What's wrong with the Coal Industry?

There is no denying that Central Queenslands future prosperity is closely linked to the coal mining industry. However the fundamentals to Australia's potential future coal mining industry are strong. What is wrong about it from my perspective at the moment is the following 4 points.

1. The Australian Dollar is too high. Partly due to the exponential capital being invested at the moment.
2. The unions are struggling to get along with the corporations. Disputes that have been going on for two years now have gone too far for my belief. Im not going to get into a debate about what is right or wrong. However my point of view is that it is no ones right to have a job. Therefore  our jobs and industries are not fail proof. We are putting to much pressure on the business environment in this country.
3. Two new taxes have been introduced, a) MRRT b) carbon tax. It always takes time for people and industries to see how this will, in reality, affect them. Leading up to an election, the large corporations with so much at risk always attempt to have their political sway buy affecting the environments and aiming to have people vote for a party which the industries believe will benefit them long into thw future.
4. The cost base of our mining industries are exponential. In fact, just last week BHP made an announcement that it was time to be more conservative with their operating expenditure. When commodity prices go sky high, the miners will do whatever it takes to get the stuff out of the ground as quickly as possible. most of the time, oblivious to costs. 

this is summed up in a statement from BHP.
"While our resource base in Queensland is very high quality, the heavy cost of taxes, royalties, declining productivity and a strong Australian dollar means that further investment to grow these operations is much less likely," BHP CEO Marius Kloppers said in notes for a speech in Brisbane.

Read more: http://www.brisbanetimes.com.au/business/carbon-economy/bhp-blames-costs-for-stagnant-coal-output-20121017-27qp3.html#ixzz29uSMHVt9

When all of the 4 factors sort themselves out to some extent, we will be back on track. times like these have happened before, and they will resolve themselves, and most likely happen again. 

Back to Emerald. It will also be the hub for many future projects, which will, at some point, go ahead. I would recommend for everyone to due a lot of due diligence into the mine closures at present as there is a lot to be understood about them.

As investors follow each other, i believe we will not see many new properties being built from July next year. This will, as it has in the past, provide time for the market to soak up an increase in rental properties which have been bought, usually at inflated prices, to investors who jump on board with the hype without understanding the market fundamentals or even its short, medium and long term outlook. This will see rents increase when, inevitably, there is limited supply and high demand, and investors will, once again, push the market even higher than the average. 

Luckily, yesterday (22/10/2012) the majority of BMA's 3000 strong workforce voted in favour of the latest employment agreement. ending a 2 year long dispute, Thats one problem solved, now for the other three!

Regional Qld market update

The end of financial year has been and gone, we all bought our new large screen TV’s as the retailers gave hefty discounts to move them out the door. However, it seems you can still get them for a song even after the EOFY sales have meant to have finished. Consumer confidence rose 3.7% in the month of July however businesses are still doing it tough. The unemployment rate has been creeping up and over 5% since its may low of 4.9%.

It will be interesting to see August statistics as economist talk down the lynch pin to our economy, mining. Deloitte Access Economics have made a bold statement that the mining boom will be over in just 2 years. This is obviously a vast contrast to what we have all read and educated ourselves on for some time now. I have provided commentary on this topic as has Terry Ryder. PPI’s Facebook page has all that you need to inform yourself otherwise.

The question is, has the low consumer confidence over the past couple of months hit the ever buoyant mining regions of Queensland? Arguably, yes it has. Whilst the EOFY period is traditionally slower in investment sales as people finalise their financial position and set goals for the year to come, the property industry generally gets a little breather. However it has been a deeper breath than usual as it appears the former Qld Labor Governments $10,000 new home boost didn’t boost overall new home starts, it appeared to have brought many buyers with the intention to purchase is 2012, to do so in the first 4 months of the year. Many people have experienced reduction in sales south east Qld of nearly 70% since the boost ended. For the sake of humanity, I refuse to believe that we can be encouraged to buy a house in order for the cash gain of $10,000. As such, I am left with the opinion that this boost only brought buyers forward.

Going Into the regions now for an update as I see it. Overall, we have seen rental prices increase for a number of reasons. Many purchases from last year and the start of this year have finished construction and added considerable amounts of new stock to the market. Camps that were planned have seen stages of completion so companies moved out of houses and into the camps. BMA (BHP & Mitsubishi Alliance) have intensified their debates with the unions and this has seen a pause in new contracts being issued. With 6 (previously 7 prior to the Norwich Park closure) mines in the Bowen Basin they are a major employer and create a lot of demand for service related industries also.

