Site preparations underway at LNG Canada site in Kitimat

LNGCanadaKitimatIt’s not a final investment decision but LNG Canada is embarking on early site preparation at their proposed liquefaction plant site which will pave the way towards a smoother construction phase.

As of right now there are currently 120 people working on site.

If a positive FID is made in 2016 the company would then shift to construction of permanent facilities on the property. [source]

Another item leading up to their FID, is the decision to lease a parking lot at Northwest Regional Airport in Terrace.

“LNG Canada has made provisions for parking at the Northwest Regional Airport in Terrace to function as a “park-and-ride” facility for LNG Canada staff and contractors who live in Terrace and the surrounding areas,” [source]

 


Recent Facts About LNG In B.C.

On December 7th, 2015 much of the Chinese capital shut down after Beijing’s city government issued its first red alert for pollution. Less than 2 weeks later, China issued a second red alert December 18th, 2015.

China, which meets 66% of its energy through coal, has committed to reducing that to 62% by 2020. Despite that commitment, it continues to build new coal-fired power plants at an alarming rate. Coal is the dirtiest of all fossil fuels, it creates more pollution than oil, natural gas and gasoline when burned.

Liquid natural gas (LNG) is the cleanest fossil fuel, and Canada has an abundance of natural gas. “That’s another significant piece that people miss on this whole LNG story in B.C – that we’re actually helping large economies that are continuing to grow to create new transition fuels to get out of older fuels into cleaner-burning fuels,” said Greg D’Avignon, CEO of the Business Council of BC.

Northeastern BC is home to the Montney Formation and Horn River Basin, the third largest hydrocarbon fields in North America. Between the drilling, piping, and exporting of the natural gas in British Columbia, there is over $100 billion of proposed capital investment. Each project has one key component: all of the natural gas comes from Northeast BC.

A few of these massive capital projects proposed are as follows:

Given the speculation regarding the future of BC LNG, we wanted to share some recent facts.

$715 Million Natural Gas Processing Plant Project Is Greenlit

Construction of the processing plant, which would be south of Fort St. John, has received the go-ahead from the Cutbank Ridge partnership formed by Encana and Mitsubishi. The complex includes a processing plant as well as storage and other facilities. The decision to build the complex follows the announcement of a $860 million natural gas plant near Dawson Creek, by Cutbank Ridge.

Both processing plants are expected to start operating in 2017, and would handle natural gas from the Montney Formation.

Site preparations underway at LNG Canada site in Kitimat

It’s not a final investment decision but LNG Canada is embarking on early site preparation at their proposed liquefaction plant site which will pave the way towards a smoother construction phase.

There are currently 120 people working on site.

If a positive FID is made in 2016 the company would then shift to construction of permanent facilities on the property.

Another item leading up to their FID, is the decision to lease a parking lot at Northwest Regional Airport in Terrace.

“LNG Canada has made provisions for parking at the Northwest Regional Airport in Terrace to function as a “park-and-ride” facility for LNG Canada staff and contractors who live in Terrace and the surrounding areas,”.

 

Petronas LNG terminal ‘not likely’ to harm Flora Bank

Pacific NorthWest LNG, led by Malaysia’s state-owned Petronas, wants to build an $11.4 billion export terminal on Lelu Island, which is located next to Flora Bank.

“The technical work completed to date indicates that the project is not likely to cause significant adverse environmental effects on fish and fish habitat,” according to the consortium’s 36-page summary of its findings.

Recent news about an global glut of LNG under production has cast a shadow over BC’s prospects to develop the industry, but as late as mid November Petronas CEO Datuk Wan Zulkiflee Wan Airffin said, “the company will proceed, pending federal approval.”

Between the $8.9 billion BC Hydro Site C Dam, and the over $100 billion of proposed capital for BC LNG, the population in Northeastern BC is expected to double by 2020.

These massive capital projects create high paying jobs, and people move to the region to fill these jobs. The average age in Fort St. John is 29 years old with an average income of $108,000.

 


The Impact Of Federally Increased Interest Rates

What is the impact of the US Federal Reserve’s decision to increase interest rates? As you are likely aware, on Wednesday December 16th 2015, the US Federal Reserve announced their decision on monetary policy for the coming months including an increase in interest rates of 25 basis points (0.25%).  While this increase is yet another signal of a healthy US economy (a great sign for the value and demand for our rental properties), this also marks the first interest rate increase since the Fed dropped the rate to near zero in 2008.

