Port Hedland Australia's iron ore boom town - Aussiehome

Hot spot | port hedland
Port Hedland
Australia’s iron
ore boom town
On the back of the commodities boom,
Port Hedland offers investors not only
Australia’s highest rental yields at 10% but
also the promise of continued capital growth
flowing from $37bn in iron ore projects.
Flynn De Freitas investigates what has driven prices up
$630,000 in five years and why it is still not too late for
investors to buy
Australia’s leading ‘superinfrastructure’
town is beyond
a doubt Port Hedland, a town
that benefited from over $12bn in iron
ore projects and a 45% increase in its
population since 2002. To say the town
is ‘full’ is an understatement. Vacancies
are zero and rental yields 10%.
With a roaring Chinese economy,
$9.5bn in new projects already
approved and another $37bn proposed,
and $562m in civic projects to
improve local amenities for the 19,000
citizens of Port Hedland and its (more
affordable) twin, South Hedland,
investors have good reason to take
a closer look.
Despite the economic turmoil
of Western economies, the
urbanisation of China, India and
other emerging Asian economies
continues to relentlessly demand
iron ore and other commodities.
Indeed, Australian iron ore
exports surged 21% in 2009 to
391 megatonnes according to the
Australian Bureau of Agriculture
and Resources. Further, iron ore
exports are forecast to rise another
40% to 546 megatonnes by 2015 –
more than double 2005 export levels
(see Chart 1).
Port Hedland is at the forefront
of Australia’s mining boom, with its
population growing from 13,000 in
2001 to some 19,000 today as billions of
dollars worth of iron from the Pilbara
region is shipped out of its port.
With its population forecast by the
local government authority (see Chart
2) to surge to 27,000 by 2015 (40,000
by 2025) and no easy solution to Port
Hedland’s chronic land shortage, the
town’s property market is likely to
continue soaring for years to come.
The China factor
More than any other nation in the world,
China and its population of 1.2 billion
people (eager to experience ‘Western life’)
are driving our commodities boom. The
mass migration of China’s population
from farmlands to new and expanding
cities is expected to see 37 cities the size
of Perth emerge in the next 10 years.
Amazingly in the next 15 years,
nearly 255 million people (ie, 17 million
18 www.yipmag.com.au

Hot spot | port hedland
Chart 1: Australian ore exports
600 60
Volume (left axis), megatonnes Value (right axis), $bn
500
50
400
40
300
200
30
20
100
10
0
2000
- 01
2002
- 03
2004
- 05
2006
- 07
2008
- 09
2010
- 11f
2012
- 13z
2014
- 15z
Source: Australian Bureau of Agriculture and Resources
Chart 2: Port Hedland population, 1996–2025
40,000
35,000
30,000
ABS data
Town of Port Hedland data
105% growth
25,000
20,000
48% growth
15,000
each year) will relocate from rural
areas into urban regions (according to
research from the global consultancy,
McKinsey & Company) – the equivalent
of the entire adult population of
Australia each year.
The essential building block of the
cities that will house these people is,
of course, steel, which provides the
framework for apartments, office
towers, ports and strengthening rods
of all concrete structures.
China has also brushed off the
economic woes of 2008 and 2009 due
to its unique status as the world’s largest
holder of foreign exchange reserves
(ie, US dollar holdings) – US$2.44trn in
March 2010, according to China’s central
bank, the People’s Bank of China.
This has meant that China could
‘pay cash’ to counter the effects of the
financial crisis in 2009 through the
largest economic stimulus package in
history – a very cool A$635bn.
In doing so, China has vastly increased
the number of its infrastructure (eg,
roads and railways) and urbanisation
10,000
5,000
0
1996
2001 2006 2010 2015 2025
Source: Australian Bureau of Statistics, Town of Port Hedland Authority
Chart 3: Port Hedland median value & annual growth
Thousands
$1,200
$1,000
$800
$600
$400
$200
0
1991
Median value
1992
1993
1994
1995
1996
1997
Source: Residex (data to year ending June 2010)
Annual growth
Commodities
boom begins
1998
1999
18% 10-year annual
growth average
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
%
40
35
30
25
20
15
10
5
0
www.yipmag.com.au
19

Hot spot | port hedland
Chart 4: 10-year average annual house price growth
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
18.0%
0.0%
Port
Hedland
Source: RP Data, Residex
Chart 5: Gross rental yields
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
10.0%
Port
Hedland
Source: RP Data (as at June 2010)
12.2%
11.3%
(eg, apartment complexes and schools)
projects underway.
