It’s no secret that mining towns are risky, but not for many of the reasons investors commonly think. Patrick Cornwell has made a success out of investing in these areas and reveals eight real dangers, from last to first.
8. Changing rental yields
It is likely that you’re interested in these markets for the higher returns 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.
It is not uncommon to have the rents jump quite dramatically over a six month period if vacancy rates drop back and demand puts the squeeze on to turbo charge your returns and property values.
The problem: 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.
7. Corporate/company leases
Longer tenure is common, with one to two year leases normal, with even three or four 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 at some point 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 problem: There is often a high turnover of people in the property. This causes excessive wear and tear and there is no individual responsibility – unless an actual individual name is on the lease.
Air conditioners get left running 24/7 so they have a high maintenance and replacement rate. Gardens and lawns are neglected, as are swimming pools.
6. Buying at the wrong end of a cycle
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 problem: The timing of entry and the phase of the mine life cycle are very important to get right and not many investors know how to do it.
5. Buying at the wrong 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.
The problem: 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.
4. 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.
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.
3. Not enough mines in the town
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.
2. Not enough infrastructure spending
Towns that will do the best over the long term (from an investment standpoint) have significant infrastructure spending in areas such as:
Port, rail and roads
Hospitals and schools
Local shire development and beautification programs
Property development such as hotels, apartment buildings, commercial buildings as well as house and land
Good investment destinations will have a diversity of industry and not be supported by just mining, and will have future projects in the pipeline.
The problem: 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 stabilize or reduce sky high land values.
1. Life span of the 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 more recent developments for the supply and export of natural gas and coal seam gas.
The problem: 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.