Hi, I am looking at the new 1×1 apartments up in South Hedland that are on the market for $599,000. They are advertised as being able to rent for $1300 a week which is a yield of 11.1%
I am obviously a little cautious and want to know why these deals aren't being snapped up by investors when it sounds like an easy way to get a CF+ property.
Any insight or opinions would be appreciated.
Wouldn't touch them with a barge pole.
Hold off for a while. There's a whole lot of things happening at the moment with regard to mining and resources and none of it looks too good. I'm getting anecdotal information of large numbers of layoffs at some sites and particularly in Perth (support/admin). The East Coast is having similar difficulties but mainly in coal.
Yeah thats what i hear but then again. Others are saying that things are fine…Its often times like these you can pick something up while the others wait. Risky though…
I bought one. And yes it’s a risk. Things to cobsider. 1. They are being snapped up. Mine won’t be finished until April. 2.billions are being invested. Projects are on hold due to lack of staff and executive accommodation. It’s a growing city. The rusks are land releases for locals only. But they will build houses mot units and must live in them. In 10 years there may be so many houses prices and rent may fall. But building a house is not cheap. 5k a square metre. I think it’s worth the risk. But do your research as it may not be right for you. Good luck!
Sorry for typos. Using a phone
Thanks Chooky. Is this one of a number of investments for you? I am starting out so as a first IP it is seemingly perfect. I was thinking along the lines of holding it for 5 years then trying to sell…but then again who knows what the market up there will be like.
What are your thoughts on the intial price. do you think once they are built they will increase in value as people are exposed to them (seeing as they are not prevalent yet) or they will just hold their value for a while?
I lived there for the last 4 years. Like I said wouldn't touch them with a barge pole. 1×1's are the most expensive RE there is up there.
You're buying at full retail at the top of the cycle. If you think accommodation pressure will be sustained past the next 2 years you're in for a shock I think. 7/8 major projects in WA complete by the end of next year. All the demand is construction so watch the Pilbara empty out once they finish.
The big miners are starting to drop support staff around the country in their droves. Same with many of the big project companies. Some estimates suggest the project pipeline will halve over the next 12 months. I think it'll be more than that.
Chooky88 wrote:Projects are on hold due to lack of staff and executive accommodation. It's a growing city.If you believe that you believe in fairies Chooky.
Hi Freckle. I needed to post the contract front Page with two initials today. Holding off to Monday. Got a 1×1 in Lovell Pl Sth Hedland on hold. 630k to settle. Do you think it will drop in value in 2 years? The loan is approved and if I cancel the deal. What do you suggest I do with the money. I can’t afford to negative gear another property. I have 3 rentals a home and I’m supporting a family. Cheers. Ps. I don’t touch shares. Lost 80k in the gfc.
I will have to agree with Freckle on this on this for a change.
I will not comment on the mining side of things as I am no expert on this area, however I am an investor in Perth and would not touch the Pilbara area at this time because you are buying at the top of the cycle, very high risk.
Also, the product you are purchasing is entry level in this particular market but the most costly. I would also be concerned about oversupply with land releases coming on deck in the area. Are mining companies sourcing their own properties, something to also consider??
If things go south those yields will vanish very quickly and this product will be the most difficult to sell.
Personally I dont mind taking a punt on mining towns but the boat has already sailed in the PIlbara and therefore your risk is too high.
Cheers WI
Hi Chooky88
Perhaps you should be holding back at the moment and review your strategy, look at ways of turning negatively geared property into cashflow investments.
Where are you based?
Cheers WI
Hi WI. I live in Perth. I think you and Freckle may be right. On Friday the proposed property manage said “the downturn in 2 years may not be that bad. In any investment you have to take the good with the ups and downs .” After the WA TODAY article about the property bust and other articles I have read my wife last night demanded we pill out. Talk about a close call! I think the RE company are going to be angry though. I don’t like messing people around. Still, my family cones first. Cheers
Talk about 6 degrees of separation. My youngest son moves into Lovell in the next few weeks (company house). Four years ago an elderly friend had a 2×1 for sale there. At the time things were much slower than they are now but by all accounts still booming. He had difficulty selling it and it took around 6 -8 months I believe. In the following 4 years that property probably doubled in value and rent.
I definitely don't see that happening now primarily because you have 3 major miners all trying to double production capacity simultaneously. That's created enormous pressure on services and accommodation in Hedland. That kind of growth has never happened before that I'm aware of. This rapid growth phase has a defined life cycle and it's being shortened by global economic events. The logical assumption an investor should make is that within 2 -3 years things should wind back down to a more sustainable pace. That means all the drivers that push asset prices and rentals will vanish fairly quickly. I would expect to see prices and rents gradually move back to levels seen 4 years ago.
The major problem I see with PI's in todays market is that the new guys (& gals) look at historic performance and because of naturally inclined bias try to project that kind of performance forward. Most of us prefer to assume positive outcomes and often reject downside risks because that's seen by peers and industry to be negative instead of realistic. It doesn't fit well with an entrepreneurial culture. The experienced PI on the other hand has been well and truly indoctrinated and that's been reinforced by a continuously growing property market over the last 60 years. The experienced PI often has a strong portfolio of performing assets with healthy debt to equity ratios and rental yields that can take some downside pressures without too much damage to the bottom line. That engenders a sense of confidence and coupled with anecdotal advise persuades new PI's it's a relatively simple exercise to embark on a fortune making adventure.