With ANZ forecasting China’s
growth to continue to remain at
approximately 9% for the next 10 years,
the future demand for Australian iron
ore and other commodities is assured.
The Port Hedland boom
The property market of Port Hedland –
comprised of the twin regions
South Hedland (inland) and Port
Hedland (coast) – has undergone an
amazing boom.
The town has long experienced
sustained and strong capital growth
(see Chart 3), with median house
values rising from $66,000 to $184,000
over the 10 years to 2000. Over the
following five years, values doubled to
$361,000. The current average price for
9.9%
9.5%
6.6%
Perth Brisbane National Melbourne Sydney
3.9%
Perth –
houses
4.2% 4.0%
Perth –
units
National –
houses
4.8%
National –
units
Port Hedland and South Hedland sits
at $740,000.
While the median house prices
have grown nationally at a 10-
year average annual growth rate of
9.9% (12.2% and 11.3% for the
commodities boom capitals of Perth
and Brisbane respectively), this pales
in comparison to returns investors
have made by directly investing in
Port Hedland.
Specifically, median house values for
Port Hedland have risen at double the
national 10-year average annual growth
rate – a stellar 18%.
The reasons for this phenomenal
boom in prices come down to the influx
of thousands of very well-paid miners
and the town’s severe land supply
constraints, which have seen years of
zero or near zero vacancy levels.
Rental yields are a staggering 10%
– easily the highest in Australia (see
Chart 5) – and have been at these levels
for many, many years as the town has
struggled to cope with the influx of
workers associated with the numerous
iron ore projects in the Pilbara region.
Consequently, at the start of the
commodities boom, astute investors
seeking the likely huge demand for iron
ore by China snapped up four-bedroom
homes in town for between $210,000
and $240,000 in 2002 and 2003.
Seven years later, these homes now
fetch between $950,000 and $1.2m, with
rents of $1,200 per week for a $600,000
property in South Hedland and $2,000
per week for $950,000 homes in Port
Hedland.
Mines and land supply constraints
Port Hedland had been a remote outpost
on Australia’s north-west coast, 1,700km
from Perth. This has all changed in the
last 10 years.
The expansion and opening of over
20 mines in the Pilbara region have
dramatically altered the town’s property
market, which is essentially land-locked
by expansive flood plains.
The sudden transformation of
Port Hedland into Australia’s largest
exporting port by tonnage, and resultant
large wage increases combined with the
town’s unique land supply constraints,
have made a perfect recipe for its
property boom.
Further, the dramatic rise in ‘fly in/
fly out’ (FIFO) workers from Perth
and interstate into Port Hedland means
FIFO workers now account for some
2,000 (11%) of the town’s population.
As Australia enters the second leg of
the commodities boom, these powerful
forces will continue to exert strong
upwards pressure on Port Hedland’s
rents and property prices.
Miners and their $100,000 salaries
The mining boom has rapidly boosted
the town’s average salary for workers,
which has risen 39% within seven years
from $43,000 to $60,000 in 2007 – the
latest data available from the Australian
Bureau of Statistics – and has most likely
continued to rise over the last two years.
This rapid rise is due to the fact that
virtually every worker employed by
BHP Billiton and Fortescue Metals
Group (which export iron ore out of
20 www.yipmag.com.au

Hot spot | port hedland
Port Hedland), the numerous mining
contractors and extensive port facilities
are on $100,000-plus salaries.
These large salaries are a result of
the flood of wealth mining companies
and their suppliers have enjoyed from
booming iron ore prices, the town’s
remote and hot location (its annual
median temperature is a scorching
33°C) and the fact there is a chronic
shortage of workers in Western
Australia’s remote ‘resources’ sector.
Despite the global slow-down of
2008/09, this acute shortage of mining
workers continues unabated. Indeed, the
shortage of miners hit its peak in May
2010 according to the ABS, with over
6,200 vacant positions across Australia.