Mackay regional council has been inundated with building approvals and is struggling to keep up. Very limited land is available that would be ready to build on within 3 months as sales of new estates is at an all-time high. New 4 bedroom homes are being sold in the low to mid $500,000 range in many estates. Rents seem to be going well with similar housing achieving in the low to mid $600 per week range. However many rental appraisals have come down below $600 from the local agents and this may be in anticipation of more stock coming on the market from the glut of builds this year. However I stand by my prediction that Mackay is an outstanding investment. Just don’t expect a BOOM, the only reason that it will boom are investors. And that’s not a real boom. Long term steady growth is achievable in Mackay and that’s what we should be expecting. Land developers are only putting their prices up because we are paying it. Let me say, they’re making hay while the sun shines. As competition increases in land supply, it will be good to see the arrogance and feeling of self-importance of land developers be levelled once again. Mackay still sits proudly as a growing regional hub with no factors that would see a construction workforce misconstrue what is really happening.

Gladstone has seen a cautious buying market as many more land developers release their stock compared to last year. We are being hounded by developers in Gladstone to sell their product, considering last year they didn’t want to know anybody associated with investors their tune sure has changed. The rental marked has subdued and you can now rent a new 4 bedroom house for under $600 per week. Perhaps an oversupply due to investors buying in on the hype and not looking properly at the long term fundamentals? This is still a market that I suggest to stay away from if you don’t have thick skin. Many more development sites are also now for sale compared to last year. The justification of spending $530,000 - $560,000 ($100,000 over the states median sales price) to get a rent of $600 per week doesn’t look that great to me. But maybe I’m just spoilt for choice?

Moranbah would have to be one of the most interesting case studies of QLD at the moment. Making headlines only 12 months ago about the lack of disparity of rents with Gold Coast mansions to not coming to a standstill and having over 150 properties to rent at any one time. Poised as the fastest growing region on the continent, how could this happen? This is mainly due to the BMA and union led disputes. Again, I bring reference to another post about this. The ULDA has released their land at the wrong time also. It seems the take up of their original target market being locals and small businesses was miniscule. With the council looking to lodge a Development application in the future for residential lots, it appears Moranbah may be able to breathe again and get back some life and attract the families back. People are underestimating the importance of this to happen so the town can be a vital hub to the colossal number of projects around it. Rents are still high at $1000 plus per week for good units and up to $2000 per week for houses. If they can stand this time, I believe they are here to stay. However at least now people can buy some affordable housing and the town can continue to grow properly so it can serve the region for decades to come. I still tip a good buy in Moranbah as a good long term investment.

Emerald Is doing its usual cycle that I am use to. Six months hot and six months a little cooler. BMA has inevitably had an effect on the town in the short term. Couple that with some more stock coming on the market and we have seen rents on 4 bedroom houses shrink to $750 or so per week from their highs of $900 - $950 just 4 months ago. I don’t like saying it, but I told you so. It was inevitable. The Emerald market was not ready for a steady $900 per week. The market fundamentals just weren’t there to support it long term. Argue with me if you will however for a purchase in the high $400,000’s with a rental return of $750 per week, this still has to be one of the best investments around that I can find for a typical 4 bedroom house. This is also due to the long term fundamentals that are at play in this regional hub were poise it for long term population growth with a very high median household income and company support for accommodation. There are a few estates coming online in the future which will see a broader range of property investment opportunities. If you’re not getting value in Emerald right now, then wait for the right one, it will come. Again, I couldn’t recommend a better place to invest with a 5-10 year perspective. We haven’t seen any impact from the Alpha mines yet and I believe it will be a couple of years from now until we do.

So…Is the mining boom over like economists say?

My understanding of the widely reported publication from Delloitte access economics is they have made an assessment on when they expect the continual flow of new project announcements to dissipate within a couple of years. This view is synonymous with what we are also hearing from some of the mining giants like BHP and Rio Tinto.

What the widespread publications of this report outline to me, is that as investors, we need to read the facts, not the headlines and also look beyond the article too. I have had a number of comments made to me saying “did you read? the boom is over”! My response is usually accompanied by a chuckle as I realize how people continue to take small, misconstrued headlines and pieces of information and make decisions based on them.

If for a moment we thought that the continued commitment of multi-billion dollar capital expenditure projects was going to be around forever, we really weren’t thinking into things too much. The level of financial commitment by large, medium and small mining companies over the last couple of years has been unprecedented and will continue to be for another two years let’s say. Should some proposed projects not be committed to like the Olympic Dam mine in South Australia, or the $20 billion construction of the outer harbour at Port Headland from BHP we should not start to say the boom is over.

