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202: The mining boom, powerful economic forces and Norway property focus


07-01-2008

PropertyInvesting.net team 

This special report explores opportunities real estate opportunities following the boom in the mining sector, and describes some powerful economic forces at work which will shift massive financial wealth from the West, to the Middle East and Far East. We end with a focus on Norway - a safe property heaven in this time of economic challenge.  

 

Mining Property Boom

 

As India and China industrialize, commodity price have risen fast – all commodities have experienced big rises in the last five years. This cycle seems unlikely to end any time soon. Minerals like iron ore, aluminium, platinum, uranium, copper, lead, gem stones and coal are required to fuel industrialization in the “BRIC countries”(Brazil, Russia, India & China). This cycle has been described by investment banks as a “Supercycle” which could last a decade or two – rather than the normal five yearly boom-bust mining cycle. The reason is this time, the expanding global population, shortage of supply, increasing demand for raw materials and rapid industrialization of India and China would likely lead to a sustained demand over a long period. Countries heavily positively exposed to mining are:

 

·         Chile

·         South Africa (NW and north of Jo’burg)

·         Australia

·         Russia

·         Kazakhstan

·         Mongolia

·         Democratic Republic of Congo (high risk)

·         Sierra Leone (high risk, diamonds)

·         Canada (oil sands open cast extraction)

·         Indonesia

·         Zimbabwe (high risk)

·         USA (coal in Wyoming, low risk)

·         UK (London is the biggest global financial centre for mining companies)

 

Out of these Russia and Kazakhstan are also rich in oil and gas and to a lesser extent Australia is also. South Africa has no significant oil or gas, but is very rich in minerals – however, the government recently cut off electric power to the mines in January due to power shortages which reduced mining GDP by -22% - risks have therefore increased and inflation is now over 10%. For a pure mining real estate play, Chile is probably the closest you can get. Purchase of real estate in Chilean mining towns is a pure mining real estate play. When mineral prices skyrocket, mining jobs multiply and the mining rental market strengthens – all the employment leads to property prices rising. Void periods are low and yields are high. In Canada, the oil sands mining town of Fort MacMurray is a place the canny property investor can make serious money – purchase of oil company temporary accommodation. Rents are high, property is in short supply, real estate prices are rising and the employment scene is booming – massive skills and accommodation shortage are the order of the day in this oil sands boomtown outpost.

 

For a booming city with a stable economy, mineral wealth, oil and gas wealth and general exposure to Asia Pacific’s booming economy, Perth is a place to consider, albeit it is very remote. Many oil, gas, LNG companies and successful mining companies have their offices in PerthMelbourne is another city positively exposed to all these booming sectors. In Kazakhstan, Almaty is a city to consider – massively changing in a positive sense. The reason for mentioning all these great cities is that if one finds the sweet spot of rising oil, gas, minerals prices coupled with real estate – you can massively reduce your risks and increase returns – if you can be bothered to visit these cities and invest in these expanding regions. So much easier than trying to make serious returns in Italy, Greece and Morocco – all countries with negligible oil, gas and mineral wealth and set for economic downturn as oil prices rises.

 

Powerful Global Economic Forces At Work

 

Our analysis of oil and gas imports-exports suggest a massive transfer of wealth in future years from oil importing nations to oil exporting nations. The dollar is likely to continue it’s slide and asset prices in western countries are likely to drop. This will provide conditions for Middle Eastern oil wealth to be re-invested into low priced dollar and UK pound denominated assets such as commercial property, businesses, infra-structure and residential property. In general the Middle Eastern, Russian and Far Eastern economies will inflate – whilst the western oil importing nations will deflate. Banks may well go bust in the west as write-downs and lack of credit begin to bite. How long this process lasts and how severe it will be is very difficult to judge – part of it depends on how high the oil prices go – high cost of oil imports acts like a huge tax on energy importing nations. Economic balance will shift further to China, India, Middle East and Russia – and away from Europe and USA – albeit these economies will of course continue to be dominant as far as percentage of global GDP for the next few years. China and India will be catching up fast. Overall global GDP should continue to motor onwards at 3 to 4% growth per annum – fueled by expansions in BRIC countries and oil/gas and minerals exporting nations. For UK investors, avoid the FT100 stock market – all shares except oil, gas and mining stocks. Retail, property and construction will continue to take a hammering. In the USA, the Dow will also suffer (except for oil, gas, coal and mining stock) as asset prices drop and business profits come under pressure from inflation and high energy prices. We re-iterate our stance to invest in property in areas positively exposed to high oil and gas prices.