Commenting on these statistics,
leading labour hire firm Drake Australia
said: “The mining shortage never went
away. Mining workers are very hard to
find. You need critical skills – more than
other industries – and you often need
them in remote locations.”
Another mining recruiter, NES
Global, believes because of this shortage,
“wages are expected to rise 20% over
Median house values for Port Hedland
have risen at double the national 10-year
average annual growth rate – a stellar 18%
the next 24 months”.
The net result of this has not only
been booming property prices but a
consistent gross rental yield of 10%
for investors in Port Hedland and (the
more affordable) South Hedland. This
has been one of the main draw cards for
investors, given gross rental yields are
more than double the national average.
Flood plain limits land supply
The first thing most investors say when
they hear about the prices of houses in
Port Hedland is, “why don’t they just
build more homes” If only life was
that simple!
The ‘available land’ for residential
construction around Port Hedland is
very limited due to the vast flood plains
and salt deposits that cover some 85% of
the immediate area around the town.
Indeed, Port Hedland could easily
be 10 times its current size but for the
flood plains alone. While many parts of
these flood plains are dry all year round,
planning restrictions on residential
www.yipmag.com.au
21

Hot spot | port hedland
building prohibits construction in areas
that may be subject to flooding on a
10 years-plus basis.
This safety limitation on residential
land will not change, meaning that
the only real way to increase housing
supply in town is to increase the
density of housing. Consequently,
it is likely that housing pressures will
not substantially abate for some time –
if ever.
Dramatic fly in/fly out increase
An additional element to the housing
boom in Port Hedland has been the
dramatic increase in the number of
passengers at the town’s airport, which
has rocketed from 70,000 in 2003 to
210,000 in 2009 (a rise of 200%).
This has been driven in part by a
large increase in the size of the FIFO
workforce associated with the town’s
expanding port facilities and mining
services companies that support the
Pilbara mines.
Living in private rentals, companyhired
residential properties and short
stay accommodation (eg, hotels and
caravan parks), these workers have been
the ‘icing on the cake’ that has supercharged
the property market – given
that virtually all of them are on very
Table 1: Port Hedland civic projects
Project Proponent Value Project Proponent Value
Road and bridge
works
Hedland Regional
Hospital Centre
Marina and Retail
Precinct development
Road and bridge
works
Multi-purpose
Recreational Centre
South Hedland town
centre revitalisation
Public amenity
enhancement
South Hedland
Community Centre
Hedland Senior High
School upgrade
Finucane Island
Community Function
Centre
JD Hardie Youth
Precinct
Federal
Gov
high incomes.
Often they are also crammed into
accommodation, with three, four or
even six workers per house, operating a
‘hot’ bed system where one worker ‘flies
out’ and cleaners replace the bed sheets
for the next worker who then ‘flies in’.
This FIFO phenomenon is not unique
to Port Hedland. According to the Pilbara
Development Commission, at least 18,000
of the 30,000 workers in the Pilbara
mining industry are FIFO workers.
The Town of Port Hedland Authority
$160m Managed
accommodation for
visitors
Doric Ltd $138m Marquee Park community
facilities
WA Gov/
T of PH
is predicting the strong trend in
passenger growth will continue,
with numbers potentially rising
another 60,000 in 2010 to a whopping
270,000 passengers.
Pilbara Cities Blueprint
In November 2009, the Premier of
Western Australia Colin Barnett
announced the Pilbara Cities Blueprint,
which would create “vibrant, major
cities” in the iron ore ports and towns
of Port Hedland, Karratha, Dampier,
Newman, Tom Price and Onslow.
Focusing on the two superinfrastructure
towns of Port Hedland
and Karratha, the blueprint would
provide “new schools and TAFEs;
hospitals and medical centres; leisure
and entertainment facilities; shopping
and retail precincts”, and also seek
to increase the town’s level of
housing density.
Premier Barnett said that “the
government’s vision is to create a
place that people choose to settle on a
permanent basis, a place to bring up
families with access to high standards
of education, health and diverse
employment and career opportunities”.
