Worth over $13bn, Western Australia's liquefied natural gas plants are paving the way for a new mining boom.
Western Australia has long been known for its mining potential - from the gold rush in the late 19th century to the first liquefied natural gas (LNG) plant at the North West Shelf in the 1980s. Now, with the positive exploration of gas fields off the coast of Broome and Karratha, energy companies are once again seeking out this pristine piece of Australian coastline.
There are several proposed LNG plants worth a total of $133bn. Overthe next few years these plants, which lie mainly off the coast of Karrathaand Broome, will begin to harvest the gas and then transform it into LNGfor shipment.
On the Barrow Island in the Gorgon gas fields, Chevron, Exxon Mobil and Shell have begun work on a $50bn project, which is expected to create 7,000 jobs and a further 3,000 in 'spin-off' positions. With an estimated 40 trillion cubic feet of gas hidden in the fields, the scheme has secured $300bn of gas supply contracts so far - including a $50bn contract to supply gas to China for 20 years. Chevron is also in charge of the Wheatstone LNG project - to the south of Karratha - which will create a further 3,000 direct jobs and begins construction in 2011.
Meanwhile, Woodside - the company behind the LNG development on the North West Shelf - is developing the $12bn Pluto project on the Burrup Peninsula (also near Karratha). The company estimates that 3,000 jobs will be created during the construction phase, and another 300 once the plant starts drawing gas in 2010.
Woodside has also teamed up with BHP Billiton, BP, Chevron and Shell to mine Torosa, Brecknock and Calliance gas fields off the coast of Broome, which contain a an estimated 27 trillion cubic feet of gas. The Browse LNG plant, as it is know, is scheduled for completion between 2013 and 2015 and is expected to be in operation for 40 years.
This is big news for the Pilbara region. Already home to Rio Tinto's iron ore plant and Woodside's North Shelf Venture, a thriving LNG industry would create local jobs and improve the region's infrastructure. It is also expected to increase West Pilbara's population 21% by 2016.
With the construction of the plants underway and multiple contracts already confirmed, real estate agents are quick to recommend north WA. If the hyperbole is to be believed, WA is the place to be looking for your next investment.
Unsurprisingly, the areas of Karratha and Broome are the prime spots for investors. "In the last quarter the volume of sales in Karratha lifted 28% on the previous quarter," says Angus Murray of PRD Nationwide. "The best bargains are being snapped up at the moment. There's no way the house prices will stay the same over the next 12 months."
According to Murray, three and four-bedroom houses in the Nickol suburb of Karratha can command up to $1,600 and $2,000 per week respectively - a necessary return when the same properties start at $750,000 to $1m. Dave Hipworth of LJ Hooker Karratha also recommends the suburb of Nickol but he highlights Tambrey, Millars Well and Baynton as investment areas too. "In Millars Well and Baynton, you will pay $750,000-$810,000 for a 15-20-year-old four- bedroom house and can expect $1,600 rental per week; while in Tambrey you will pay around $900,000 for a four-bedroom home on a new estate and can expect up to $2,200 rental per week," he says. "There is huge potential in Karratha and we are only seeing the beginning if it." Land packages can provide good
value, allowing you to create the ideal rental property and still be in time to
profit from the LNG workers by next year. Hipworth estimates a 550-600sqm
lot of land at around $160,000 with an extra $600,000 to build a four-bedroom,
two-bathroom home. A new home in an area such as Karratha can command
up to $1,750 in rental. The property prices are high in Karratha, but investors who are considering the lower end of the market should be wary. There is a plan to zone 3.5 hectares of land in Karratha for transient workers accommodation,
which will allow those employees not on inflated gas wages to rent a three bedroom house for just $600 a week.
With space for up to 800 employees, the zone will be stiff competition for investors should it receive government approval. A more affordable option is shortterm letting, which caters for workers who fly into town for a few days.
