I designed this blog as a platform to communicate my professional opinions on the real estate industry and in particular West Australian property market. This month however I would like to share an article I came across in the September edtion of the BRWA magazine that I though was an honest valuation of where Perth currently sits in the economic landscape of Australia and the world. Report was written by Agnes King, I hope you enjoy it. Please feel free to comment.
On the 20 minute ride from Perth airport to the central business district, the cabbie reveals he arrived in Western Australia two years ago to start an Indian restaurant with his friend who is a Perth local. That's Western Australia, the entrepreneurial state.
Everyone from the taxi driver to the mining magnate has a money making idea that they're not afraid to take a crack at. Some saya it's the isolation. Western Australia is a big state and Perth ia a awfully long way from anywhere else of importance. Freight from the eastern seaboard is so expensive it's often cheaper to make a product or develop a service from scratch.
The spirit of Western Australia's famous entrepreneurs, including Robert Holmes a' Court (Australia's first billionaire), Alan Bond and Lang Hancock loom large in the state's psyche. "A lot of people worked with them,learned the skills set and applied it, like Alan Newman (former Futuris managing director)," PwC tax partner and Perth local Frank Cooper says.
That entrepreneurial flare is still there. While the 1980's is looked upon as the period of the "wheeler dealer", today's entrepreneurial culture has a more profesional dimension to it. The mining boom has transformed WA from a domestic economy to one that s more nationally and internationally focused.
" The fundamentals of WA haven't changed. It has three major industries: mining, government and property. But over the past seven years, our small and medium enterprises have become less small, more medium," says Cooper. That's changed the dynamic of places such as Perth, which has transformed itself from a big country town into a capital city.
Perth is an easy town to integrate into because in most boardrooms, 50 per cent of the people around the table are from somewhere else. "Old school ties mean a lot more in Sydney and Melbourne," says Cooper. "most people here don't have on, which makes people more inclined to judge you on your merits."
But growth has created challenges for WA. The surplus infrastucture locals enjoyed up until 2005-06 as a result of the investment of previous governments are now under pressure. What's more, the mining boom has sucked an entire layer of blue collar workers and entrepeneurs out of the economy and into mining: gardeners, cleaners, plumbers and electricians are in short supply.
People talk about capital infrastructure projects worth $230 billion over the next five to eight years and an aditional 46,000 workers to avoid crippling labour constraints in the economy. Whether these numbers are precise is almost irrelevant. It's the magnitude that matters.
The boom-bust nature of the mining state creates distortions in the economy that most locals have learned to live with. Few things demonstrate this better than Perth's hotel market. It's almost inevitable that any cocktail party discussion in Perth will dissolve into a long-winded gripe about the dearth of ecent hotels in town. No one wants to invest in hotels in the down cycle and in the up cycle, real estate, labour and building supplies are too expensive to make it commercially viable. Why would a hotelier shut rooms in a boom to renovate them, especially when people will stay and pay premium prices regardless?
The Richardson in West Perth is perhaps the one exception. Owner Joe Oxley ia an Irish national who moved to Perth after 17 years in Hong Kong. He saw there was no true five-star hotels in Perth and invested $30 million in 2003 building a 75 room luxury hotel and spa that has hosted the likes of Beyonce and Maylasian Royalty. At the time, people said he was crazy. Oxley claims the operation is profitable now. But he says building another like it in today's market is cost prohibitive. "Staff, material, property, everything has gone up." says Oxley. Most locals are accustomed to WA's peaks and troughs. "We've seen lots of booms - the nickel boom in the late 60's typified by Poseidon, gold in the 90's.
Most of the locals know enough to diversify their interests from different countries and different commodities," says Damien Connelly, founder and director of Mineral Engineering Technical Services, a privately held mining services firm, which has substantial interests in Africa and South America.
Locals also know to diversify their personal wealth, although the two-speed economy has overlaid complexities that even experienced hands couldnt have envisaged.
The Hay Street Mall in Perth's central retail district is a ghost town, its emptiness made more miserable by the smattering of "closing down sale" signs at recently bankrupted chains such as Colorado and Angus & Robertson.
Locals are caught up in a vortex of inflation. It's fine for those blugged into the mining boom but for those tha aren't, the 20 to 30 per cent premium on basic services hurts. A young mother complains about the cost of parking at Subiaco markets: $5 for a half hour on a Wednesday morning when the markets are deserted. "Jeez you think they'd want people to come and shop," she says.
The wealth of a lot of private business owners-tied up in equity and property-has also taken a beating in the "GFC mark II" stockmarket volatitlty. But among the doom and gloom there are pockets of inspiration, driven by that strong entreprenurial bent and sense of resilience.
Family-owned winemaker Leeuwin has used the slackening demand from some traditional buyers to supply Asian markets that it previously didn't have the volume to service and has set up a scenic charter flight service from Perth to Leeuwin's airstrip to tap the corporate market. It has resulted in the number of visitors to its Margaret River estate rising in the past 12 months, despite the adverse impact on the strong Australian dollar on tourism.
The question of how long WA's mining boom can last elicits interesting responses. For Tony Sage, another self-made multi-millionaire from WA, it's less about the Chinese economy stalling, or the extent of the deposits in Australia. In his view, it hinges on how quickly Chinese money can bring African and South American deposits online and how fast the Russians can make their Siberian assets economically viable.
The belief undoubtedly is tainted by Sage's own extensive African investments. For others, such as New Standard Energy managing partner Sam Willis who has just secured $US109 million ($105 million) worth of funding from ConocoPhillips, the fith-largest refiner in the world, to explore its shale gas deposit in WA's Canning Basin, the outlook for the mining boom is a little more rosy.
Report by: Agnes King BRW September Edition 2011