Now, for any property investors this
type of talk is exciting – revitalisation
22 www.yipmag.com.au
$69.8m
Cemetery Beach and
Koomba Park facilities
WA Gov $40m Crime prevention and
safety initiatives
WA Gov/
T of PH
T of PH
$8.5m
WA Gov/ $8.2m
BHP Billiton
WA Gov $6m
T of PH
$5.3m
$35.3m Town cycle plan T of PH $5.1m
Landcorp $23m Port Hedland GP housing
project
T of PH $9.6m Iconoic Family Park
(Stage 2)
T of PH $9.5m Park improvement
program
WA Gov $9m South Hedland Bowling
and Tennis Club
development
T of PH $9m McGregor Street precinct
redevelopment
T of PH/
BHP Billiton
Chart 6: Port Hedland annual growth in median house values
40%
35%
30%
20%
15%
10%
5%
0
BHPB project
FMG project
$575m RGP 2
approved
$111m RGP 1
approved
$30m accelerated
expansion approved
$564m Area C & PACE
expansion approved
Source: Residex, BHP Billiton, Fortescue Metals Group
$8.7m
West End cultural precinct
artistic landscaping
T of PH
T of PH
T of PH
T of PH
$4.5m
$3.7m
$2.8m
$2.4m
T of PH $2m
T of PH
$1.6m
Total $562m
$2,600m RGP 4
approved
$1,529m RGP 3
approved
$3,100m Cloudbreak
Mine, Rail and Port
Facilities approved
$3,850m Chichester
mine approved
$6,800m RGP 5
approved
$2,000m in early
works for RGP 6
approved
$650m Chichester Hub
55 expansion approved
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Hot spot | port hedland
and improvement in a property market’s
amenities creates strong capital growth
potential and will also diversify the
town’s economy from being driven by
purely the mining industry.
Better still, the blueprint would
work in conjunction with the $300m
already committed towards ‘Royalties
for Regions – Pilbara Revitalisation
Plan’. In total, the WA government
intends to spend $457m in addition
to actively seeking to attract private
investment into the region.
The $562m transformation
The combined partnership of the WA
government (Pilbara Cities Blueprint
initiative and Royalties for Regions
Revitalisation Plan), federal government
and private sector will transform Port
Hedland from a relatively undeveloped
coastal town (outside of its port facility)
into a modern regional city.
In total, there is a massive $562m
(more than $29,000 per person) in
civic and local infrastructure projects
underway, with five flagship initiatives
planned or now in progress.
1. South Hedland Town Centre
Revitalisation
One of the most significant projects for
Port Hedland is the $23m revitalisation
of South Hedland Town Centre, which
the WA government in February 2010
Map 1: Port Hedland Flood Plain
called for expressions of interest from
the private sector to develop the large,
half moon-shaped site on the edge of
South Hedland.
Developers have been invited to
propose their schemes for an extensive
mixed use site which will incorporate
retail, office, commercial and residential
components that will be a focal point for
the South Hedland community.
Earthworks have already commenced
onsite and civil construction (eg, roads
etc) is expected to be completed by
October 2010.
2. Multi-Purpose
Recreational Centre
The Multi-Purpose Recreational Centre
will bring world-class indoor and outdoor
sporting facilities to Port Hedland.
The $35m flagship project between
BHP Billiton and Royalties for Regions
commenced construction in June and is
due to be completed in late 2012.
3. Hedland Regional
Hospital Centre
Providing extensive inpatient and
outpatient facilities, the $138m Hedland
Regional Hospital Centre will include
dedicated wards for surgical, obstetrics,
paediatrics, and emergency services.
Medical support services (eg, medical
imagery, pathology, renal dialysis,
primary and mental health) will also be
Continued pg.26 >>
finucane
island
Cookie point
West end
Cemetery
Beach
pretty pool
Redbank
Dampier Salt
Wedgefield
Great Northern Highway
Airport
Boodarie
industrial estate
South hedland
Source: Town of Port Hedland
www.yipmag.com.au
23

Hot spot | port hedland
24 www.yipmag.com.au

Hot spot | port hedland
www.yipmag.com.au
25

Hot spot | port hedland
Map 2: Pilbara iron ore mines & deposits
Source: FerrAus
available at the centre.
