Why boom towns are a property minefield

Mining towns have delivered huge returns for some property investors, but don’t expect the good times to last forever.

PORTFOLIO POINT: With mining companies preferring to employ workers on a fly-in, fly-out basis, the demand for permanent housing in nearby towns is likely to subside.

Gina Rinehart is once again the centre of attention, with the furore over whether she should be allowed to employ 1700 foreign workers at her Roy Hill iron ore mill plant in Western Australia’s Pilbara region.

There are, however, useful insights emanating from this latest controversy that should temper the widely held assumption that the mining boom will inevitably lead to a sustained property boom for nearby towns.

The huge capital gains in property prices and rental prices in towns like Gladstone in Queensland and Port Hedland in Western Australia in recent years is not in doubt. There are indeed many mining town investors who will have reaped great returns. For example, according to Australian Property Monitors, in Port Hedland median house prices now exceed $1 million after averaging 20% capital growth over 10 years, and median rents are now $1900 a week.

The key questions now for these investors, and for those who wish to follow them, is whether these prices and rents can be sustained and additional capital growth secured, and what are the risks of prices and rents falling just as dramatically in coming years?

Mining town property can only move beyond being just a highly speculative affair if we can be confident that mining town population growth will persistently outstrip new housing supply over many years.

However, the actions and messages coming from mining companies, and the Australian population more generally in recent days, indicate that this scenario is not a realistic proposition.

Mining companies aren’t looking to build large permanent residential workforces in mining towns. Instead, they are, by and large, opting to support the expansion of their operations through the use of fly-in fly-out (FIFO) workers. This matters. Permanent workers bring families and set down roots. They add to a burgeoning community around which all sorts of amenities – child care facilities, schools, parks, swimming pools and so on – coalesce.

In contrast, FIFO workers don’t become part of the community and have little call on its amenities. Most work long shifts and sleep much of the rest of the time they are in town. And, of course, they fly out at the end of their roster to be with their families and to spend their leisure dollars elsewhere.

The mining companies have been criticised for this approach, but they argue the alternative is too expensive. According to its submission into a Federal Parliamentary Committee inquiry into the use of fly-in, fly out workforce practices in regional Australia, Fortescue Metals Group advised that it costs three times as much to permanently locate an employee in the Pilbara than it does to use fly-in, fly-out arrangements. Not surprisingly then, it is estimated by the Western Australian Chamber of Minerals and Energy, that some 52% of all mining employees work on a FIFO basis, and this figure is expected by many to rise in the near future.

However, the mining industry also knows its demand for workers will not last indefinitely, even if the mining boom doesn’t end due to external factors such as a slowing in Chinese demand for resources. Most of the employment on a mining project is heavily loaded to the construction phase. For instance, Sino Iron’s Pellet Project near Karratha in WA employed 4000 construction workers but will only have 500 operational staff. For many projects, the ratio of construction workers to operational staff is greater than 10 to 1.

Moreover, it is clear that there isn’t a great appetite for Australians to move to mining towns, at least not permanently, despite the lure of six-figure salaries. Indeed, total annual net migration to WA and Queensland from others states is less than 20,000 persons a year, according to the ABS. This is dwarfed by annual net overseas migration to these states of around 70,000.

The reality is that efficient modern transport logistics have given mining employees a genuine choice between relocating their families to remote mining towns and remaining in their home city close to family, friends and familiar pursuits. Despite the challenges of spending weeks away from home at a time, it shouldn’t be surprising that many mining employees prefer FIFO to relocation.

This has serious ramifications for property investors in these mining towns. Many have benefited from the influx of workers pushing up prices as demand outpaces supply, but we can now expect mining companies to ramp up their existing efforts to build company-owned cabins for their transient FIFO workforce. And, over time, as more mining projects move from the construction phase to the operational phase, it is likely that demand for private rental accommodation will fall off significantly as mining employees opt for cheaper company-owned FIFO accommodation.

Even if you think the mining boom will last for several more years (which, in itself, is a risky assumption), these housing demand and supply dynamics should give pause for thought to those who think investing in mining town is a sure winner. It will always be a precarious investment that is dependent on the fortunes of one industry.

Property Q&A

This week:

  • Investing in commercial property.
  • Is proximity to transport more important than the floor plan?
  • Downsizing to a high-rise apartment.
  • Buying a property that hasn’t sold

Commercial Property
I am looking to invest in commercial real estate (small office). Could you please supply some tips?

Commercial property – be it retail, office or industrial – has quite different characteristics to residential property. Most fundamentally, commercial property is valued through a different prism to its residential counterpart. Capital growth is always the principal engine of investment returns but with commercial property it is rental income and lease quality that underpins the viability of the investment and its capital growth. Consequently, in the selection process rental yield is the key yardstick. This is in direct contrast with the residential sector where capital growth underpins the rental yield.

Another distinction is the budget you’ll require. Whilst it is possible to buy a blue-chip residential property from around $400,000, for good commercial property one needs to spend at least $1-1.5 million to avoid compromises. So whilst it is certainly possible to find small offices for $400,000, it is likely to be compromised in terms of its future performance. In turn this hampers your ability to secure good, long-term tenants and rental growth. A small office investment may be worth considering if you were buying as an owner-occupier, which provides you security of tenure.

Transport versus floor plan
I want to invest $450,000 and am looking at two-bedroom apartments in the Elsternwick/Caulfield (Melbourne) area. We’re applying your investment criteria in choosing which properties to look at – i.e. we’re looking at smaller, older style blocks in quiet streets that have allocated car parking. In order to refine the search even further, which is the most important criteria: distance from transport or the floor plan and level?

For this budget, you may struggle to find a good two-bedroom apartment, unless it is compromised. $450,000 will secure you an excellent one-bedroom apartment and you’ll want $500,000-plus for a good two-bedroom apartment.

Both factors you mention are of course important and desirable. In the areas you are talking about, proximity to transport is probably a given. If you can be within 10 minutes walking distance of public transport then you should be okay. Once the distance becomes greater, you tend to put off those prospective tenants without a car.

Floor plan is probably the most crucial factor, as many prospective tenants and future buyers will be put off by an illogical arrangement. The floor level is only important if it confers particular benefits such as views or if a ground floor has compromised security or outlook.

Going high-rise
Most new strata-title properties have defects according to a recent University of NSW report. We intend to downsize to a high-rise apartment and would appreciate your advice.

This is a case of doing one’s homework before committing. Check with the owners’ corporation or body corporate for a history of work and defects. Ideally, try to secure minutes from owners’ corporation meetings from the last two or three years. These documents will also give you insights into the health of the body corporate and whether there are major issues – structural or otherwise.

Living in high-rise apartments is not for everyone, especially if you have been used to a traditional house. You may want to rent an apartment for six or 12 months first to see how it goes.

A property quandary
I’m considering a property that’s been on the market for six months. It seems to fit the bill for investment purposes. But if no one else has wanted it so far, perhaps it’s a lemon and I should avoid it. What should I do?

If a property has the right underlying characteristics to work as a first-class investment it should have sold by now. This may indicate that the property is over-priced, possibly by more than 10% above the market rate – this is a level at which a property will be ignored by most owner-occupiers and investors. It may also be the case that the estate agent has poorly marketed the property, either due to incompetency or possibly because the vendor has refused to authorise a sufficient budget for print and online advertising. Alternatively, the property really doesn’t have the right attributes to qualify as a first-class investment. You may want to seek the advice of an independent property advisor to help you decide whether the property is sub-standard or to help you negotiate a fair market value.

Monique Sasson Wakelin is a director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter: @WakelinProperty.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique? Send an email to monique@eurekareport.com.au

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