Don't jump for the first pot of gold
It would be fair to say that never before in the history of property investment in Australia have we (ordinary investors) been presented with such an opportunity, such a golden goose as the mining/resource boom that is upon us.
There is probably only three obvious ways of participating in this opportunity for most investors; either:
- get a job or start a business in the industry;
- buy shares/equities related to the sector or;
- invest in property in resource driven towns or cities.
I don’t advocate for a minute that buying just mining town properties is the only thing or the best thing to do, however for many it will be an opportunity to leverage off to the maximum, turbo charging their property investment portfolio and allowing them to move onto bigger and better things.
For others it will be a way of replacing income and escaping the rat race and being the envy of their former work colleagues!
There are some points you need to consider when doing your diligence before launching off and buying a mining town property.
Top 10 Things to Consider Before Buying Into Mining Towns:
1. Timing
As in all property markets there will be a typical cycle which some might describe as being “boom to bust”. Within that cycle, the growth phase can well be more prolonged than other property markets and is driven by external factors rather than just the emotion of the market.
External factors such as increased demand for resources; mineral or gas prices; infrastructure spending; mining expansion from exploration to extraction; rapid increase in workforce as new contracts are awarded; the availability of land or lack thereof, for property development.
This tends to drive property values and rent up in spurts rather than being linear growth. In between these growth spurts you get a plateau where the market forces stabilise for a period, which are the points to look for to enter the market to get set for the next market upsurge.
The timing of entry and the phase of the mine life cycle are very important to get right.
2. Phase of Mine Development
From exploration to extraction, there is typically a large surge in employment in the local area as a new mine is brought online. Typically it takes a much larger workforce to develop and open a new mine as it does to run and support an operational mine so there could well be a contraction in the local property market once extraction of the dirt begins, unless there are other projects in the pipeline.
3. Type of mining involved
The current demand and more importantly the forecast future demand for the mineral or gas will have a big bearing on the future health of the local economy and property market. There needs to be clear indication of long term demand and profitability for the product coming out of the ground.
Currently the regions that are benefiting the most from the demand for resources are associated with Iron ore, coal and natural gas, with the Pilbara in WA leading the way followed by North Queensland then the Northern Territory with SA showing latent potential.
4. Number of Mines Town Supports
Significant for building momentum in the local property market and long term tenure. The impact of a mine closer or workforce reduction on a ‘one mine town’ can be devastating to the local community. An example of this is the impact on Hopetoun in WA after BHP’s Ravensthorpe mine closure in 2009.
5. Infrastructure spending
Towns that will do the best (from an investment standpoint) long term have significant infrastructure spending In areas such as port, rail and roads, hospitals and schools, local shire development and beautification programs, coupled with property development such as hotels, apartment buildings, commercial buildings as well as house and land. They will have a diversity of industry and not supported by just mining, and will have future projects in the pipeline -both Shire and State coupled with big business spending.
Typically the bottleneck or choke point that has caused many mining town land prices to soar so dramatically is the shortage of land and the delays in making new land available for development by local Council. In essence, forward planning has been caught out or nonexistent and reaction to the demand increase has been slow in coming.
In time in many cases more land will eventually be brought on stream to sate the demand which could well help to stabilize or reduce sky high land values.
The towns to look for have long term sustainability, diversity of industry and diversity of infrastructure, which are well supported by one or more large mining companies.
6. Influence of FIFO
Some smaller less sustainable/ desirable locations will never achieve a critical mass for long term sustainability due to the reliance on a FIFO worker force denying the local area of infrastructure spending and money being spent in the local economy. The net effect of which will prevent a community from developing organically.
7. Life Span of Mine/Mine and the Outlook For The Relevant Mining Sector
The lifespan of the project is determined by the size and quality of the resource deposits, as well as the long term demand and profitability of the resource. You would want to know the forecast lifespan of the mines in the area you are targeting.
Presently, Australia’s resource industry is in the grip of an Asian lead economic expansion, with China being the dominant force with their near insatiable demand for the raw materials for making steel. Coupled with this are the more recent developments for the supply/export of natural gas and coal seam gas.
When conducting risk analysis in a given mining area we need to be concerned with questions such as; the long term mineral price forecast? Long term demand forecast? What‘s in the pipeline?
Our largest export commodity is iron ore, (followed closely by coal) which is currently fetching around $150 per tonne, and has been as high as $200/tonne in the recent past. The cost of getting the ore from the ground varies but is circa $25-40 per tonne. Current demand is from China, Japan and South Korea and is considered ‘robust’.
Future demand is forecast to increase ( with demand expected to come from India in the future also) to the point where the three giants of the iron ore game, BHP, Rio Tinto and FMG are expanding their infrastructure to allow a doubling or even trebling of volume over the next 10 years.
Port Hedland is the main beneficiary of BHP’s port and harbour expansion, with circa $50 billion being spent on port and rail infrastructure to take their iron ore operations from circa 150 million tonnes to 480 million by around 2020.
The economic spin off for the local economy is massive, with the town population expected to grow from the current 15,000 to an anticipated 50,000 by 2035 (figures from Town of Port Hedland).
8. Know What Type of Tenant You’re Going to Get
A renovated property nicely presented will attract not only a better rent but a better quality of tenant. A more basic property in need of some attention could potentially give you more problematic tenants in terms of paying the rent reliably and taking care of your property.
9. Corporate/Company Lease
The Good
Longer tenure is common, with 1, 2 year leases normal, with even 3 or 4 year leases possible with renewals. For a good corporate tenant, a high standard of property is required, which will be new or almost new.
Going forward, as supply finally catches up with the demand for rental property, it will become harder and harder to tenant the poorer quality or older houses, so beware that if you get into the cheaper end of the market, you may be called upon at some point in the future to make significant upgrades to your property.
Companies can afford the lofty rentals that many individuals could not, and you can bank on the rent being paid each month.
The Bad
Often high turnover of people in the property- causing excessive wear and tear.
No individual responsibility unless an actual individual name is on the lease, so ensure you have someone named on the lease.
Air conditioners get left running 24/7 so high maintenance and replacement rate.
Gardens and lawns are neglected as are swimming pools. Either make your property low maintenance or incorporate a maintenance plan for the garden, lawn and pool – to be managed by the property management agency. The cost of this can be included in the rental and it ensures that it gets done.
10. Rental Return
The Good
Obviously you’re in this market for the higher returns that are available. I typically look for a 10% return at purchase on a mining town property with lots of room on the upside in the near term as well. To quickly determine a target return, take the selling price, divide by 1000 then multiply by 2= target rental return (pw) of 10%. e.g. $500,000 property; 500,000/1000= 500, x 2 = $1000 pw.
It is not uncommon to have the rents jump quite dramatically over a 6 month period if vacancy rates drop back and demand puts the squeeze on to turbo charge your returns and property values.
Valuations tend to be more volatile as values seem to keep pace (you might say arbitrarily ‘pegged’ to yield, as typically residential property values are based on land value and not yield) with rental return which fluctuates with demand.
The Bad
Rental rates are known to fluctuate downward also if vacancies dramatically increase due to a mine closure or staff cut backs. When a mine is in the expansion or development phase you usually have the peak number of people employed/contracted, so these numbers will fall away as the mine becomes fully operational.
