Lithium to Drive the WA Economy?

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Lithium demand is set for a meteoric rise based on national and international Government Policy driving its use in batteries.  Firstly, to stablise the use of renewable sources of electricity in the grid.  South Australia and Tesla have built a stand out project to deliver this after SA disastrous power outage last year.  Secondly with their commitment to electric vehicles to reduce carbon emissions.

Meanwhile electricity and battery producers are turning themselves inside out to keep up with the expected surge in demand.  There is even talk that there is not enough lithium on the planet to meet demand.  This will drive new technologies and battery development.

Australia is currently the world’s largest exporter of lithium, however is only in third place in reserves held.  Argentina has the highest reserves, followed by China, Australia and then Chile. WA dominates this market and has several notable projects[1].

What are we mining and where is it going?

Talison Lithium is located at Greenbushes which is 250km south of Perth, and 90km south east of Bunbury Port[2].  It is currently undergoing a $340 million expansion in it’s mining operations.  This is forecast to deliver 200 construction jobs from May 2017 and then 40 to 60 operational jobs from mid 2019.

Tianqi Lithium is one of the world’s leading suppliers of lithium and based in China.  It is spending $300 million on a lithium hydroxide plant and now has the green light for a $317 million expansion at Kwinana[3], 38km south of Perth[4].  Lithium can be shipped as a metal ore, or significant value added through refinement into the chemical compounds used in batteries.

This project is forecast to have 500 construction jobs in phase one, that is forecast to finish late 2018, and phase two may be similar with its finish in late 2019.

Altura Resources at Pilgangoora, one of the largest reserves in Australia, is located 120km west from Port Hedland.  Its $139 million project is moving so fast it is reported as ‘in the early part of construction with hundreds of jobs from March 2018 and operational from early 2019’.

Pilbara Resources also has a project at Pilgangoora with an investment of $234 million they forecast they can produce 2million tonnes per annum (mtpa) with a workforce of about 400 at peak of construction with 120 operational jobs to follow[5].  The value of the mine is projected at A$9.23 billion over an estimated 36-year mine life.

In addition, there is Mt Cattlin at Ravensthorpe on Highway 1 between Albany and Esperance[6].  At full capacity they project 1mtpa.  They have commitments to ship the bulk concentrate to China.

All in all a positive sign for the WA Market.


Changes in the Opportunities in Sydney for 2018?

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Change is the constant in our lives and it can be challenging to sort out which changes we need to stay on top of to stay informed.  If you are a property investor (or home owner) what do you need to pay attention to in 2018 for property prices in Sydney?  

Over 2107, property demand has been squeezed with restrictions imposed on investors and foreign nationals, those who are not Australian taxation residents. 

Nationally, availability of finance is the tightest it has been for many years.  Policy changes have restricted investors’ access to money.  This has occurred in three ways, firstly through the amount of money they can borrow, secondly through assumed serviceability limitations and thirdly through restricted access to interest only loans.

Owner occupiers, on the other hand, have no restrictions to on their access to funds. If we put this into perspective investors represent about half the value of funds being borrowed according to the ABS.

Regulators are trying to make sure that investors do not compete with owner occupiers by forcing banks to increases their loan to value ratios (LVR) for investors. This means the investor is going to have to find a larger deposit to invest.

Lenders are only taking part of the real rental income, and only part of the real depreciation allowances into account when assessing investors serviceability.  Plus, they are measuring the investor’s capacity to make repayments against much higher interest rates.  Lower income earners with high equity can’t release it as they can’t service the loans. 

Lastly access to interest only loans has changed. This change in policy required the banks to restrict their interest only lending to 30% of new loans however most have made this historical as well.  This has created huge turmoil in the sector.

Investors buying off the plan may need a larger deposit payment to make the property work for serviceability if they need to repay the value of the loan as well as the interest.  Scary for those with limited funds. 

Depreciation laws have changed.

In addition, national taxation laws for depreciation benefits have changed. 

New properties attract taxation benefits for the costs of the actual building and for the fixtures and fittings such as kitchens, bathrooms, carpets and lighting.  

However, those buying existing property can only claim the building depreciation, not any of the fixtures and fittings amounts unless they have changed these things personally through renovation. 

This supports investors buying new property, doing renovation or buying in higher risk regional areas with higher returns.  However, most investors make more money from capital growth than cash flow so regional properties are not as appealing. 

Regional cities have other risk factors with property cycles being either on or off giving much less discretion for selling at will.  They also have more volatile prices. 

Additionally foreign buyers’    demand has been restricted through taxation changes.  Foreign buyers: those who are not resident for taxation in Australia have had their capital gains exemption on their own home removed. There are also changes planned for investors.

State based NSW stamp duty will double from 4% to 8% on 1st July 2018, for foreign buyers.  This is above Victoria’s 7% but below some Canadian provinces with 15% fees.  In NSW this cost for a $1M purchases rises from $40,000 to $80,000.  Land tax rises are also rising from 0.75% to 2%pa.  If your land is valued at $600,000 then this cost rises from $4,500 to $12,000pa.

Our question is what do these changes in demand add up to?  They appear to have tipped property prices into relaxed decreases in Sydney.  More significantly how will reduced supply of investment property impact the rental market.  Will it tighten and rents rise significantly in the next 12 – 24 months? 

Population growth continues to be strong, and, as housing supply is till not keeping up with demand we are likely to see rents increase due to strong demand. Then we are likely to enter into another phase of continued capital growth, perhaps just not as strong as in recent years.