Upon its completion in August 2010,
the centre will replace the existing
Port Hedland health campus as the
central healthcare hub for the Pilbara
Gascoigne Health Region.
4. Marina and Retail Precinct
Development
The largest initiative to improve the
town’s amenities and appeal is the
ambitious $69m Marina and Retail
Precinct Development at Spoil Bank.
This 258-recreational boat pen
marina, mixed use commercial and
residential project will create a complex
comparable to the best marinas in Perth
and Queensland.
Situated at the eastern edge of
the port’s entrance, the tourism-focused
development will involve extensive
dredging and a 300-metre protective
breakwall. Both low and high
density options for development are
being considered.
5. Road infrastructure upgrades
The largest initiative underway is
a $200m infrastructure project to
upgrade and realign major roadways
and build new bridges. This project
is being jointly funded by the federal
government ($160m) and state
government ($60m) and will be
vital to support the increased
commercial, industrial and residential
traffic as the town continues to
rapidly expand.
Other minor but significant projects
include the following:
• $9.6m increase in public amenities
• $9m Finucane Island Community
Function Centre
• $9m Hedland Senior High
School upgrade
• $8.7m JD Hardie Youth Precinct
• $8.2m Marquee Park community
facilities
• $6m in facilities and a new park for
Cemetery Beach and Koombana
• $5.3m Crime Prevention and Safety
Initiative to increase security
• $4.5m Port Hedland General
Practitioner Housing Project to
build nine new dwellings to attract
GPs to the town
Pilbara powerhouse
The Pilbara is Australia’s primary iron
ore region, with more than 20 operating
mines (see Map 2). It is broadly split
into two regions, according to the two
railway networks owned by BHPB (East
Pilbara) and Rio Tinto (West Pilbara).
Port Hedland primarily services
the East Pilbara iron ore mines along
BHPB’s railway network and the
relatively new FMG railway. However,
there are a few smaller mines located on
minor railway networks that the town
also supports.
The West Pilbara Rio Tinto railway
network is serviced by Australia’s
other WA boom town, Karratha, and
its two nearby ports of Dampier and
Cape Lambert.
Since the early 1960s when large
quantities of iron ore were first
discovered, the Pilbara region has been
exporting iron ore to steel mills all
around the world. Initially meeting
the demands of a growing Japan, then
South Korea and now China, the region
has helped create two of the largest
companies in the world – BHP Billiton
and Rio Tinto.
Today, Australia supplies
approximately 16% of the world’s iron
ore (according to the Australian Trade
Commission), with the largest export
markets being China (60%), Japan (25%)
and South Korea (10%).
In 2009 the value of exports reached
$29bn but are expected to soar to $47bn
in 2010, according to the Australian
Bureau of Agriculture and Resource
Economics, as iron ore prices continue
to rise on strengthening demand
from China.
The Pilbara region itself accounts
for 89% of Australia’s iron ore deposits
and, with 65 years of resources left at
current production rates, has more than
enough room to continue its rapid rate
of mining expansion.
Biggest port set to get larger
Port Hedland is not only Australia’s
largest exporting port but it is also the
world’s largest bulk export port and
biggest iron ore port. However, things
are set to become even bigger.
BHP Billiton has nearly completed
its $2.1bn Rapid Group Project (RGP)
4, which will increase its annual export
tonnage by 26 megatonnes. At the
same time construction has already
commenced on RGP 5, a mammoth
$6.1bn project to increase tonnage a
further 50 megatonnes which will lift its
total annual tonnage to 200 megatonnes
– 100% more than 2007 levels.
BHP Billiton is not alone in its
expansion plans: Fortescue Metals
Group, Hancock Prospecting and Atlas
Iron all have ambitious expansion plans
to increase iron ore exports.
In total, iron ore exports from Port
Hedland are forecast to soar from 160
megatonnes in 2009 to 460 megatonnes
26
www.yipmag.com.au

Hot spot | port hedland
by 2015 – nearly a 200% increase and
more than four times that exported
in 2005.