"It's a new product we've seen coming onto the market and one that's very successful - one-bedroom units can get up to $275 per night," says Angus Murray. "They start at about $500,000 and have net returns of about 10%, compared with 8% on family properties."
Broome, on the other hand, attracts long-term renters lured by the town's clean beaches and 'outdoorsy' lifestyle. "Broome is a tourist town with great facilities," says Murray. "Companies are a lot happier to put their workers there - especially the people with families - and they often end up migrating permanently." With this in mind, three and four bedroom houses in Cable Beach or Roebuck Estate -which sell for $650,000 and $750,000 respectively with a 5-6% net return - are the most attractive investment.
Considering Karratha and Broome's location to the plants, investment in these areas seems an obvious choice. However, Murray forecasts that Perth - where a lot of construction is taking place before transportation to the LNG plants and where some gas companies are expected to station their employees - will also benefit from the development. The areas of Baldivis and Wellard, close to the construction hub of Cockburn, are the suburbs that are the most likely to benefit from Perth's recent construction boom. The net return here is slightly lower than Karratha and Broome, but at around 4% on a $650,000 four-bedroom house, the market is steadier.
Learn from the past
And if history tells us anything, it is that house prices in mining towns are frequently unstable. In 2006, during the run-up to BHP's new nickel mine in Ravensthorpe, WA, annual median house growth topped 35%. Earlier this year the mine was shut down and 1,800 jobs were lost due to "the diminished prospects for profitability", leaving the current median growth for 2009 at just -0.3%, with only three recorded house sales in the town this year.
Ravensthorpe is a sad tale but one that does well to highlight the inherent risks of investing in mining towns. And despite the Pilbara Coast's diversified industry - iron ore, salt and fertiliser have been produced there for years - it is not beyond the reach of the economical downturn.
Median house growth in Karratha rose just 0.5% the year up to June 2009, with house sales at their lowest and prices at their highest. According to the Real Estate Institute of Western Australia (REIWA), the median house price for Karratha is $693,500 and the highest house price is $1,350,000, while land growth has dropped 7.8% in the last 12 months.
Broome has coped better during the economic downturn, with the median house prices standing at $635,000 - a 2.8% increase on the previous quarter and a 10.4% increase over the last 12 months.
The economic effect
"During 2005-2007 there was a real shortage of land, which pushed up the prices of houses," says Stewart Derby of REIWA. "Supply has now caught up with demand and this has put a lid on prices, so investors have to look at the long term. Windfalls were had a couple of years ago. Now you must move away from speculative gains and think in terms of rental yields."
But rental yields have fallen too. In the last June quarter the REIWA recorded a median rent of $1,400 in Karratha, compared with $1,700 in the December quarter before. In Broome, the median weekly rent has dropped by 2.7% in the last quarter. It now stands at $535, while the vacancy rate stands at 3.3%. Perth's vacancy rates have risen 0.6% in the last quarter to 3.5%, with a median weekly rent of $360.
Of course high levels of low-priced stock would affect these median statistics, but they do highlight the vulnerability of a market so heavily reliant on boom times. We are far from over the economic downturn and despite interest rates remaining static the last five months, there is an expectation by the futures market that these will start to rise again before the end of the year. If rental and vacancy rates don't catch up, investors could be left with high repayments without the returns to match them.
That said, the LNG industry does look to be a strong and particularly reliable one. The plants are expected to run for up to 40 years, with contracts signed with China, India and Japan - the world's largest importer of LNG - and trends suggest global energy demand will increase by around 40% over the next 20 years. Western Australia's population grew 12.3% between 2000 and 2008 - with 30% of the population born overseas - and the LNG plants are expected to increase population by up to 40% in some areas.
Western Australia's market looks incredibly appealing. There are risks, as with all investment, but the state certainly has the right foundations - and the huge amount of private and public investment suggests there is serious potential for property investors. But you must be in it for the long term to realise good returns.