What the boom is to an economist isn’t exactly what a boom is to a property investor. The economists are counting the continued financial capital expenditure commitment as their “boom”. As property investors our “boom” is seeing these large projects come to fruition and putting long term demand on housing in regional hubs throughout Australia. That “boom” is long term as a result of the short term “boom” that the economists look at.

There are three main reasons that it was always expected the boom in commitments was short lived:

1        1.    Access to capital funds and exposure from the funding market to one industry.

2        2.      Access to skilled workforces to bring the large amount of projects to fruition within a relatively short time frame.

3        3.       Increased costs of construction due to the boom in demand for labour and materials in a relatively short time frame.

I believe that in 5 to 6 years we may see another boom in capital commitments. This will be after the above three factors have all eased a little bit. In the meantime, for property investors, your time frame must remain long term and your desire to jump in with the crowd must be restrained  otherwise people will pay above the odds and will not see good yields on their property or good capital growth, so you may as well invest in a capital city.

My next blog will be about investors hype and the danger everyone is putting their selves into with the tunnel vision a lot of investors seem to invest with. Property investing is about strategy, not just buying property. If you really want to be successful at this, it is time to be smart.

Until next time, good luck with your property investing!

Josh

Moranbah, the fastest growing municipality in the country and its inevitable growing pains

Quoted by one of the countries most renowned demographers, Bernard Salt, as “the fastest growing municipality on the Australian Continent” The Isaac region and its hub of Moranbah is certainly going through some growing pains. But what does it all equate to?

2011 was a year that produced some of the best results for property investors in the country. The median sales price rose over 30% and rents sky rocketed to record levels, providing investors with 17% rental yields at purchase price.

With the FTE population set to double, why has this thriving hub come to a grinding halt? It should be no surprise to anyone who is actively looking to invest in the Bowen basin that the BMA (BHP & Mitsubishi Alliance) union led strikes are causing havoc throughout the region. The recent closure of Norwich Park mine just down the road in Dysart sent shockwaves through the property investing community. BMA claim the mine was running at a loss and the union disputes was what tipped them over the edge of the cliff.

As Terry Ryder pointed out, watch what they do, not what they say. Is it convenient that the tail of the Minerals & Resources Rent Tax is being discussed and BHP is a key player in the negotiations with the Labor Government on this tax? The closure of a mine puts them in the box seat when they are arguing there point against taxes, not to mention union involvement within their mining operations.

Close eyes need to be kept on Dysart and local insight and networks are vital to ride the wave successfully into the future. None the less, some great opportunities will be had in the long term future.

But the union disputes don’t stop in Dysart, the shockwaves have reverberated to its neighbourhood hub of Moranbah. The housing market has come to a standstill as new leases aren’t being signed by key players including BMA, and in fact, people are vacating as there employment contracts aren’t being renewed by BMA.

The lay person would put this down to the fact that BMA simply refused to pay the rents landlords were asking. Allow me to clarify one thing here using an example of one of my clients who owns a house in Moranbah. With a quality, low maintenance tenant in his property in July 2011 he was achieving $900 per week in rent. He anticipated that upon a lease renewal in January 2012 he may receive above $1000 per week. Renting direct through the a contracting company, he contacted the housing manager to ask their opinion on the matter. In one phone call, the company offered an increase of $300 per week. However when the lease came up for renewal in January, it was time to formalise the increase to reflect market value. The company immediately offered $1900 without even being asked by the landlord.

I tell this story to illustrate that it was not the landlords who demanded such increases in rents, it was the companies offering it as they are completely aware of the demand for housing and their reliance upon it both now and in the future. The thought that Moranbah’s housing market has slowed down at present is actually, completely un-related to the prices they were paying for rent. It has to do with a political standoff between BMA, the Unions and the Government. The fact that Moranbah’s housing market has retracted, is nothing less than a by-product of an 18 month old bitter dispute with the unions.

What does this mean for Moranbah’s future. To get a true understanding of it, I believe it is important to look at 2 things:

1.         The current change of local government which has seen the Isaac region become one of the last Labor Strongholds of QLD.

2.         What items are already agreed upon in the currently negotiated EBA’s (Enterprise Bargaining Agreements).

The new local government are anti-mining camps that will impact the township and its service providers who were originally there to service the full time residents, not a fly-in-fly-out workforce. The new council are pushing strongly for more family housing to be built to grow the community for the long term. The newly elected LNP government has since handed back decision making power to local councils that hastily became powerless to the ULDA (Urban Land Development Authority) who were appointed to take over development control in certain regional councils throughout Qld.

