only challenged by
the emerging LNG hub of Gladstone and
the Surat Basin, which have three LNG
projects under construction (see Map 2
below).
Map 1: Pilbara towns
Map 2: Key bulk commodity basins and ports
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Iron Ore Exports Set to Double in Five Years
The Pilbara has one of the largest deposits on earth of easily accessible iron ore (it can
literally be dug out from the surface without any overburden) and has been mined since
1986, when Port Hedland was established to export iron ore to Japan (as it experienced the
heights of its industrialisation). The commodities boom has seen iron ore exports increased
from approximately 150Mt to over 400Mt.
The good news is that the boom is set to continue. Having capitalised on historically high
prices, iron ore giants BHP Billiton, Rio Tinto and Fortescue Metals Group are leading
the charge to lift Australia’s iron ore exports from 429Mt in 2011 to approximately 800Mt
by 2016 (equivalent to 50% of total iron ore exports globally). There are also plans to
potentially further expand to beyond 1,000Mt by 2025.
Chart 13: Australian iron ore exports and share of global seaborne exports
Chart 14: Iron ore export targets by company
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Pilbara LNG to Increase Three-fold to Make
Australia an LNG Super-giant
Iron ore is also not the only game in town. The Pilbara is home to the two largest
operating LNG plants in Australia, the $27bn Chevron consortium North West Shelf plant
(with the first of five processing trains built in 1989) in Karratha and the $14bn Woodside
Pluto plant just outside of Karratha that was completed in early 2012. Approval has also
been granted for three additional multi-billion dollar LNG projects in the Pilbara region,
which will see LNG production jump three-fold by 2020.
Chart 15: Pilbara LNG exports by company
These three projects (Gorgon, Wheaton and Prelude Floating LNG) total $84bn in value
and will have an immense impact on the Pilbara, particularly the LNG boom town of
Karratha.
Chart 16: Australian LNG projects
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$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 2012, over $192bn
linked to iron ore and LNG projects in the Pilbara.
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.
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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 2020.
Chart 18: Pilbara population – Historical (Excluding FIFO and Construction Workers)
Chart 19: Pilbara population – Forecast (Including FIFO + Construction)
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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, 2012
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!
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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, $
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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 developable land off-limits
for construction.
The hot and arid, 30-40 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 travelling
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.
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$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 2012 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.
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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 2012
Indeed, the Pilbara Cities Office estimated in 2012 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
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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 2015. 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 (1960-2008)
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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 1983. 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 2011.
This is clearly unrealistic, as less than 600 properties were sold in Port Hedland (including
South Hedland) in the 12 months to June 2012 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 2012.
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
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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
Unabatted
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
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Port Hedland
Overview
Australia’s most well-known resource town is Port Hedland, a community of 19,000 that
also encompasses the inland sister township of South Hedland (c10,000). Established in
1987 to export iron ore from the famed Whaleback Mine near Newman in the East Pilbara,
Port Hedland is a natural deep anchorage port, which is perfectly suited to large iron ore
bulk carriers. It also holds the title as the largest bulk commodities export port in the
world.
The town exports iron for from vast iron ore mines in the East Pilbara operated by BHP
Billiton and Fortescue Metals Group (FMG), as well as emerging iron ore player Atlas
Mining. With iron ore making up more than 95% of exports, these mines contributed to
the record 247Mt of exports in the 2011-12 year. These iron exports are transported by
railway and road trains to Port Hedland, where they are held in huge, open air storage
facilities to the south and west of Port Hedland. From there, they are loaded on a supersized convey belt system into ‘Capesize’ bulk carriers (150,000+ tonne deadweight
capacity).
In addition to iron ore, Port Hedland is home to one of the largest private salt mines in
the world, Dampier Salt (a subsidiary of Rio Tinto), which operates over 9,000ha at the
eastern end of Port Hedland and produces 3.2Mt of salt each year. The town is also a
major support centre for the offshore LNG gas fields of the North West Shelf.
A key project in Port Hedland is being directed by Fortescue Metals Group, the world’s
fourth-largest iron ore miner. It includes plans to construct a second iron ore export
berth, following the recent opening of the Utah berth, as part of FMG’s $8.4 billion
project to increase its production by an extra 100Mt by 2014.
