First published 10/04/2012
Few issues in property investment are as dividing as the opportunity presented by mining towns. Some argue they’re profit making machines with staying power to match. Others say they’re bubbles waiting to burst. The paradox is that both are right.
Mining towns grow in circles
As in all property markets there will be a typical cycle. Some might describe this as "boom to bust". Within this cycle, the growth phase can be more prolonged than other property markets and is driven by external factors rather than just market emotion. This includes increased demand for resources, mineral or gas prices, infrastructure spending, mining expansion from exploration to extraction, rapid increases in the 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 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.
The influence 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. This often equates to a contraction in the local property market once extraction of the dirt begins, unless there are other projects in the pipeline.
What’s dug up?
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.
The regions that are currently benefitting 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.
Sustainable towns have many mines
This is 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.
More infrastructure equals more opportunity
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 be 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 non-existent and reaction to the demand increase has been slow.
In time, more land will eventually be brought on stream to sate the demand in many cases, 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.
Never forget the fly-in fly-out crowd
Some smaller less sustainable and 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.
A question of lifespan
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 more recent developments for the supply and 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, the long term demand forecast and what is 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 per 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).
The tenant market in mining towns
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.
The rental returns
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.
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.