The Gladstone LNG Boom!
A long read but well worth it!
What we are seeing right now in Gladstone is put simply a boom. That is, housing prices and jobs have gone from moderate levels to unprecedented, record levels in a 1 year period. For property this has caused what looks to be a 20 - 30% rise in the median land sale price from this time last year. I am using land as the example here because whilst land is going up the size of the houses being built seems to be coming down in order for house prices to be more affordable. So looking at the median house sales price right now can give the wrong impression I believe.
Of course, all of this is due to some of the world’s largest gas companies discovering commercially viable sources of Coal Seam Gas reserves throughout the Bowen & Surat Basins and securing export contracts to sell such large amounts. A lot of this demand comes as millions of people are continually being lifted out of poverty and seeing a change in their way of life, thus providing increased demand in energy needs. The CSG companies have developed, and what seems to be refined, ways of extracting large amounts of this gas from the reserves, to the surface, through pipelines that are hundreds of kilometres long to the industrial town of Gladstone where it goes straight over to Curtis & Fisherman Islands. Here they are building multi-billion dollar plants that reduce the gas in temperature and turn it to liquid which can then be stored and exported.
With any mining “boom” it is imperative that as investors we educate ourselves on the short term and long term demands of these companies. What do they require and how will they get it. After being in property for years now and successfully investing on the back of such companies it is my job to assess in full these companies and their intentions and how their demands will impact the property markets in Queensland in both the short term and long term.
The general consensus is that with a boom a bust must follow especially when it comes to mining. What I think is important to note is that this statement can be true, however it isn’t always true. This is why it so important to buy on facts not on hype. Quite often underneath a lot of hype can be some good facts, but also bad facts that get overlooked. I want to look at the opportunity of investing in Gladstone underneath all the hype and base my decisions on facts. In the past this has worked for me very well, so I am going to apply my methodology very similarly.
At a glance in the midst of the hype we see the following:
- - A big 4 bank making a statement that they see higher growth in Gladstone in the coming years than Australia on average.
- - A lot of investors talking about their increase in rental yield over the last twelve months.
- - People buying off the plan with quoted rental of $500 and then achieving $600 once completed.
- - No land left.
- - A lot of local agent hype and excitement.
- - The next Port Headland.
- - $60 billion dollars of investment…what could go wrong!
In reality and digging deep we see the following:
- - Land still available and local builders not selling all what they have secured and in fact having to settle and build spec homes on land that they had under “put and call”.
- - 3 fully approved CSG plant projects totalling $51billion dollars ($15b of that is USD)
- - Expected approval from another large player (Arrow) due in the next 1 – 2 years as they conduct a full EIS.
The companies that are the underlying fundamental reasons for investing in property in Gladstone and their plans:
Unfortunately many people don’t do nearly enough research into this. People get too caught up in trying to find what property they should buy and how much rent they will get. They apply the property to their portfolio, not the area. This is regional investing mistake 101. We should be applying the area to our portfolio, not the property or the rent. One bad investment and our portfolio can potentially be severely damaged.
Here’s what I have found out about the companies investing this money…
THE CONSTRUCTION
Out of the three fully approved projects (both Government and Company funding approved) there will be 3 separate CSG train plants (the trains are the machines that convert the gas to LNG) each costing approximately $15b each to construct. Most of these plants have 2-3 trains with a construction timeline of approximately 4 years each and not being built simultaneously although there is a possibility of this being the case especially for the second and third trains. (see below timeline from GLNG (Gladstone Liquefied Natural Gas)
It is important to see that peak construction workforce is reached by the second year for a very short period of time. In the third year you see over a 60% reduction in the workforce with the remainder being diminished in the 4th year. Note the significant reduction in the construction workforce for the 2nd and 3rd trains. I would assume this would be due to experience gained from the construction of the first train along with potential economies of scale.
The companies that have begun are GLNG & QGC with APLNG expected to start once some final approvals come through for their pipeline by the end of 2011. GLNG is the only company to publish a detailed timeline like the one above that I could find. It is quite helpful when determining if you should invest in property in Gladstone and, if so, for how long. Given that 2 of the companies have begun and another one to begin this year, we can assume similar trends in the workforce population with one company a year behind.