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Another key project is BHP Billiton’s plan to more than double its current export capacity
in the ‘inner harbour’ of Port Hedland in an effort to capitalise on the roaring iron ore
demand.
According to the Town of Port Hedland (Council), the last three years have seen the value
of the Port Hedland economy increase by 61% on the back of rising iron ore exports.
Population Growth – Targeting a Population
of 35,000 by 2025
Whilst Port Hedland is experiencing a large population boom, this has not always
been the case. Between 1996 to 2007, the town’s population hovered around 13,000.
This then dramatically started to change, as projects proposed during the start of the
commodities boom were first approved and then commenced construction. While the
‘resident’ population jumped by over 10% by 2010, the town began to experience the FIFO
phenomena which had not been a substantial part of the town’s population in the past.
Chart 24: Estimated Resident Population – Port Hedland
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By the end of 2010, the number
of FIFO and construction workers
had grown to 2,906 people while
short-term visitors accounted
for 1,686 in town at any one
time. In total, this translated to
an overall population of 19,216 or
approximately a 50% increase on
the 2005 resident population.
Since this time, the population
forecasts for Port Hedland
envisage even stronger growth
with the Western Australian
government forecasting a
population of 50,000 by 2025.
More detailed analysis by the
Town of Port Hedland (ie, Council)
see the population jumping to
25,000 by 2015 and reaching an
impressive, but more conservative
39,000 by 2025 – with a large
proportion of this growth coming
from FIFO workers.
The significance of FIFO workers
for Port Hedland cannot be
understated. Between 2012,
the expected number of FIFO
workers is expected to more than
triple from 4,000 to 15,000 by
2016. Assuming that the $20bn
BHP Billiton Outer Harbour will
not proceed, the number of
FIFO workers will slowly ease
as local projects move into their
operational phases and will
return to a level close to the 2010
numbers by 2031.
Chart 25: Composition of Port Hedland Population – 2010
Chart 26: Port Hedland (including South Hedland) population
forecast
The approval of the Outer Harbour
will have an enormous impact and
will likely see the peak workforce
of 15,000 persist for another three
to five years.
Chart 27: Port Hedland FIFO Workforce (Assuming Outer
Harbour Does Not Proceed)
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Property Market – The Largest Property Boom
in Australia
Over the last ten years, approximately $20bn in infrastructure projects have been built or
commenced that have directly benefited Port Hedland, either through being related to
the town’s port facilities or associated with the iron ore mines in the East Pilbara (which
export from Port Hedland).
The effects of these infrastructure projects on the town’s property market have been
astounding. Over the decade to June 2012, the median price of houses in Port Hedland
have risen from approximately $199,000 to $1,150,000 – averaging 19% per annum and
exceeding 20% per annum on five occasions. This is a rise of a million dollars in value and
far eclipses any other property market in Australia.
Chart 28: Median House Prices – Port Hedland
In the sister inland township of South Hedland, growth has been similarly dramatic over
the last decade (also averaging 19% per annum) with annual growth hitting an amazing
65% in 2007.
Chart 29: Median House Prices – South Hedland
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There are three main reasons for this dramatic rise in median house values in Port
Hedland. They are:
1. Rapid growth in the town’s population from approximately a flat 14,000 between
2001 and 2006 to 19,000 by 2011;
2. Strong rental growth associated with the rising population and very high median
incomes of the town’s workforce, which have maintained 10-11% rental yields over the
last decade; and
3. Inability to supply new housing due to land-lock issues. Flood plains and salt pit
works mean that approximately 85% of land around the town is not available for
residential development. Additionally, building incurs high costs due to the strong
competition for workers and materials from the mining industry.
Today median rents are $2,200/week and the town has a vacancy rate of only 0.6%. As
the below chart from SQM Research shows, the town’s vacancy rate has persistently been
below 2.5% and has had extended periods of absolute 0.0% vacancy rates.
Chart 30: Vacancy rate – Port Hedland
In investigating the severe housing shortage and reasons for the massive boom in rental
prices in Port Hedland, the Pilbara Cities Office concluded in 2012 that Port Hedland had:
•A current shortage of 1,402 dwellings
•A requirement for 2,950 new dwellings by 2015 to meet its growth needs
Given the demands for thousands of workers to build expansion projects in Port Hedland
and throughout the Pilbara, it is very probable that insufficient constructions workers will
be available to build enough houses to ease the dwelling shortage.