 

For Europeans who have been living off debit, rising house prices and the seeming never ending growth period – particularly in the UK – tough times lie ahead. The amount of air travel to foreign locations is likely to drop, with it the holiday home markets in place like Portugal, Greece and Italy – possibly Spain. Much of the property price increases have been driven by mobile UK and other European citizens buying second home. As retrenchment begins, these prices should come under pressure. There will be exceptions though in fast growing local business areas like Barcelona, Valencia, Montpellier and Malaga/Marbella. But areas remote from jobs and business relying on ultra-low priced air travel will suffer – Cyprus, Greece and remoter areas of Portugal spring to mind.

 

Property prices are likely to stay firmer in Nordic countries that have efficient industry, knowledge based economies and many high paid jobs with relatively low unemployment – also with better demographics and less of an aging population. Some of our favourite locations are London, Oslo, Luxembourg, Aberdeen, St Petersburg and Moscow.

 

As Italy and possibly Greece and Portugal slip towards recession, there will be pressures building to reduce Euro interest rates. However, because EU inflation is running at 4% and driven by high energy prices and growth in Germany and France, the European Central Bank is likely to INCREASE rates – sending the peripheral EU economies further towards recession. In a year or so, if oil prices stay high – which we expect – this could eventually lead to the break-up of the Euro currency – as Italy, Greece and Portugal split then deflate their currencies to stimulate business, growth and competitiveness. If they keep pegged to a Franco-German Euro dominated Euro, they will likely slip into recession if oil prices surpass $150/bbl. Hence if oil price rise above $150/bbl we predict Italy to be the first to break away from the Euro – possibly in 2010.

 

 

Norway Focus

 

Let’s take a look at Norway. This cold and rainy northern outpost! The population is 5 million. We predict oil and gas revenues will top $200 billion a year by 2009 – massive. That’s $40,000 per person per annum. Meanwhile inflation is moderate, currency is strong (hardly surprising with high oil prices), and the Norwegians have been investing their oil wealth for years internationally in high earning investments. The trade balance is massively positive. The population is stable. No problems with immigration, emigration, asylum seekers etc. Politically very stable democracy. Highly educated workforce. Efficient working practices. Trusting and honest people. Very high on transparency and business ethics. Good legal framework. Many good engineers. Beautiful scenery. Long summer evenings. Hydro-electric power in abundance. Forestry in abundance. Nordic culture. The list goes on. Okay, taxes are high and it’s cold and rainy in the winter. But for property investment in such a booming business climate looks to us to be low risk and relatively high reward.  Another bright outlook is the currency – how can such a currency drop when the oil prices are booming, look set to continue this boom, whilst the currency is not pegged to the dollar or Euro.

 

Our favoured locations are:

 

·         Oslo – capital, oil company headquarters, banking, services, government-public sector jobs

·         Bergen – oil town

·         Stavanger – oil town, port, oil-gas import-export terminals

·         Southern coastal seaside resorts SW of Oslo – 2nd homes for increasingly rich Norwegians     

 

If you like long distance skiing, the northern lights (Santa for the kids) – the place is also a winner in the winter. In the summer, 20 hours of daylight, skinny dipping in the Fjords and the staggeringly beautiful scenery are all plusses. Good healthy outdoor life. We really cannot think of anything particularly negative about Norway – you’ve got to break into the relatively introvert family oriented cultural persona and social circles. It’s got Finland, Denmark, UK and Sweden as it’s neighbours – nothing negative here either! The real highlight though is massive oil revenues and massively increasing gas revenues projected over the next twenty years. Norway will overtake Switzerland and Luxembourg as the most wealthy state in Europe soon – and it’s difficult to see property prices not rising off the back of this. 

 

We hope you have found this special report of interest - in guiding your investment strategies. if you have any comments, please contact us at enquiries@propertyinvesting.net  

 

    

 

   

 

    

 

 

  

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