Below is a graph that I have prepared assuming that each train at each plant is constructed at separate times. This is the current plan however some companies may construct or at least overlap the train constructions should the resources and labour be available. If this happened the construction workforce at any one time could peak a lot higher and also shorten the entire construction period and decrease the time that accommodation is needed. I have also charted the potential workforce population should Arrow Energy start construction in 2 years’ time. Please take this graph as a sample only. I have prepared it for my own purposes and you should conduct your own research into its accuracy. There are several variables that cannot be controlled.
Simultaneous: This is a predicted workforce situation should each approved plant build one train at a time simultaneously.
Split Construction: This is a predicted workforce situation where GLNG & QGC begin construction at the start of 2011 and APLNG begin at the end of 2011.
Arrow Energy: This is a predicted workforce for Arrow Energy should they begin in 2013. Note the workforce for arrow energy is said to be 3000 during construction.
All 4 projects: This is a predicted workforce at any one time when all 4 companies are constructing and continuing on their current timeframes. This is the most likely scenario out of the 4.
You may realise that the said number of workers for just one project is 5000 people; however the graph does not represent this. This is due to the fact that there is not a single time in the construction phase that GLNG has predicted that all workers will be deployed at the same time. There will be a total of 5000 workers for one project spread throughout the 4 year construction period of the train.
In conclusion of the above chart:
- In 2012 there could be 7500 workers on Curtis Island
- In 2013 there could be 6500 workers on Curtis Island
- In 2014 there could be 3400 workers on Curtis Island
- In 2015 there could be 2000 workers on Curtis Island
- In 2016 there could be 4400 workers on Curtis Island – This is the peak future workforce expected to reach this level again in 2020
- There are other smaller projects that will build smaller trains when commercially viable which are years away. This could add to the amount of people and reduce the fluctuations in workforce however from an investment perspective this is purely speculative at this stage.
- Worst case scenario is the simultaneous construction. This would see greater fluctuations in the workforce.
CONSTRUCTION WORKFORCE
Now that we have an idea of potentially how many workers will need accommodation at any one time, we can work out what demand this will put on the Gladstone housing market.
So where do the companies plan to put all of the workers? Well interestingly enough in the GLNG EIS they state that they will build a 2000 man camp on their site at Curtis Island. Each other company must provide relevant studies, and as a result, suitable commitments to the government and local councils to ensure that their projects do not severely impact the local rental and housing market. Many of you would be saying that it already has impacted the market and I agree, it most definitely has. However by digging a bit deeper the main company wanting houses in the Gladstone market is a company by the name of Bechtel. Bechtel have been awarded the contract to construct a lot of the infrastructure for the GLNG plant, including a 2000 man camp.
Pressure has been placed on this company to comply with the EIS of GLNG. They are in fact legally obliged to. Failure to do so can result in serious ramifications from the Government. The 2000 man camp will also house any employees of Bechtel once built. However it is likely that Bechtel will secure further contracts with other companies no doubt, again, where accommodation should be provided on site. Bechtel have secured a lot of accommodation in Gladstone and are paying top rents, for how long though we will have to find out, and in some of our cases, we will gamble on that question.
In May 2011 Bechtel were called to answer the Gladstone Regional Council as to why they were securing properties in the Gladstone Region as it was not a part of the EIS. Here they assured that the securing of the accommodation was for the up skilling of the local labour market. They also assured the council that they have capped the rent that they will pay. This is a continuing saga with locals as a widespread rumour of bidding for rentals is occurring from this company. Whether this stands to be true or not I am not sure. The outcome of this all will be quite interesting and will have a large impact on investment properties in the Gladstone Region.
What is alarming to me is the fact that a premium is being achieved for furnished accommodation. Such companies are only interested in renting furnished properties and they must be of a good standard (no more than 6 years old from what I can find out). Furnished accommodation has always been considered to cater to a non-committing client. In this case the company wants to put as many people in one house as possible (generally limited by the number of bathrooms). This tells us that the people/companies paying the high rents are for fly in fly out workforce. This was in fact not allowed under the guidelines of the EIS’s for all of these LNG plants.
Organic growth signs in a rental market would be families moving into homes and furnishing them themselves as they are moving to the region for the long term. This is happening however this is not what could potentially drive rents even further. In an unstable property market you would expect to see rents plateau around the 9 – 10 % ROI at current market value. We are seeing this with the furnished accommodation currently. Should rents increase, you would imagine the price of the property will increase accordingly.
