Five tips to make the right moves investing in a mining town: Simon Pressley
Despite some cooling in commodity prices and job losses, Australia’s mining party is still in full swing.
For property investors, hearing about a new mining project really gets the corks popping because a new mine can mean demand for accommodation skyrockets, rents can go through the roof and property values can start to look very peachy indeed.
But a new mine announcement does not always mean a new mine will be built. And a new mine coming to town does not always means its workers will look for local housing.
Here are five tips to making the right move when investing in mining towns.
Wait for the green light. In the mining industry, the approval process for building a new mine is long and complicated. The time between project announcement and start of construction can be several years.
When you look at the long list of factors in the approval process, it’s obvious how hurdles are hit and plans are scrapped. Competing land use challenges, native title, water supply, fauna and flora impact, land contamination, waste disposal, effects on marine life, and general environmental impact all need to be dealt with. Some issues can take years to resolve, involve masses of government red tape, create conflicts in communities, and sometimes just become too difficult for mining companies to pursue.
Meanwhile, the economic landscape changes around us. In our post-GFC world, there are other complications, too. Some companies are finding it harder to secure funding or to gain final investment approval from their board. Costs can blow out because companies are paying interest on loans for projects that haven’t yet started to make money or there are higher wage costs resulting from a shortage of skilled local labour or trade union demands.
The problems are real. In fact, I’m seeing an emerging trend of mining companies putting ego aside, sharing infrastructure, and doing joint venture agreements on some projects in an attempt to trim costs and make projects more economically viable.
If return on your investment is highly dependent upon specific projects it’s important to wait for that green light.
Do your research. Understand exactly what the mine is and how it will operate.
Look closely at its workforce requirements; How many workers will it need? What roles will they perform? How long will they be in town? Where will they be living – conventional housing or on site in temporary employer-supplied villages? Will the impact on local goods, service, and accommodation be sustainable or short-lived? Will the departure of the construction workforce and the arrival of the (often smaller) mining workforce reduce your rental returns? Is there likely to be a glut of housing once this occurs and high vacancy rates as a result?
Know the mining industry. According to Geoscience Australia, Australia produces significant amounts of 19 different minerals from almost 400 operating mines across the country. Coal and iron ore are Australia’s biggest export commodities, but liquefied natural gas is a major growth market and copper is also significant.
Mining is big business, but commodities are, by nature, volatile and their prices rise and fall for a wide range of reasons. It’s standard practice in the mining industry to recruit workers when prices are high (to maximise the amount of resource they can get out of the ground to sell at high prices) and to lay off large numbers of workers when the price of the commodity falls.
Vacancy rates obviously take their lead from the workforce. These cycles can be deep, bringing high peaks and low troughs. An astute investor will be aware of these fluctuations and insulate against them by choosing a location that relies on more than a couple of mines so their pool of potential tenants is large and diverse.Get in on the ground level. The best time to make a move is just prior to the start of mine construction.
Constructing a new mine and associated infrastructure generally needs a mass of skilled workers. There can be processing plants, railways, pipelines and ports to be built and create direct jobs. Indirect jobs also come in the form of businesses supplying manufacturing components, heavy vehicles and machinery, and shops in town.
If a property investor times it right, they’ll be buying just as those jobs are being advertised and the people are starting to roll into town. Once the mine is built, it’s onto the business of mining, which sees the workforce change and downsize to those mine workers who will extract the coal, iron ore, copper or gas, and transport it away for processing and exporting.
If you’ve bought in, you’ll already know from your research who these people are and where they are coming from. You’ll know that your rental property is a likely candidate for their accommodation and there will be sufficient numbers of potential tenants to generate some competition for housing.
Understand what a ‘high-performing investment property’ means in a mining town.
A high-performing investment property is one that consistently produces above average rental returns and capital growth over the long-term. To attract those two factors, a property needs to be in a place where the tenant pool is significant, the infrastructure is established and of high quality, and the economic outlook is positive, with plenty of growth drivers from a diverse range of industries pushing it along.
A lot of traditional mining towns only exist because of a few local mines and are therefore unlikely to present high-performing investment properties to the market. They don’t have the infrastructure or the diverse economy.
If, however, the mines are already in, or coming to, a town which has a range of other industries, such as tourism, agriculture or education for example, and the infrastructure to support these industries and their workers is in place, then the location will benefit enormously from the addition of mining to the mix—and a property investor is likely to benefit enormously from their investment decision.
I am very selective about investing in mining towns. There have been many times when I have anticipated a strong growth period for a property market on the back of certain mining projects but held off from purchasing property for clients because of my concerns over things such as mine project approvals and a location’s unhealthy reliance on a single industry.
I favour locations with several mines, 10 or more years of life left in the available resources, additional untapped resources directly in the area providing scope for new mines in future, and a few other sustainable industries supporting the economy.
Simon Pressley is Managing Director of Propertyology, a full-time property market analyst, accredited property investment adviser, and the 2012 and 2013 REIA / REIQ Buyer’s Agent of the Year.