Many are likely wondering about its impact on their investments in the United States, specifically in the Phoenix market. The following is intended to help provide you with our insights on the subject.

By The Numbers

For every 0.25% increase in the variable interest rate and $1,000,000 in loan amount, the interest payment will increase $2,500 per year or $208.33 per month.  To put this in perspective, our average asset in Phoenix has an $8 million loan and consists of 200 units.  For this example, the mortgage payment would increase $20,000 per year or $1,667 per month.

This equates to an increase of approximately $8.33 per unit, per month in mortgage payments. In the past year we have increased monthly rents an average of $87.00 per unit (not including washer/dryer revenues) and we continue to see the strong indicators for future growth.

In November we returned to investors cash flows averaging 8.8% of invested capital.  The 0.25% interest rate increase, without any mitigation, would have reduced the returns to approximately 8.3%.

Why The Increase?

Here’s the good news: the Fed is increasing interest rates because the economy is growing in the United States, especially in Phoenix which is forecasted to be the second strongest job growth market in the United States in 2016.  With the national unemployment rate down around 5%, considered full employment, the Fed is expecting wage growth which should increase inflation. Wage growth and inflation are very positive for real estate investments.

We have chosen the path of variable rate mortgages because of the deep discount in interest rate (1.5% – 2.0% discount) and as we believe that although we have seen a single rate increase we will not continue to see significant increases in the near-term that would warrant the additional costs of fixed-rate mortgages.

In conclusion, when we see rates go up, there can be some media bias that will lead some to believe that this is a bad thing, but ultimately the move is a vote of confidence. There is job growth in the region, which leads to inflation and that means rents are rising and property values are increasing.  As long as the rent increases exceed the increase in the cost of financing, this is good news for all investors.

 


David Steele On The Future Of LNG In BC

David Steele On The Future Of LNG In BC

Long time developer David Steele attended the Vancouver Board of Trade Energy Outlook 2015 conference on December 9 2015. What follows is a guest post detailing what he learned.

Slow At First

The energy conference certainly doesn’t paint the brightest picture of Alberta with capital spending having dropped from $81,000,000,00 to $45,000,000,000 in the last year and 40,000 lost jobs in the Alberta economy. The overall mood certainly wasn’t one of excitement with oil under $40 a barrel, a falling Canadian dollar and an energy industry that knows it has to change to keep up with the world demanding environmental changes.

The Pace Quickens

As the day progressed, it became evident that we are in a pretty good place in British Columbia and particularly Northeast BC. We heard a lot about natural gas and the clean energy that natural gas will deliver to Asia.

We heard that worldwide demand for natural gas is expected to increase 2 ½ times in the next 20 years. We also got a first-hand view of when Beijing’s city government issued its first red alert for pollution. The air quality index stood at 250 Tuesday morning, classed as “very unhealthy” and 10 times higher than the World Health Organization’s recommended levels.

We heard that we have an incredible abundance of natural gas in Northeast BC. The two natural gas plays-the Horn River and the Montney Basin have an astounding amount of gas. In fact, one of the experts stated that there is enough natural gas to heat every house in Canada for 8000 years. As the day wore on, we heard from panelists like Seaspan that are powering their Ferry fleets with natural gas and Vedder transport that are converting their trucking fleets as well. All of this was followed by an executive from Fortis BC showing off PowerPoint slides of the new one billion cubic foot natural gas storage facility that is just being completed in Tilbury.

The Highlight: What Everyone Came To Hear

When Rich Coleman, the minister of natural gas for British Columbia, took the stage at 12 noon, the mood became significantly more upbeat. He talked about all of the reasons that he felt British Columbia would become a major world player in the natural gas business. He talked about the fact that British Columbia has world-class ports and the cleanest natural gas process in the world. He talked about the fact that the natural gas business already employs over 13,000 people in British Columbia and he made it very clear that BC is 58 hours shorter shipping distance than any of its competitors. (JREI wrote about this in 2009)

He acknowledged that the BC government took huge steps as early as 2011 to attract companies that would build the infrastructure to take advantage of the opportunity to develop and export to Asia. Further, he made it abundantly clear that many in the media and across the aisle in government don’t believe that it will ever happen.(!) In the meantime, there are over 20 projects at various stages in the process. If they were all to go ahead, they would represent an investment estimated at $300-$400 billion.

During the question-and-answer period, the minister was asked,

 

“If you were a betting man, how many of the 21 LNG projects do you see proceeding?”

