Expert Advice: by Sam Saggers
Mining Hotspots and Not Spots - Part 2
Is the market a single market economy?
Single market economies are towns that have one resource, for example copper! The fate of the township fluctuates with the price of world supply and demand and therefore with copper prices. The new mining markets of this decade; i.e the “new boom towns”, have high returns and low entry points, but many of them are also not solely dependent on commodities and international commodity prices.
Was there a purpose to the township prior to the boom?
Take Gladstone for example. Prior to the $90B dollar announcements and the LNG plant occurring, Gladstone was seen as a port; a bauxite refinery to aluminium....it had a purpose. Conversely, take a town like Middlemount; prior to coal being a need of China, there was not much in Middlemount except maybe a fish and chip shop!
Is there more than one company in the township?
If there are multiple heavyweights collaborating forces it means there will be huge capital injections; accommodation will be needed, jobs will be created, which forces rental and house prices up. Additionally, if one company has an unexpected share market dip, there are other companies still operating!
Are the mining companies planning to provide housing to miners in the form of “dongas”?
Some mining companies provide on-site accommodation for fly-in-fly-out (FIFO) employees to ensure they keep costs down. One reason miners earn such high incomes is their need for accommodation, often due to the housing shortage. Some mining companies have started camps and roped that into their salary; which reduces wages and ultimately affects the growth of property. The more "dongas", the lower the wages of the workers are and therefore house prices will stay the same in that town.
Is there a local property manager in town?
Having a good rapport with your property manager, means you are protecting your investment. If there are no real estate agents in the township, you can just imagine the nightmare of trying to look after your property, especially if you are located in Sydney or interstate! No property manager can mean chasing rent, doing property inspections, sourcing repairmen or even having to attend the rental tribunal when you live hours away!
Wouldn’t it be nice to buy into a mining town this year – that made you $600K in equity over the next three years and achieved exceptional rental yields at the same time? You could be investing in the next Port Hedland Goldmine if you do your research!
Mining towns are central to high rental returns in Australia. Huge returns, well over 11%, can be achieved by navigating your capital to small towns controlled by BHP, Rio Tinto and others. Passive cashflow returns are especially available in the market. When negotiating high yielding properties, remember to do the numbers and make sure you are truly buying positive cashflow. Genuine positive cashflow properties should give the benefit before tax and not be reliant on deductions.
Properties within the market that can’t produce a pre–tax positive cashflow result are either positively geared by tax deductions or still negatively geared. I am a big advocate of positive cashflow real estate, but as Australia rides the next commodity boom and as many educators continue to re-deliver buying strategies in what I consider to be old boom towns or towns that experienced high rates of capital growth from 2004 to 2007 thus are excessively expensive. Cashflow Buyers are often seeking serviceability for their wider property portfolio.
To maintain and even increase serviceability, investors should consider returns or yields two to three per cent higher than the standard variable interest rate of the day. I would aim for yields starting from nine per cent for residential property. Off-the-bat passive returns are available in the market and are often found in small regional towns, university towns and mining areas. However always look for markets that will grow as well to balance your portfolio. There are plenty of new hot spots out there with high rental returns and fair property prices.
The main drivers in mining towns, where positive cash flow investments are available, are socioeconomic factors; also easily represented as average income vs. average house price. By way of example, let’s use the history of old boom towns to explain these factors. During the Howard years, the country experienced an impressive and profitable resource boom. This boom slowed during the GFC, but is once again experiencing a renaissance; however, the socioeconomic driver of average income vs. average house price is no longer viable in many of the mining market towns. These are what I call old boom towns.
Continuing with this example - in 2003, I was brokering a property deal in Port Hedland and South Hedland in Western Australia, which were towns with a combined population of approximately 15,000 and were experiencing high wage increases due to the mining boom. The average wage was well up around $100,000 or $1,400 a week after PAYG. Conversely, the average home price in 2003 was very affordable at around $200,000 or a weekly repayment of $250pw.
To fuel socioeconomic growth, a market needs to be bearable, equitable and sustainable in order for both investors and owner-occupiers to purchase there. To understand the example mentioned above, let’s ask the following questions of the Port Hedland/South Hedland market in 2003.
Was the market:
Bearable? - Yes. The average income of $1,400 could afford the average debt of the average house price of $250pw.
Sustainable - Yes. The market could sustain fluctuations in house price growth. Let’s take the 120 year Australian average of house growth of approximately 10.4% (10%) and compound the growth for 3 years. The house initially costing $200,000 would be worth $220,000 in one year and $266,000 by the third year. Could $1,400 income a week afford the house price of $266,000? Yes! In 2003, the Port Hedland/South Hedland was very sustainable and the future looked good!
Equitable - Yes. Assuming the owner of the property wanted to take the gain made in property growth in the form of equity, could the average income afford it? Yes. The Port Hedland/South Hedland markets in 2003 and the pursuant years were very equitable markets.
Viable - With the above formulation that the market was bearable, equitable and sustainable in 2003, the Port Hedland/South Hedland was extremely viable to buy within.
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
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