$37bn in infrastructure projects
Over the last five years, billions of new
infrastructure projects have been built
in the East Pilbara, which in turn has
fuelled the massive influx of highly paid
miners into the region and subsequent
property boom in Port Hedland.
Billions more, however, will be spent
over the next five years as relentless
demand for iron ore comes from China.
There are some $37bn in planned
Chart 7: Port Hedland iron ore exports
500
450
400
350
300
250
200
150
100
50
0
25 to 30% year-on-year growth
100 MT 2005
200 MT 2010 + 5yrs
300 MT 2012 + 2yrs
400 MT 2013 1yr
Thereafter outer harbour
Source: Town of Port Hedland Authority
and committed infrastructure projects
in the East Pilbara and Port Hedland
(port facility expansions) region.
This is a phenomenal amount of
projects, which are anticipated to
employ over 29,000 construction and
10,000 operational workers – workers
on $100,000-plus salaries that are
willing to pay (or are subsidised by their
company) the huge and growing rents
that exist in Port Hedland.
The projects include the $7.2bn Roy
Hill project by Prospecting Hancock
(owned by Australia’s richest woman,
Gina Rinehart) to develop a super, open
160 mtpa now
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2007
2003
2005
2007
2009
2011
2013
2015
cut iron ore mine, brand new railway,
power plant and new port facilities in
Port Hedland.
BHP Billiton is also considering
spending more than $10.3bn over
its Rapid Growth Projects 4, 5 and
6 to substantially lift its annual
exporting capacity.
The iron ore miners believe the
China growth story and have backed
their views with billions of dollars in
infrastructure projects.
Considerations for investors
Investing in Port Hedland is quite
different from the usual espoused
‘within 10km from the CBD’ strategy
and investors should bear in mind
three considerations:
• Port Hedland is firmly leveraged
to the ‘China story’ and the
commodities boom
• Any ‘mining tax’ has the potential
to curtail the extent of future
infrastructure spending
• The high price point of properties
1. Strength of the China story
The extraordinary gains property
investors have enjoyed in Port Hedland
have been directly driven by the soaring
demand for iron ore from China. In the
face of the financial crisis, China has
sailed through smoothly aided by its
Table 2: Port Hedland & East Pilbara infrastructure projects
Project Proponent Location Commodity Status Cap exp.
Solomon Hub
Expansion
Source: Omega Investments
Fortescue Metals
Group
Peak
workforce
Operational
workforce
East Pilbara Iron ore Pre-feasibility $9.3bn 15,000 6,000
Roy Hill Hancock 277km south of Port Iron ore Feasibility $7.2bn 1,500 750
Hedland
Rapid Growth Project 5 BHP Billiton East Pilbara Iron ore Commenced $6.1bn 3,500
Chichester Hub
Expansion
Fortescue Metals
Group
East Pilbara Iron ore Pre-feasibility $5.25bn 7,500 2,700
Ridley Magnetite Atlas Iton 75km east of Port Iron ore Feasibility $3bn 960 740
Hedland
Rapid Growth Project 6 BHP Billiton East Pilbara Iron ore Commenced $2.14bn 1,000
Rapid Growth Project 4 BHP Billiton East Pilbara Iron ore Commenced $2.1bn 1,000
Solomon Port Facilities Fortescue Metals East Pilbara Iron ore Pre-feasibility $1.2bn 400
Group
East Pilbara FerrAus 70km from Newman Iron ore Feasibility $600m
Panorama CBH Resources 160km south-east of Iron ore Pre-feasibility $242m 176 160
Port Hedland
Utah Port Berth Port Hedland Port Hedland Iron ore Commenced $225m
Port Authority
Total $37.36bn 29,036 10,350
www.yipmag.com.au
27

Hot spot | port hedland
Case study
Katie Joy
Former St John Ambulance paramedic
Katie Joy is one of the great success
stories to come out of Port Hedland –
within three years, Katie went from a
96-hours-a-week job to early retirement
in her early 30s through riding the Port
Hedland boom.
After extensive research convinced
her that the billions of dollars of
projects from one of the largest
companies in the world spelt great
things ahead for Port Hedland, she
used equity from an existing property
in Perth to purchase two investment
properties for $358,000 and $360,000
within a fortnight of each other in
February 2006. She chose these
properties based on their ‘executive
style’ presentation, which appealed to
company tenants, and the fact they
were low maintenance in nature.