The reality is that past performance doesn't guarantee success and few understand we may be on the eve of a new economic super cycle or are simply not prepared to accept it as a possibility. I suspect that we are and that it will parallel the 1890 – 1950 super cycle where property depreciated on average over that time. The drivers of this next cycle will see a deleveraging world trying get balance sheets back in order. Given the size and growth of debt this cycle could be as long as the 1890 – 1950 cycle.
From Wikipedia..deleveraging
- …..it is found that almost every major financial crisis during the period of study has been followed by a period of deleveraging.
Studying that particular cycle and current global debt issues should give PI's some insite in how to play this evolving market. Even a deleveraging market offers opportunities however it would be problematic to apply past/current property cycle strategies in the hope of achieving the same result.
There are plenty who see the current economic crises as little more than a hiccup in global financial markets and that somehow politicians and the corporate banking sector will find solutions or muddle through. My personal take is that things are far more serious than most are willing to admit or the powers that be are willing to tell us. As I say to friends if you prepare for rain and rain comes then you'll do all right but if you prepare for rain and a hurricane comes will you survive.
Chooky88 wrote:Hi Freckle. I needed to post the contract front Page with two initials today. Holding off to Monday. Got a 1×1 in Lovell Pl Sth Hedland on hold. 630k to settle. Do you think it will drop in value in 2 years? The loan is approved and if I cancel the deal. What do you suggest I do with the money. I can't afford to negative gear another property. I have 3 rentals a home and I'm supporting a family. Cheers. Ps. I don't touch shares. Lost 80k in the gfc.You probably need to talk to guys like Jamie and Richard et al about that stuff.
In terms of your property portfolio I would take a good hard look at it and run the ruler over each property. You will have to look at potential worst case scenarios and figure out if you can survive them and come out the other side with any upside potential.
My generic view of Perth and WA for that matter is you have to look at it a lot like a mining town. Mining and energy aren't ever going to go away but their activity levels fluctuate and that drives both macro and micro economic activity here. My overview of Perth is that economic activity is probably running around 120% at the moment and that level of activity is not sustainable for much longer. Ore prices continue to fall ($113.80 today) and volumes are now starting to decline as well.
- Iron-ore exports from Australia's Port Hedland declined for the second straight month in July as shipments to China fell, port authority figures showed Wednesday Exports from Port Hedland, one of the world's largest iron-ore terminals, dropped 9.3% from June to 19.5 million metric tons. The port is the hub most used by BHP Billiton Ltd. for its iron-ore exports, while Fortescue Metals Group Ltd. and Atlas Iron Ltd. (AGO.AU) also ship from there. Source
Mining construction or expansion projects have driven the boom in the WA economy NOT mining. A point many fail to recognise or understand. As you can see from above two forces are working against the economy here; time as the expansion phase reduces in intensity over the next year or two and diminishing returns on a global downturn forcing miners to reign in costs.
My guess is that all the drivers that have enabled a high growth state economy are about to dissipate fairly rapidly. Population pressures (currently running around 1000/mth inbound) may well reverse if the mining sector starts to shed jobs along with canceled projects on the construction side. A double whammy to underlying employment within this state.
If ore volumes decrease then state budgets will be impacted substantially especially where most are predicated on increased volumes and prices. State budgets will also take a hit from tax revenues (incl GST) and a myriad of other fees if activity slips. We've already seen it in other states as economic drivers wither and fail.
The state has a $7.6billion infrastructure spend scheduled for next year which includes the Perth waterfront development, a new sports stadium and a children's hospital. If there's any change to that spending then it would signal revenue problems for the state. Late 2008 the state debt was around $3.6B. Today it's around $23B. That's a massive increase in debt over the last 5 years all based on predicted earnings and exchange rates of around US$0.78 by 2015. If resources go even slightly pear shaped over the next 24 months this state faces some serious fiscal and financial challenges. Property does not do well in struggling economies.
The risk here is that nationally perceptions may change about WA and Perth in particular being the growth center of Australia. WA state government claims a GSP growth rate of around 6% however it's estimated that capital expenditure accounts for something like 2.6% of that. That brings growth down to around 3.5% which is still good until you strip out the trickle down affect of all that capital expenditure. We may well see growth drop below the 3% which would indicate near recessionary conditions. A possibility that can't be discounted.
Chooky, people pull out of contracts all the time. I think it is a wise decision in this case. Probably a good move before you buy your next property is to get educated. I am doing Steve McKnight's course and now I won't touch anything new (unless i build it myself!). Cheers, Janice
Hi Chooky
you seem to be every where and no where cos there is a whole in your pocket. Slow down, this is real, this is debt you are incurring and the decisions you make now will impact your future goals if you get it wrong.
Investing is all about managing risk and strategy = the end plan, most will only buy and not think of the outcome, just keep buying and hope for the best, some will do OK and most will get burnt.
What you are proposing is high risk, the entry level is very high and there is only one industry in Pilbara which is mining.
Just to give you an idea of the risk you are taking I will give you an example of my recent acquisition which I consider very low risk –
I paid $325K for a property 12km from Perth, will rent for $390 per week, demand is great and rents are increasing, it gets better, the property will be cashflow positive because I can build at the rear of the property for $160K revalue rear property at $350K and rent for $420 pw.
My point is you do not need to take high risk to achieve a great outcome, what you need to do is research areas that will provide opportunities to add value, houses on blocks which can be sub divided is one strategy. It may require more work however less risk.
Cheers WI
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