 

His answer was that he saw 3 major projects and two midsize projects being given final investment decision within the next year. He wouldn’t be surprised if we see 50- 75 billion dollars committed by the end of 2016.


7 Things To Know Before Investing In Real Estate

  1. Educate Yourself

Knowledge can take you from being a “good” investor to a great investor. This has always been true. What is going to separate you from the pack is how much research you put into your investments and how often. Markets are always changing, new trends are always beginning, old trends are always reversing.

If you dedicate yourself to researching and refining your investment strategies and you remain focused on investing in regions where economic growth is booming (which leads to job creation and population growth you will reap the benefits of a stable appreciation in the real estate market.

  1. Set Investment Goals

A goal is not a wish; you plan and execute specific steps to achieve a goal. Investment goals require sufficient research, knowledge, and planning. Setting clear and specific goals (and writing them down!) becomes your road map and action plan to becoming financially independent. You are statistically far more likely to achieve your goal of financial independence by writing down specific and detailed goals than not doing anything at all.

Here is an example of setting clear, concise investment goals for investing in one (or several) real estate property:

  1. Setting the number of properties you need to acquire each year (if desired)
  2. Specifying the type and location of the property
  3. Specifying the annual cash-flow your property should generate
  4. Setting the parameters for your desired rate(s) of return
  5. Specifying the ideal tenant for occupation

It may seem extremely basic, and you may feel you can carry this info around in your head, but by putting it down on paper and using it to keep track of your how you advance toward your goals will free your mind to “see the big picture” and make better (and more financially beneficial) decisions.

  1. Invest For Cash-Flow, Mortgage pay-Down & Appreciation

Cash-flow is what your asset should be generating for you so that your investment will sustain itself without draining additional cash from your monthly income total. It should cover all operating expenses and provide a pay down on your mortgage.

Mortgage Paydown is exactly what the name tells you it is. You pay down your mortgage by leveraging you cash-flow assets. This is unique to real estate investments. There is no other asset class where you can use the bank’s money to purchase the investment, and use a tenant’s money to pay back your loan every month.

Appreciation is the largest source of return on your investment, providing you have done the proper research and due diligence.

  1. Invest In The Fundamentals

Always start by selecting the best markets that align with your investment goals (see 2. Set Invest Goals).

The best approach is to choose your property’s location. To choose your property’s location, you need to consider many factors. Take the time to research each one. There is no “quick and easy way” to do this. Everything your investment does for you leads back to this step. If you are unsure as to whether you can make this commitment consult with an expert.

Primary Factors To Consider When Choosing Your Property’s Location

  1. The current housing market
  2. Unemployment rate
  3. Projected job growth
  4. Population growth
  5. Capital spending on any major infrastructural projects (ex: hospitals, highways, hospitals, hydroelectric projects, etc.)
  6. Supply and demand trends
  7. Capacity to pay

Secondary Factors To Consider When Choosing Your Property’s Location

  1. Amenities
  2. Transit access
  3. Schools
  4. Crime
  5. Rental demand

This is the most work and takes the most time. Research, research, and just when you’ve had enough, do more research. You really need to do your homework. Investigate each factor in as much detail as possible and you will be able to assess your investment opportunities base don the facts. You will be glad you did.

  1. Diversify Across Markets

Our recommendation: focus on one market at a time.

Accumulating from 3 to 5 income properties per market is a very good start to creating a solid portfolio. Once seasoned (and after doing even more homework) you would diversify into another prudent market that is geographically different than the previous one.

One of the underlying reasons for diversification within the same asset class (real estate), is to have your assets spread across different economic centers.

The reason for this is simple: every real estate market is “local”. Each housing market moves independently from one another. Diversifying across multiple states helps reduce risk should one market decline for any reason, such as increased unemployment rate, increased taxes, or reduced capital spending on infrastructural projects (see Primary Factors above).

Hybrid Markets:

Hybrid markets are areas that have linear, slow-growth characteristics for a period time, followed by periods of moderate cyclical-style appreciation. They never boom quite like Florida or California, but they also never need to correct like the more volatile markets either.

Markets like Phoenix, Las Vegas, Chicago, Seattle, Minneapolis-St. Paul, and Detroit are in this category.

Comparing Markets:

Although each market has different characteristics, one is not necessarily better than the other. Each market offers the real estate investor different levels of appreciation and cash-on-cash returns.

Some investors may not sleep well at night investing in a cyclical market and prefer the pace of a linear market. While other investors may find a linear market to slow and prefer to see greater appreciation potential.