Just over a year later, she plucked up
the courage to purchase a $760,000
double-storey house in Port Hedland
(June 2007) and then a $560,000 South
Hedland three-bedroom home in
October 2007. As her equity continued
to rise on the back of the commodities
boom, she purchased once again
in January 2008, buying a $730,000
South Hedland home.
While living in Port Hedland, Katie
self-managed her properties but
once she moved back to Perth they
were managed by local real estate
agents, including Crawford Realty.
Now retired since 2008, with a $4.3m
portfolio, $1.5m of equity and $8,500
per week rent, Katie continues to hold
her investments.
28
$635bn stimulus package.
With a double dip recession being
speculated by some economists for the
US, there are concerns that this would
translate into lower demand for Chinese
manufactured goods that in turn would
slow China’s relentless growth (and
iron imports from Port Hedland). This
said, the world’s leading economists
continue to see very strong GDP growth
for China in 2011, which will only be
slightly lower than its 10-year average
of 10.1%:
• 9.9% according to the IMF
• 9.7% according to the OECD
• 9.1% according to the Asian
Development Bank
• 8.5% according to the World Bank
Note, their forecasts are nearly
three times the 3.5% IMF forecast for
Australia’s 2011 GDP.
Consequently, a serious slow-down
in China (and therefore iron ore exports
from Australia) does not appear likely.
2. Mining tax threat
The Mineral Resource Rent Tax
(MRRT) negotiated by BHP Billiton
and Rio Tinto with the Gillard Labor
Government immediately before the
August 2010 election was a ‘watered
down’ version of the aggressive
Resource Super Profits Tax, which was
attacked by mining companies, the
Western Australian government and the
federal opposition as devastating for the
mining industry.
The future of the MRRT is
uncertain. Labor lost numerous seats
in Western Australia and Queensland
due to the proposed tax but The
Australian Greens party (who now
hold significant power in parliament)
are in favour of increased taxation on
mining companies.
However, the potential for such
a tax did not stop Rio Tinto from
announcing immediately before the
election an $862m expansion of one of
its Pilbara ports. Indeed, Rio Tinto said
this expansion would be the start of a
multi-billion dollar enlargement of its
Pilbara operations (estimated by Merrill
Lynch to cost up to $11bn).
As they say, actions speak louder than
words and BHP Billiton was also party
to the same agreement as Rio Tinto.
While FMG continues to protest any
future tax, the fact that the MRRT
headline rate has been reduced from
40% to 30% and it allows BHP Billiton
to depreciate its current operations at
market value (rather than historic book
value) before payment of any tax means
that the real sting from any tax has
already been taken out.
3. High price point
A median house value of $955,000
will make any investor draw their
breath. However, so is a 10% yielding,
cash flow positive property with
strong capital growth potential.
Further, investors have the option
of buying in South Hedland (median
house value of approximately
$630,000) on the same yield and
growth prospects.
Ultimately investors need to
weigh up the higher price point, with
immediate cash in their pocket and the
future capital growth prospects.
Opportunity to ride the boom
As the second leg of the commodities
boom begins in earnest, property
investors have a unique opportunity
to capture substantial capital gains
and 10%-plus yields in Port Hedland’s
property market.
Should house values continue to
rise by even half the 10-year average
of 18%, this will mean capital gains
of some $90,000 per annum. Rich
rewards indeed.
Investors should also consider
where else in Australia has over
$500m in civic and local infrastructure
projects planned and underway to
specifically improve the ‘liveability’ of
the town’s population. Or which other
town actually has credible population
growth plans to double in size within
the next 15 years but also immense land
supply constraints.
Many investors missed yesterday’s
commodities boom; others, however,
will not miss today’s.
Flynn De Freitas is principal of Omega
Investments, a boutique firm specialising
in residential property investment in
regional mining towns. Utilising his
training and experience as a former
management consultant and investment
banker, he has developed an extensive
knowledge and understanding of towns
exposed to the commodities boom. For
investment opportunities please visit
www.omegainvestments.com.au
www.yipmag.com.au