Currently rents for a furnished house worth approximately $600,000 (including furniture etc.) would achieve between $800 - $1000 per week (a 9% return @ $1000pw). Should rents say, double, then you would expect the price of the property to potentially double, reaching a value of $1,200,000. We are being told that rents are capped at $300 per person they can put in the house. So for a 4 bedroom 4 bathroom house you may achieve $1200 per week rent. Making the property potentially worth just under $700,000. This is based on what we have seen in some areas of WA and QLD where the values of the houses are dictated by the rent that can be achieved.
What about the operational workforce:
The operation workforce predictions of the projects are between 15-20% of the construction workforce. Of which 60% are expected to be local and 40% fly in fly out.
This is clearly a significant drop in a workforce and is to be expected by such a project which is exactly why local and state governments will do everything they can to avoid a short term bubble that can burst overnight as this would be detrimental to the region leaving hundreds if not thousands of homes empty, or achieving significantly less rents than investors originally thought would be achieved. Not to mention any locals that buy in the midst of a boom and find there house worth significantly less in the years to come. I am not saying that this will be the case, however I hope I have made it clear how easily this could happen. It may not, I hope it doesn’t, however we need to be aware of the fact that it could.
Behind all of this, organic growth will still occur, local businesses will grow, contracting companies will strengthen, retail will expand and disposable income will be increased in the region.
In Conclusion:
Would I invest in Gladstone? Long term the answer is no. Short term, well that depends how the poker tables are treating me at the time. The reason being, and as harsh as this may sound, I do believe in the greater fool theory. I’m not calling you a fool if you invest there; I’m making the point that when I see it prudent to get out, someone else may still see it prudent to get in. This may not happen however.
Would I sell property in Gladstone to my clients? Well that depends on the clients risk mitigation strategy, their goals for their portfolio, their knowledge of the Gladstone area, their ability to monitor the market and make a call if and when to get out. At the end of the day it us up to my clients to take the risk. I am not backwards in coming forwards in educating people about the risk of investing in certain areas. I would not recommend Gladstone to a first time investor or even an investor that does not have time to monitor their portfolio closely, of course, as a company we do as much as we can to do that for you; however at the end of the day it is your call and your responsibility.
If you did invest in Gladstone, timing is everything. Again I am not saying that it will go bust, I am saying that if it goes crazy over the next year or two, there is high potential for a harsh correction soon after. It will not be a ghost town; Gladstone is an industrial powerhouse and has many good industries behind it. However it has had its share of construction workforces artificially inflating house and rental prices for short periods of time in the past. Overall, it has come out ahead, as everywhere else generally has.
What is a possible scenario is a boom and then stagnation or even a drop in prices until it comes in line once again with the rest of regional Queensland.
What is important to note is that Gladstone is not Port Hedland or Karratha which are both very prominent mining towns in WA. These towns are very remote and accommodation is in very short supply. You can buy a 4 bedroom home for just over $1,000,000 and achieve a 9.5% return. What is important to note is that Gladstone has many close by regional cities that can help service its needs. There is a lot of reasonable accommodation that is only a 1 hour trip to Gladstone. Whether these areas are utilised to relieve rental pressure only time will tell. Both Bundaberg and Rockhampton Councils are trying to see if there is any way they can benefit from this.
I believe that with these areas and the potential release of 9000 blocks of land over the next ten years, that we will not see Gladstone property prices match those of Port Headland and Karratha. Rents may match those of Port Headland and Karratha, however, unlike Port Headland and Karratha; these rents will not be there for the long term.
Normality will resume if Gladstone goes out of control that we can be guaranteed. If Gladstone sounds like it is for you, choose carefully, it is not as easy as picking any property and going for it. It is not for the faint hearted and it is not for in inexperienced.
In my coming blogs I will discuss the opportunities and or pitfalls of towns like Chinchilla, Roma, Dysart, Moranbah, Mackay, Emerald, Blackwater and more. A post which will be most important for people to look at will be my research into how QLD’s mining boom will affect the rest of QLD and its property market. There’s some staggering figures and statistics to be assessed which will help us look outside the box for maximum capital gains. Buying in a mining region is not the only way to benefit from a mining boom. This will all be discussed in the coming weeks. I hope this information will help people look beyond the hype and see the reality before you take the plunge and invest.
You are in control of your own future, so control it properly!
Reference list for information in this article
