Busting the mining town property myth

Property investment in mining towns is not a recipe for instant high returns. It’s high risk and at Moranbah in Queensland it went very sour.

PORTFOLIO POINT: Property investors in the Queensland town of Moranbah may have to dig deep into their own pockets after a sudden slump in rental returns.

Last year, demand for rental properties in the central Queensland mining town of Moranbah was so high modest three-bedroom homes were fetching $2,000 a week or more. Then the 'perfect storm’ hit and caused a slump unlike anything one expert has seen before. How long will it last?

It’s not every day a segment of the property market enjoys the highest of highs one month and suffers a nosedive in values the next. But that’s what happened in Moranbah earlier this year.

After 16 months, an industrial dispute between three unions and mining conglomerate BHP Billiton and Mitsubishi Development Pty Ltd (BMA), the proponents of major projects in the Bowen Basin, really began to bite.

While the negotiations dragged on, workers were unwilling to commit to new tenancy agreements.

The subsequent slowdown in rental demand coincided with a blanket refusal by BMA to sign any new leases for its workers until landlords dropped their asking prices.

Add an extended wet season to disrupt mining operations and you’ve got what Helen Collier-Kogtevs of Real Wealth Australia describes as the “perfect storm”.

Not a renter in sight
As 2011 came to a close, rents in Moranbah had soared towards $2,000 a week – in many cases a four-bedroom established home could achieve close to $3,000.

“At the moment, older properties are getting around $1,000 to $1,200 a week and something that’s new is getting about $1,500,” Collier-Kogtevs says. “In all the years I’ve been investing in mining towns, I haven’t seen anything quite like this.”

Bella Exposito of Moranbah Real Estate is just as shocked. After working in the local market for 25 years, this slump is the worst she’s seen.

During the global financial crisis (GFC), rental demand slowed and there was a glut of stock but leases were still being signed – albeit slowly.

“This time '¦ nil. We had 50 properties for rent (in April) and they’re not moving. We aren’t renting anything at all,” Exposito says.

Recent investors who managed to find a tenant by significantly discounting rents are the lucky ones. But for them, Collier-Kogtevs points out, still achieving an average 10% yield is an enviable outcome.

“There aren’t too many places you can get a yield like that. Unfortunately many of these investors saw the massive rents others achieved before Christmas, bought and settled, and now aren’t getting what they expected.”

Investors either safe or exposed
Julie Green and her husband Robert purchased a five-bedroom property in February that came with an existing three-year lease agreement, fetching an incredible $3,500 a week.

“We wouldn’t have bought it unless there was a long-term tenancy agreement in place,” she says.

Moranbah’s seemingly unshakeable boom had busted a month later when the couple decided to buy a second, untenanted property. Post-settlement, the house was still vacant.

“We anticipated it could be empty for a while, but we’re not concerned. Thanks to the income from the first, we’re able to sustain and service both properties even if only one is tenanted.

“There’s continued development and expansion in Moranbah, which is a good indication it’ll be a strong bet for a few more years.”

Melbourne couple Terry and Maureen Taffe started looking for their second Moranbah investment over Christmas. They eventually signed a contract on a three-bedroom house.

Six weeks after settlement, it was sitting vacant without any serious interest from prospective tenants. At the time of purchase, it was expected to fetch upwards of $2,000 a week. The Melbourne couple dropped the price by $300 and considered further reductions.

“I’m not so sure it’s the rental price that’s the problem, but the situation in town. It’s sort of like playing to an empty theatre,” Terry Taffe says.

Their other local investment has a lease in place until the end of the year and offers some breathing space. But it’s not enough to cover the repayments on the new property. “We’re keeping an eye on things. The situation isn’t very enchanting, but there’s plenty on the map in Moranbah to give us hope – and slumps don’t last forever.”

Is it worth the risk?
Moranbah’s troubling start to the year is an example of the risks that come with investing in mining towns, according to property expert Margaret Lomas of investment group Destiny Financial Solutions.

The lure of high rental yields and possible capital gains often outweighs a sensible assessment of an investor’s capacity to weather tough times, she says.

In Lomas’ opinion, about 80% of investors aren’t suited to the higher than normal exposure of mining towns. “That exposure comes from what I call 'hidden risk’ which is the kind of thing you can’t anticipate ahead of time. It’s an event or outside influence that hasn’t occurred before and threatens investors’ underlying asset value.”

The key to resource industry markets is getting in and getting out at exactly the right time – something few manage to achieve, she says.

“If you’re an investor who is experienced and you can afford to lose, then speculative investment can pay off. For the rest of us who are trying to bank our financial future on a growing property portfolio, mining towns represent too great a risk.”

Collier-Kogtevs is still optimistic about Moranbah and believes a stream of continued industry investment in the next five years should see renewed growth.

“There are still five new mines to go in and they’ve only just scratched the surface with one,” she says.

“In the long term, Moranbah ticks all the boxes for me. I’m comfortable with the big picture.”

Those considering investing should do their homework regularly to ensure they get in at the right time.

“Moranbah operates like a commercial real estate market, which means everything is tied to rental demand and return,” Collier-Kogtevs says.

“The trigger to look for is how many rentals are on the market. When volumes start drying up and drop to about 50, it might be time to consider re-engaging and reassessing the situation.”

Isaac Regional Council Mayor Cedric Marshall says the region still offers strong returns for investors, but believes the days of $3000 a week rents could be over.

“The average price for a house in the Isaac region is $705,000,” Marshall says. “An investor could drop their asking rent to $900 to $1000 and expect a 6% to 7% return on their investment. This still far outperforms Brisbane on 4.1% and Mackay on 5.6%.”

The pocket comprising the Mackay, Isaac and Whitsunday regions is predicted to be the fastest growing in Queensland for the next decade, he says. Projects currently under study would require a minimum increase of 30,000 workers by 2020 if brought to fruition.

Based on cycles she’s witnessed in the past, Exposito is confident of a return to more prosperous times.

“We’ve been in a crisis in a lot of ways, but it will turn around. As I always say, after the rain the sun shines again.”

For now at least, the forecast for Moranbah remains cloudy with a chance of showers.

This article appeared in Australian Property Investor magazine and is reproduced with permission. Visit www.apimagazine.com.au