Rethink mining towns and don't invest in yesterday's hotspot

As we look to what's ahead for 2012, Property Observer is republishing some of our most noteworthy stories of 2011.

Are you searching for your next investment in the mining towns of Mt Isa, Kalgoorlie, Boulder, Cloncurry or Blackwater? Perhaps you should re-think your choice of location. Why?

Towns such as Mt. Isa, Kalgoorlie, Boulder, Cloncurry and Blackwater, as well as Port Hedland, South Hedland, Karratha, Weipa, Moranbah, Dysart, Kambalda and Middlemount were fantastic mining town hotspots. Some markets tripled in value from 2004 to 2007, however now they've become either stagnate or they're on a slight slide, as the homes in these areas have now reached their capacity for capital growth.

The markets referenced above performed very well during the commodities boom from 2003 to 2008. These areas grew rapidly as wages were very high while housing prices were relatively low. Wages averaged about $120,000 a year, or $2000 per week, while home prices started at $100,000 in 2003.

Higher wages caused housing prices to grow exponentially, until the growth was no longer sustainable. For the average miner to afford houses in these areas now, he would have to make $200,000 a year for an $800,000 house in Port Hedland to grow in value.

Rather than buy somebody else's capital growth, in tired markets, investors should look for certain key indicators when searching for the next mining hotspots.

1. Infrastructure spending is key to finding good growth markets. An investor should look for towns with more than $1 billion in planned private investment. One thing to note is that although the old boom towns have a lot of planned private investment in the works, investors would be smart to have a growth strategy in mind when choosing where to buy. Rather than buy homes that have reached their potential, thus buying somebody else's capital growth, investors should sink their funds into markets where house prices are still low.

2. Look for areas with multiple market economies. Markets that rely solely on one resource, for example, copper, will have economies that rise and fall with commodity prices, whereas areas with a more diverse economy can weather market fluctuations. Diversifying into dual market economies are an investor's best bet at getting decent rates of return for his portfolio. I'm now a believer, having lived the last market cycle to diversify into dual market economies. I saw house prices in Cobar reverse 30% in 2008, mainly as it's a single-market economy. Returns in Cobar were 10% and now they are 6%. Homes are worth 25% less because of the global financial crisis.

3. Choose cities with aggressive councils that will set in place procedures to encourage growth and investment in the area.

4. Look for areas where large corporations are injecting billions of dollars in the area, expanding existing infrastructure and building new facilities.s

5. Keep in mind the demographics of the mining market when selecting homes in different areas. Each mining town has different areas that are worth buying in, however it's important to note that a typical miner may not want to live on certain streets because of lower socio-economic social issues. Also, the local demographic does prefer a reasonable standard of accommodation, so I would suggest relatively new properties rather than older ones, otherwise the miner may as well live in a mining camp! 

6. Practise due diligence when searching out investment opportunities in mining towns to uncover any potential issues that may interfere with profits. The housing or dwelling type is less relevant than some of the idiosyncrasies a township may have. For example, some mining areas are subject to flooding and have environmental issues as a result from the local refinery. Also, some title towns and streets have title issues, mainly as the mines have covenants over the lands, providing a potential problem should the mines have a need for a mine extension underground. Most of Dysart, for example, is leasehold land, so you’re not even buying Torrens or freehold title in some cases.

Mining towns are a fabulous investment for individuals who are looking to invest for retirement. Right now investors can mirror what happened in the last mining boom by seeking out new mining markets that are expected to follow a new commodities boom that is taking place right now. Real estate is an investment that will certainly help you retire comfortably. Bearing this in mind, you need to ask yourself this final question in regards to mining towns: will the mine be yielding and operating the date I retire, or will that be the year they close or slow down production of that commodity and my valuable asset becomes significantly less valuable?

Recently I have read the rebuttals from speculators and many industry “experts” scaring people away from investing in mining towns – claiming towns can simply “disappear” if the mining town goes bust or relocates to other lucrative areas.  I have seen many experts advising people to invest in city locations over mining towns; however based on my investing experience and research there is not just one market in which I would “put all my eggs” so to speak!

I would like to stress that a savvy investor works towards a balanced property portfolio, a portfolio that has both cashflow properties and capital growth properties. So my strategy for profit would be to invest in strong cities and then diversifying to major regional markets that have significant property pressures. I really would not suggest a client goes into a mining town like Gladstone with high rental yields in preference over another investment in a city location with less rental yield unless I knew their particular financial and personal situation.

Sam Saggers is CEO of Positive Real Estate.