Property investors without an appetite for risk should consider major regional centres rather than mining towns

PRDnationwide has selected five townships in order to investigate property investment in Australia’s mining towns - with each town defined by diverse regional environments, population sizes, mining activities, level of infrastructure and services, proximity to regional service centres and community establishment.

Perhaps the only commonality shared between these mining towns is the shortfall of housing and the inadequate provision of infrastructure and planning mechanisms to accommodate an ever increasing workforce. The table below provides the list of townships that have been selected for the purpose of this investigation together with a snapshot of the individual housing markets performance during the six months to April 2011 and 2012.

Prepared by PRDnationwide Research: Source: PDS Live

Of the five mining towns, Moranbah achieved the highest median price growth during the April 2012 half-year period, recording an unprecedented 58.8% increase compared with the corresponding period in 2011. The town also led the way is sales activity, registering a total of 129 transactions during the April 2012 half-year period, representing an exceptional 53.6% uplift from the corresponding period in 2011.

Dysart failed to achieve this level of exponential growth, despite having a proximate median price to Moranbah in the April 2011 half-year period. Somewhat overshadowed, Dysart in fact performed extremely well, recording a median price of $545,000 to achieve 21.1% growth during the April 2012 half-year period. Sales volumes however, diluted 9.5% during the six months to April 2012, registering a total 38 transactions.

Port Hedland recorded a median house price of $1,235,000 in the six months to April 2012, undoubtedly the highest median price of all regional mining towns across Australia. With a median price of $1.1 million in the April 2011 half-year period, it is hard to believe that there was any scope in the market to inflate prices further, making the 12.3% increase all the more remarkable.

Singleton recorded a median house price of $345,000 in the April half-year period, making it the most affordable of the five mining towns. As a result the town is gaining momentum, with a 9.3% increase in median price and uplift of 35.4% in sales recorded during the six months to April 2012.

Karratha (including adjoining Nickol and Bulgarra) recorded a median price of $802,500 in the April 2012 half-year period, representing a 4.6% increase from the corresponding period in 2011. Again, while this rate is well below that achieved from the Queensland towns, Karratha is a more established township, and in relative terms, this level of growth from a median price of $767,000 in the April 2011 half-year period is nonetheless very impressive.

There is no doubt that regional mining towns across Australia are producing extraordinary investment opportunities for investors, particularly those with the financial capacity and risk appetite to enter the market. As with any property purchase or investment vehicle, lucrative returns from investing in these mining towns are directly proportionate to the overwhelming level of inherent risk.

The most prominent risk is the sensitivity of rental prices to change drastically over extremely short periods of time. Moranbah provides a perfect case in point, with anecdotal evidence suggesting weekly rental prices as at April 2012 have revised down as much as $800 since the late 2011/ early 2012 and possibly much more since then. Rental evidence provided by the Residential Tenancy Authority (RTA) states the median weekly rent for a three-bedroom house in the March 2012 quarter to be $2,000, compared with $550 recorded over the same period in 2010. This scenario has and continues to occur within the other mining towns, with the constant disequilibrium between housing supply and demand transpiring to excessive volatility in the rental market.

There are many factors that contribute to demand for housing, with the most obvious and most detrimental being the performance of the mine/mines that the town services. This is very much the case for Moranbah, with BHP Billiton-Mitsubishi Alliance (BMA) issuing statements to overseas dependants that it will will fail to meet requirements as the mines experience limited production during what has been a bad wet season (November to April). This has been further exacerbated by rolling weekly strikes by miners as BMA goes hard on its enterprise agreement with the unions. BMA has taken advantage of the situation and has refused to sign any lease agreements since earlier in the year. Vacancies have thus increased and rents corrected accordingly, with only the fortunate investors with unexpired lease agreements unaffected at this point in time.

Another example, possibly more severe, was the closure of an underperforming mine (BMA’s Norwich Park) in April 2012 near Dysart, which sent shock waves throughout the local community, with 1,400 jobs threatened and the flow-on effects to the property market yet to be fully realised. Approximately 400 of these workers are residents of the Dysart community, and some will be redeployed to the Saraji mine, while others will likely relocate to other towns or centres in the region.

As an immediate result, it is anticipated that vacancy levels will increase, therefore correcting rental prices and subsequent capital values. Some investors will wear their losses and maintain their prospects for further growth while others will consolidate their earnings and opt to exit the market. Once again, as prices soften, opportunities will arise for investors to take advantage of high rental yields and enter a market they perhaps couldn’t afford previously. However, as has been the case for Moranbah, the influx of investors looking capitalise on such an opportunity will flood the market with more rental properties, putting further pressure on rental prices and ultimately diluting these supercharged yields.

Despite the sensationalist predictions of some media proponents, the size of pipeline expansions for existing mines in the Dysart area is likely to navigate the property market from an imminent bust. In fact, the number and size of mines planned to open or expand in the Isaac Region of Queensland in the future will surely prevent towns like Moranbah and Dysart experiencing a collapse in the market any time soon.

Perhaps the most significant problem facing mining towns in the future is the expansion of campsites to accommodate a growing fly-in fly-out (FIFO) workforce in order for mining companies to reduce their cost base. Basically, the benefit of this strategy to the resident community of the town is that it will effectively drive rents and subsequent capital values in the housing market down to more affordable levels, preventing non-mining workers who perhaps are renting from being priced out of the market and forced to relocate. However, on the other hand, the added strain on essential services caused by the lack of direct investment from mining companies and local governments into adequate community infrastructure and businesses, demonstrates a more cynical consequence.

The lure of higher pay packages offered by the mines is aggravating the problem as many business struggle to maintain enough staff to operate efficiently, if not at all. The implications of a growing FIFO workforce have been debated among industry, politicians, lobbyists and community for quite some time now. There are advocates both for and against increasing the proportion of FIFO workers in and around town, with the decision likely to be resolved with government intervention. Either way, this is yet another factor which must be closely monitored by would-be and existing investors of mining towns.

For investors with short-term investment horizons and an appetite for risk beyond the norm, then this may be the ideal time and asset class to invest. However, for a majority of would-be investors, perhaps the next best thing would be to consider the major regional centres that service these remote mining towns. Gains may not be as lucrative or as quick to come by, but the long-term sustainable growth prospects afforded by these multi-industry centres (most of which are independent of the mining boom though indirectly benefit from its growth and success) are perhaps the better weighted investment. Many spectators will be paying special attention to the towns of Moranbah and Dysart during 2012; using the benefit of hindsight to measure and validate the repercussions and extent certain events have on their property markets.

Aaron Maskrey is research director at PRDnationwide.