WA Excerpt from the 2014 May Market report

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Still running strong

Despite the negative news about the mining industry, WA is still poised to deliver solid returns for investors

According to experts, rental yields and property values have softened in some of WA’s mining towns, but it’s not all bad news for investors.

For those in the know, WA’s mining downturn is a natural cycle of the resources sector, but for those who don’t understand why mining towns are no longer providing massive rental yields, here it is: most of the mines are reaching the end of the construction phase, meaning they are built and ready to start production. Put simply, this means less workers are needed in remote areas, so rental demand falls and exorbitant yields go with them.

A good example of this is the $13bn Woodside Pluto LNG project located 190km northwest of Karratha. With sale agreements for the supply of gas to Kansai Electric and Tokyo Gas, the project provided 15,000 jobs during the construction phase and required accommodation camps for up to 6,000 workers. Now in the production phase, it is understood the project currently employs about 5,000 workers.

So while many property investors have enjoyed riding the wave of WA’s construction years, unfortunately highs are too often followed by lows, and in this case the low will likely present itself as a significant fall in property values and rental yields.

Local agents say that, despite the natural downturn, investors who bought in mining towns like Port Hedland, the Pilbara and Karratha will continue to enjoy positive rental yields, but investors who leveraged returns of 12% or higher during the boom could be in some trouble.

Rob Sleator, CEO and licensee of Pilbara Real Estate, says investors need to be aware that at some point the ‘boom’ will come crashing down.

“People are still getting really good rents here, and three years ago 80% of our clients were investors and they were getting decent money,” he says.

Now some of his clients are experiencing current rental decreases of up to $2,000 per month.

“Remaining rental amounts are still in the vicinity of $1,200 per week, though, on properties with price tags of around $700,000 plus,” he says.

“These investors might have paid top dollar, but they still have a positively geared property at the moment, despite the decline in rents.

“But what happened is a lot of investors relied heavily on this income and used it to leverage other properties, and now there’s been a gross realisation that at some point things have to come back.”

New opportunities

Released in February, the Western Australian Business Outlook report predicts the slowing of construction in WA will result in “employment plummeting in comparison to the ‘boom’ of recent years, in particular 2012”.

No surprises there, but while experts wail and holler that the ‘boom’ is over, the outlook for investors is not all doom and gloom, according to the report. It states that if WA can manage an economy transitioning from construction to production, there could be an opportunity for other sectors to emerge.

While a weakening economic outlook for short-term growth is predicted, it is also thought that this could be counteracted by medium-term forecasts for gross state product (GSP) that remain above the Australian trend, with a quick rebound of about 4% predicted. This would then allow WA to retain its mantle of Australia’s fastest-growing state over the next decade.

Property developers take notice

Of interest to investors should be the report’s view that other sectors may soon have the opportunity to step out from what has primarily been a looming shadow cast by the gargantuan resources sector.

In recent years the WA economy has been defined by the state’s production of iron ore for Asian markets and by demands on the mining sector, but as construction in the resources sector begins to slow, the market beginning to poke its head out into the sun seems to be property development.

“While most of the state’s economy is looking soft or at risk of softening, the state’s housing construction sector is zigging at the time those other big drivers of growth are zagging,” it states.

In fact, research shows that 2013 recorded the highest number of new private housing approvals since 2006, and the report states that “it looks as if 2014 may be the peak year for the current housing construction cycle, but we see good gains extending into 2015 and 2016 as well”.

SUBURB TO WATCH
Augusta


Located 270km from Perth on the state’s south coast, Augusta is home to the only safe small-boat harbour between Bunbury and Albany.

More importantly, it is also located within the Augusta-Margaret River area, recently identified by RP Data as the highest-growing regional area in WA.

According to Joe White, Real Estate Institute of WA spokesman for the southwest, there is also a limited land supply of prime coastal properties in Augusta and no plans for any other townships in the future.

Another draw card of the area is its natural beauty and climate.

“From a natural aesthetic and climate viewpoint this is one of the most pleasant places on earth to live,” White says.

“The Mediterranean climate is conducive to a great lifestyle, and after 220-odd years we seem to be adapting our lives to taking advantage of it rather than having hot roast Christmas lunches in 40-degree summers.”

In terms of infrastructure, Augusta, and the Augusta-Margaret River area, has a wealth of commerce and natural resource sectors providing a healthy local economy.

“Agriculture, mining and tourism are the three mainstays of the area,” White says.

“The wine industry is recovering and tourism is steady. Mining is healthy, and in spite of the construction side easing off, all those newly constructed mines need operators, and a lot of operators live in this area with their families.”

White says the planned extension of the National Broadband Network will also have a huge effect because it will make establishing further businesses easier in the area.

“The nature of it being a high-value area means that a lot of those people who do move down here have the capacity to be entrepreneurial on their arrival, and commerce seems to follow these people very closely.”

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Top Suburbs : south brisbane , the basin , narara , coolbellup , eagle vale

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