However, over the long-term appreciation rates in both market types end up being similar. So the idea of chasing appreciation should be avoided.

It is more important to be concerned about the overall market health and its future prospects than it is to get lost in the potential cash-flow and other “numbers” on the property. They’re all important of course, but purchasing based solely on the property without considering the bigger picture of the market and neighborhood is like trying to sail a ship against strong headwinds.

If you don’t start with the right market and neighborhood, over time you will experience more tenant turnover, shorter lease terms, increased late payments/defaults, and decreased or negative appreciation (see 4. Invest In the Fundamentals)

  1. Use Professional Property Management

Our recommendation: never manage your own properties unless you run your management company. Property management is a complex job that requires a good understanding of tenant-landlord law, marketing skills and strong management skills when dealing with the constant and various needs of tenants. Your time as an investor is valuable.

Finding an experienced property management team is vital to keeping vacancy rates low and tenants happy. Additionally, they will be able to help you manage your investment properties in areas that you may not be able frequent on a regular basis, leaving you with peace of mind and freeing up time for you to pursue other interests.

  1. Leverage Your Investment Capital

Real estate is the only investment where you can borrow other people’s money to purchase and control income-producing property. This allows you to leverage your investment capital into more property than purchasing using “all cash”. Leverage magnifies your overall rate-of-return and accelerates your wealth creation.

As long as you have positive cash-flow and your tenants are paying off your mortgage for you, you are in a good position to borrow more for buying more income property.

The “Buy and Hold” methodology  methodology, as it is applicable to property, is and always has been the cause for making more millionaires than any other method. It lets you develop equity through appreciation over a period of time.

Your goal in property investing must be to develop as much equity as you can in the property while still having enough passive income to get you there. So long as you own the property, you’ll have the extra advantage of tax sheltering that you cannot obtain from any short term methods. This is the reason that explains why the Buy and Hold methodology is king.

As time goes by and you pay off your loan, you get the advantage of additional cash flow which is very useful in retirement. Traditionally, properties have doubled in value every 7 to 10 years going back 50 years in time. Imagine your equity position if you hold a property for 20 or 30 years!

Today, you are able to purchase a brand new $250,000 home with an investment of about $58.000. If you rent this home and simply break even on your cash flow, you will have an asset that grows while someone else makes your mortgage, tax, and insurance payments. At a 5% growth rate per year, that home will be worth over $697,000 in 25 years on a $58,000 investment Think of how you could use that money. This illustrates a major strength of investing in real estate: own something worth 5 to 10 times of the appreciation, cash flow and tax benefits.

True wealth in real estate is realized through equity growth and appreciation. Cash flow, although a must, is the glue that holds the deal together to permit you to wait until the value grows. Let your tenants cover your payments and make you rich!


How GDP Growth Can Influence The Price Of Real Estate

So, I’ve said this before: the most important part of any real estate purchase is its long term performance. This appreciation builds real wealth. With an ability to identify long term performance trends, it’s not hard to pick the right region in which to buy property.

The hard part is doing enough research on the region beforehand that will help inform your decision as much as possible. There is one major factor to this research that will go a long way in helping you do so: GDP growth.

What Is GDP?

The gross domestic product (GDP) is one of the most important primary indicators used to gauge the health of a region’s economy. It represents the total dollar value of all goods and services produced over a specific period of time.

Measuring GDP is complex, but in essence it can be measured in 2 ways:

  1. The Income Approach: adding up what everyone earned in that region.
  2. The Expenditure Approach: adding up what everyone spent in that region.

Both are tried and true approaches of determining an accurate GDP. With respect to real estate (and real estate investment), the Expenditure Approach can be very useful in helping to predict an increase in the regional GDP and therefore an increase in the regional price of real estate, particularly when for example, a government elects to increase infrastructural spending in that region.

How GDP Growth Can Influence Real Estate Prices

An Increase in GDP can heavily increase the regional price of real estate.

Here’s a 5-step outline of the process:

  1. A large expenditure in a specific region. This can typically be best exemplified with a large infrastructural project ( a mine, a hydroelectric damn, a new hospital, etc.).
  2. This large expenditure drives employment to that region in order to complete the project.
  3. As jobs are filled, the vacancy rate decrease as people move that region.
  4. Rental rates increase, which makes a mortgage payment seem more affordable. The demand to own a property increases.
  5. The regional price of real estate increases as a result and the regional GDP has seen a dramatic increase as a result of all the above factors.