When looking at some agreed points in the EBA, there’s some positive news for property investors. Firstly, miners were against being housed in 30+ year old houses were there standard of living was decreased significantly to that of the city life. They are demanding a higher standard of accommodation from their employers, which both parties are agreeable to.

As a result, an amount of $2000 has remained as a weekly contribution to the employees rent. This in itself is a true indicator of where Moranbah’s rental market will inevitably end after nearly two years of bitter disputes between one of the country’s largest mining companies and the CFMEU.

With an increased demand for high quality accommodation around the $2000 range, it leaves the older houses to be used to service sectors that simply cannot pay such high rents. Industries such as health services, construction, retail and small professional services will once again be able to thrive, and help Moranbah continue to become the hub that it was designed to be.

The next five years is planned to see more expansion projects and new mines under construction within a 50km radius of Moranbah than any other time in history. Over 5000 full time employees need to find accommodation as nearly $13 billion dollars of private Capital Expenditure comes to fruition.

Could now be a prudent time for sophisticated investors to enter the market, and take advantage of weaker market conditions in preparation for the potentially prosperous years ahead?

Emerald, Central Qld

I've been looking forward to reporting on Emerald for some time now, it was this time last year that investors were looking at me with a clear "are you crazy" look on their faces when I was boasting about the prospects of this town. So it is with great enjoyment that I get to mention the performance that has been seen in the last 12 months.

 Once sleepy town of only a few thousand has grown to over 17,000 permanent residents with a lot more growth to occur. Situated on the Nogoa river, 270km west from Rockhampton, this thriving town boasts a diverse regional economy which is thriving on the prospects of Qld's mining industries growth.

The local council body, Central Highlands Regional Council pride themselves on creating a harmonious community between the strong agricultural industry and the buoyant coal mining companies as well as local residents. Emerald is the industrial and service hub to the mining operations in the south of the Bowen Basin and is expected to grow even further as the Alpha projects start which are only 150km west.

Contrary to the beliefs of many pessimists of investing in a mining region, Emerald has provided a safe haven for investors wanting to get their feet wet outside of major cities for over 20 years. Recording only 1 year of negative growth in 2008 of 2.5% over the last ten years, Emeralds median price has shown what has to be recognised as unprecedented and sustainable growth, including a significant rise in the median sales price between 2004 and 2006 with 2005 showing growth of 39.5% over the 12 months. Last year Emerald achieved a 9.5% rise in the median sales price, compare that to the majority of areas around Australia and you would struggle to argue that it's not one of the best CG regions seen in 2011.

The capital growth is not all that Emerald contributes to your portfolio. The rental yields are amazing and should not be overlooked. Returns of 8.5 - 10% are not uncommon at the moment. 12 months ago we were renting 4 x 2 x 2 homes out for $650 per week, now the market his seeing the same house rent up to $950 per week unfurnished.

Emerald truly is the best of both worlds at the moment for a property investor with rental yields to make the city investors cringe all the while actually achieving capital growth in what is a fairly flat overall property market Australia wide.

The recommendation does not come without a word of advice to novice regional Qld investors. The rental market does fluctuate as it sees record spikes due to a number of factors including staged land releases, contracts and just the normal aspects of a rental cycle. This could see the current highs of $950 per week go to $850 per week for a while. Does that mean that property prices and rental yields are decreasing? In my opinion, the answer is no. With my experience in mining regions, this is absolutely normal. I believe to get the best indicator, you have to look at rental yields on an bi-annual basis to see how they have moved in real terms.

Land releases throughout Emerald have always been patchy and look set to continue that way. Estates seem to release 50-70 lots at a time which does not help out the rental shortages much.

Unlike many other inland mining towns, Emerald has an array of shopping centres including a newly finished Woolworths and Big W centre, 2 centro centres and an ever expanding commercial shopping precincts. Some of the largest names in Australia are making sure they have a market share of this town which also boasts some of the highest average male wages in the country. 15 minutes from the town is one of the largest freshwater holdings in the southern hemisphere, Fairbairn Dam. Boasting fishing and boating activities to the locals and tourist from afar.

In my personal opinion, Emerald is a town that should be on property investors radars both now and in the future. The prospects are second to none for this thriving town that boast an array of lifestyle activities and employment opportunities.