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Dwelling Constraints
Besides the shortage of labour to physically build new dwellings, development of new
residential housing is unusually constrained in Port Hedland due to extensive flood plains
that cover 70-80% of the developable land and Rio Tinto’s Dampier Salt operations that
cover an area of approximately 9,000ha.
Map 6: Flood plains – Port Hedland
In addition to flooding constraints, native title issues have also slowed residential
developments. It was in August 2011 that the WA Government was able to conclude a
native title agreement for the main growth region of South Hedland with the Kariyarra
people. A similar native title agreement is still outstanding for Port Hedland and under
negotiation.
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Future Growth – $59bn to Drive Largest Phase
of Growth on the Horizon
While Port Hedland has benefited from a cumulative $25 billion of infrastructure projects
($20bn in BHP Billiton projects alone), this pales in comparison to the pipeline of future
projects which have been estimated at $59 billion ($39 billion excluding the proposed
BHP Billiton Outer Harbour expansion).
These projects will bring an estimated additional 11,376 workers into the area during the
construction phase of development.
Table 3: Port Hedland infrastructure projects
Civil Infrastructure Projects $1.1bn of Investment
Almost ten years into the commodities boom, Port Hedland as a city is finally starting
to see fruits of it’s labout. In addressing the perpetual complaint by locals that little
has been done to upgrade the infrastructure needs of the town to meet the surging
population or improve the communities amenities, the state government, council
and private developers (in partnership with the government) have committed to an
impressive $1.1bn in civil infrastructure projects.
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These projects range from large infrastructure developments such as the $300m
redevelopment of the airport to the $188m redevelopment of the main highway to and
through Port Hedland, to more the mundane but critical new $110m waste water plan (to
support all the new people in town).
Community development projects include Stage 2 of the $77m revitalisation of the South
Hedland Town Centre (following the completion of the $33m multi-purpose recreation
centre earlier this year) and $10m aquatic centre. The region’s main shopping centre is
also receiving a $14m facelift.
Table 3: Civil Infrastructure Projects – Port Hedland
Photo: Port Hedland iron ore loading facilities to the immediate west of the township
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Karratha
Overview
Karratha is located 1,535km north of Perth and 240km west of Port Hedland. It was
established as a joint State Government/Hamersley Iron project in 1968 and then quickly
became the main support town for the LNG industry in Western Australia. Today, it
is a thriving seaside town of approximately 20,000 that is the primary service and
administrative centre of the Shire of Roebourne.
Originally developed in the 1960s to accommodate the processing and exportation of the
Hamersley Iron mining company, Karratha is a small town grown big. It is the Pilbara’s
second regional boom town and is at the centre of over $35 billion in infrastructure
projects and already has a booming economy, servicing Woodside’s operating $27bn
North West Shelf Venture’s onshore LNG production facilities located nearby on the
Burrup Peninsula and Rio Tinto’s two huge iron ore ports – Dampier to the West and
Cape Lambert to the East.
Karratha
The town is forecast to grow to a city of 50,000 by 2035 under is council’s ambitious
‘Karratha City of the North’ plan. This plan includes over $770m in civil infrastructure
projects to significantly improve the amenities and liveability of the town.
Despite its glowing economic report card, Karratha is not without its challenges. The
infrastructure boom has been so rapid that population growth and housing scarcity are
among the biggest problems it faces. This is, of course, fantastic news for investors as
median rents are driven sky high thanks to unprecedented demand and lack of supply
within the housing sector.
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Population Growth – 75% Increase by 2025
Karratha has a growing population which is forecast to rise to 20,000 in 2012 as workers
come into town for major projects. The town’s population has increased dramatically
since the start of the commodities boom, jumping from 12,000 to approximately 20,000
today – including c4,000 FIFO workers.
Chart 31: Karratha and Dampier Forecast Population Growth
The billions of dollars in projects planned for Karratha are forecast to see its population
reach 35,000 (75% increase) by 2025 and 50,000 people by 2035.
Table 4: Karratha City – Current and forecast population and employment growth
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The very attractive indicator of Karratha’s population growth is the forecast 100,000
increase in air passengers to the Karratha airport, which is indicative of a strong increase
in the highly paid FIFO workforces.