Due to the fact that many large infrastructure projects are announced far in advance of their actual construction, and that they don’t exactly stop and cancel such large projects on a dime, the process is slow and predictable enough for property investors to take advantage of the region’s (at first very affordable) real estate prices. Once invested, they can enjoy a much larger (and faster) return than if they were to invest in a region without such an increase in spending.


Bank of Canada's Rate Cut is it Good For Canada?

Peter Hall, chief economist at Export Development Canada, said  the rate cut comes at a time a number of high-profile deal and job announcements have been made by manufacturers, even as layoffs in the energy sector have overshadowed those announcements.

A weakening Canadian dollar is a windfall for Canadian exporters paid in $US dollars.  West Fraser, North America’s largest lumber producer, sees a $21 million increase in earnings before interest, taxes, depreciation and amortization for every 1-cent weakening in the exchange rate, Rodger Hutchinson, the company’s vice president and corporate controller, said in telephone interview with Financial Post reporter.  Sectors of the Canadian economy will actually benefit by the weak dollar as a result of the unexpected interest rate cut this week.

In light of recent financial market volatility, declining oil prices and the return of instability in Europe, the outlook for the BC economy is decidedly positive. Stronger economic conditions are emerging, with more robust demand from the US economy boosting provincial export volumes. In addition, employment growth is trending higher while the provincial population is expanding as a result of increased net international migration and the first net inflow of individuals from other provinces in a number of years. After expanding by just 1.9 per cent in 2013 and 2.8 per cent in 2014, real gross domestic product (GDP) growth is on track to accelerate to 2.9 per cent in 2015 surpassing Alberta for the first time in two decades. (British Columbia Real Estate Association, 2014)

 


Canada's Fiscal Situation

Why focus on balanced budget when the pundits say we shouldn’t?  This is the question being asked of Harper’s government.

“There’s nothing magic about zero deficit,” former Bank of Canada governor David Dodge told CBC Radio’s The House. “We have a very good debt-to-GDP situation… that can actually be held at the current ratio, which is quite good by international standards, while running a deficit.”

With the looming federal election the Conservatives nebulous position provides latitude to change their stance based on polling results.  High on the list is trust and brand, one of the core values espoused by Conservatives across the country is fiscal responsibility.  Much of the last campaign was based on balanced budgets and belief this is the reason why Canadians voted Conservative.

Joe Oliver, Canada’s Minister of Finance, insists he will deliver a balanced budget while postponing it’s release until April to further analyze the impact of falling oil prices.  He has not ruled out dipping into the contingency fund to make this happen.

Earlier this week, the IMF said it expected economic growth of 2.3 per cent in Canada in 2015, down from 2.4 per cent in its forecasts issued three months ago. The agency is lowering its overall outlook for global growth

Low oil prices and ailing manufacturing sector will challenge Harper’s political instinct on which direction is best to take.  The rest remains to be seen!

 


Drop in oil prices a Good thing!

oil tanker

November 12 2014, London

International Energy Agency’s (IEA) World Energy Outlook 2014 excerpts

“A well-supplied oil market in the short-term should not disguise the challenges that lie ahead, as the world is set to rely more heavily on a relatively small number of producing countries,” said IEA Chief Economist Fatih Birol. “The apparent breathing space provided by rising output in the Americas over the next decade provides little reassurance, given the long lead times of new upstream projects.”

Demand for gas is more than 50% higher in 2040, and it is the only fossil fuel still growing significantly at that time. The United States remains the largest global gas producer, although production levels off in the late-2030s as shale gas output starts to recede. East Africa emerges alongside Qatar, Australia, North America and others as an important source of liquefied natural gas (LNG), which is an increasingly important tool for gas security. A key uncertainty for gas outside of North America is whether it can be made available at prices that are low enough to be attractive for consumers and yet high enough to incentivise large investments in supply.

Click here to download Executive Summary

A recent article in the Wall Street Journal  suggests many of the world’s top pol­icy mak­ers are rewrit­ing their eco­nomic fore­casts for the United States, Europe and else­where in the world, bet­ting that plum­met­ing oil prices will boost growth by hand­ing con­sumers and man­u­fac­tur­ers a wind­fall.  Historically sharp drops  large drops in oil prices tend to be associated with recession.  According to Guy Caruso, a former head of the US Energy Administration, “this time it’s different.”

Click to view interview with Ian Talley of Wall Street Journal Oil Supply and the Global Economy WSJ