Resource rich towns back on radar

During the 2005-2007 mining boom in Australia, investors flocked into mining towns, but fell away from these resource driven investments as the GFC unwound, which caused demand for Australian resources to abate causing commodity prices to fall significantly during 2008.

Investing in resource driven markets has always held a higher level of risk than conventional metropolitan property investments. Timing is crucial – buying into a resource driven market early is the key to strong capital gains and getting out at the right time is also critical.

The most pertinent example of mining town risk became evident in the Western Australian town of Ravensthorpe where the BHP operated nickel mine was mothballed and 6,000 jobs were shed. The shutdown virtually eliminated the local economy and only three properties have recorded a sale so far in 2009.

For those investors who get it right though, there are some spectacular gains to be had by investing in resource driven areas.

Over the five years to the end of 2009, property prices on the Central Pilbara Coast rose by 230% and rental yields are generally above 9%.

Recently, Australia’s largest ever trade deal was struck between the West Australian Gorgon liquefied natural gas (LNG) project and PetroChina. The deal was worth $50 billion over 20 years – or around $83 billion if you include the previous deal with PetroChina, which was signed in 2007. A week earlier Gorgon signed India up for $20 billion over 20 years.

These latest agreements could provide the spark that reignites investor interest in Australia’s resource driven property markets. The Gorgon project alone is likely to cost $50 billion to build and create jobs for 6,000 workers during the peak construction phase of the project.

In economic terms, the Gorgon LNG project is estimated to contribute $64 billion to Australia’s gross domestic product over the next 40 years of the project. Additionally, the Australian Government is likely to earn around $40 billion in royalties from the project over the same timeframe. With such a large injection of capital and human resources the demand on the local housing market is going to be intense.

Half the workers will probably be housed in purpose built accommodation on Barrow Island. That means an additional 3,000 workers (not to mention additional demand from the peripheral service industries) are likely to require housing within the communities around the project. Much of this housing is likely to be located in the major townships along the Pilbara coastline – Karratha and Dampier, or even the smaller township of Onslow which is closer to Barrow Island.

The Gorgon LNG project will not be the only one to spur the Pilbara coastal property market. Woodside Petroleum also has plans for tripling the size of its Pluto LNG plant that operates out of Karratha and Chevron are developing the Wheatstone LNG project at Ashburton which is also on the Pilbara coastline between Karratha and Exmouth.

Housing prices in the region are high; the median house price at Karratha and Dampier is around $835,000. Rental rates are even higher; with weekly rents generally well over $1,000 per week for a house, providing rental yields that are well above average – often above 10%.

The Pilbara central coast region is easily one of the best examples of where investors are likely to be attracted to take advantage of the next resources boom, however there are plenty of other major resource driven projects in the pipeline around the nation that are likely to attract property investors.

The other three major natural gas production regions around the country also have a massive amount of projects in the pipeline. There are four major LNG production regions around Australia: the Pilbara region which has already been discussed above, the Browse Basin which is off the Kimberley Coast of Western Australia, Darwin where LNG is being drilled in the Timor Sea, and Queensland’s Gladstone which is geared towards capturing coal-seam methane gas.

Several large LNG plants are planned for Gladstone in Queensland where there is already a solid industrial base including one of the world’s largest alumina refineries, Australia’s largest aluminum smelter and the largest cement production facility in the nation; just a few of the major industries in the region.

In the Northern Territory, the Inpex gas project is also waiting approval. The project is likely to go ahead and will be the largest single private sector investment ever made in the Northern Territory. Construction of the project will cost around $24 billion and will employ about 2,000 workers during its construction phase and 300 workers when operational.

It’s not just the LNG sector that is set to ramp up. The expansion of the Olympic Dam project in South Australia has the potential to create an additional 10,000 jobs and significantly expand the housing supply at Roxby Downs.

The expansion project has recently seen an environmental impact statement released that is being considered by the Federal, South Australian and Northern Territory Governments.

Just outside of Orange in New South Wales, what will be Australia’s largest underground mine is pending approval. If approved, the Newcrest Mining Cadia East project will be the state’s largest infrastructure project, injecting $2.2 billion into the local economy and requiring 1,300 workers for the construction phase and almost 2,000 direct and indirect permanent jobs.

For the conservative investor these resource driven markets are likely to have a risk profile that falls outside their investment strategy. However, for many investors these markets are likely to be very attractive and should provide above average returns whilst the resources sector remains buoyant.

Tim Lawless is the Director of Property Research at RP Data.