Chart 32: Air passengers – Pilbara air ports
Dampier LNG Plants, 20km from Karratha
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Property Market – Market Set to Lift Again
Like Port Hedland, Karratha has experienced an amazing property boom with median
house prices rising by an annual average of 14.5% over the last decade to reach a median
price of $850,000 in June 2012. Median house rents are $1,800/week equating to an 11.0%
gross yield.
Chart 32: Median House Values – Karratha
As Karratha is the town most advanced in its Pilbara Cities initiatives, the last year has
seen its property market receive some relief after many years of absolute zero to 2%
vacancy levels. Today vacancy rates have eased to 4.3% but are expected to tighten
strongly as more workers associated with the various major projects approved come into
town, which is likely to see a return to strong capital growth.
Chart 33: Vacancy rate – Port Hedland
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Dwelling Constraints
Construction of new dwellings in Karratha is similarly constrained by flood plains like Port
Hedland, with a very large set back from the beach due to storm surge danger and large
mud flats that are vulnerable to the frequent tropical cyclones and tidal surges that occur
each year. It is also located near the large Dampier Salt mine to the west.
Photo: Karratha Flood Plain (and abandoned car)
Native title has also been a contentious issue, with overlapping claims by indigenous
peoples group leading to several court cases over large areas claiming native title that
have only been recently settled.
Future Growth – $35bn in Iron Ore
and LNG Projects
The attractive feature of the Karratha economy is that it is leveraged to two of the most
demanded commodities – iron ore and LNG – and these virtually encompass all of the
$35bn in planned and committed infrastructure projects for the town.
Table 4: Committed and planned infrastructure projects – Karratha
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These projects include the expansion of:
1. The existing $14bn Pluto LNG project, with a $8bn expansion to build second and
third LNG trains on the Burrup Peninsula
2.Cape Lambert iron ore facilities, with one $3bn project underway and another two
$3.1bn and $3.7bn projects currently proposed
3.The Nammuldi mine in the West Pilbara for $2.1bn, which exports its coal through
Cape Lambert and Dampier ports (with the iron ore held in vast open air storage
facilities)
Image 2: Dampier Iron Ore Storage Facilities
Civil Infrastructure Projects - $771m to Deliver
Improved Amenities
As part of the plan to revitalise Karratha as the City of the North, it is set to benefit from
a massive $771m in civic infrastructure projects designed to improve the liveability and
function of the city in line with expected population growth. Like Port Hedland, Karratha
not only has a shortage of accommodation but is also short of essential utilities such
as a health centre, waste water treatment system and numerous general infrastructure
requirements around the town.
One key project area is the Karratha Airport, which has two $40m and $34m projects
underway to enable it to meet the 100,000 more in air passengers expected by 2015.
The largest civil project is the $207m Karratha Health Campus, which will be a brand new
hospital facility built over a 7ha site which will complement the severely overstretched
Nickol Bay Hospital.
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Table 5: Civil Projects - Karratha
It is anticipated that the Heath Campus will be completed in late 2017 and will involve
more than 100 construction workers at its peak. The Campus’ services will include:
• A state of the art Emergency Department;
• A significant focus on ambulatory care and colocation of all walk-in day treatment
services;
• Outpatients services and telemedicine services;
• Community Mental Health and drug and alcohol services;
• New maternity services and modernised birth suites;
• Improved bed configuration to ensure the right bed for the right patient; and
• A new surgical services unit and a Day Procedure Unit.
Image 3: Cape Lambert
(55km East of Karratha)
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Newman
Overview
Newman is an inland town in the Pilbara region of Western Australia, located about
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 c6,000.
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 privately-owned railway.
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 17Mtpa, 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, WA
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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
2035.
Chart 33: Newman forecast population growth
Photo: Whaleback Mine – World’s largest open cut iron ore mine
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Property Market
As 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
2012.
Chart 34: Median House Values – Newman
Rents are also strong with the median house rental being $1,800 in June 2012,
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
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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 2012, 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 2020. 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 production-based 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 2012 to 15
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
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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
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Biographies
Ryan Crawford
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 Realty 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 Realty has fast become the network of
choice when choosing to invest in positive property. From the
dynamic website to their smart investor list, Crawford Realty
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.
www.crawfordrealty.com.au
Flynn De Freitas
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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POSITIVE PROPERTY REPORT
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WA
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