Exclusive: Can property in a mining town be a safe investment?

Purchasing property in resource-driven towns often seems like a sound investment.

Big mines can draw thousands of workers, driving up demand. Meanwhile, local incomes may increase significantly, and investors are often attracted to mining towns by the promise of high yields and fast capital gains.

But the rivers of gold can't always last. Mining town investments are also characterised by their volatility, given their exposure to single industries. Yesterday, Property Observer reported that some former mining town "hotspots" are recording price drops of up to 40% from their previous peaks.

While some defend the profitability of mining town property investments, others choose to steer clear.

Property Observer took the question to leading property experts: Can property in a mining town ever be a safe investment?

Margaret Lomas: Author, television host and Destiny founder

It never ceases to amaze me how property investors think simply about an asset's present performance when buying, and never consider all of the valid and crucial factors which must be considered before making any investment.

This is what makes mining town investors leap in to investments where the performance is completely linked to a single industry and the overall global economy in a way which can result in serious disaster.

When you become a property investor you must decide whether you intend to be a buy and hold investor or a speculator. A mining town investment is a speculative investment, yet those who buy them behave like a buy and hold investor - they buy in on the way up (and usually when it's too late) and then hold well past the use by date - often resulting in serious losses and abysmal yields when the area plunges on the back of reduced demand for resources.

Make no mistake - all mining town investments are extremely speculative and require precise market timing, both in and out.

Those buying in a mining town must not only have a very large appetite for risk, they must have the capacity to hedge - in other words, hold enough other assets so that, when the area falls in value, the loss can be offset with other stable assets, rather than result in the investor owing more than they own.

Terry Ryder: Hotspotting.com.au founder

Can a mining town ever be a safe investment?

If "high-risk" is the opposite of "safe" in investing, the answer has to be no. All investments in mining towns are high risk. Markets in mining towns are always volatile, because they are one-industry towns. And that one industry, the resources sector, is fickle and capricious.

Add to that the tendency of developers to dive into boom markets and build way too much new stock, and you have a formula for a real estate roller coaster.

But can a mining town ever be a lucrative investment? Definitely. Even with the decline in resources-related markets in the past year or two, the best long-term capital growth rates in Australia are all in mining towns or regional centres impacted by the resources sector.

The Queensland coal town of Moranbah is the quintessential case study for the win-lose scenario presented by these kinds of markets. Over the 10 years to 2012, it averaged 30% per year in growth in its median house price, which reached $750,000. Rents were absurdly high, providing double-digit yields.

Then the downturn popped by. Today the median price is $330,000 and rents have dropped so low that the typical yield is 4%.

Moranbah has had downturns before, though never as severe as this one. It will recover in time, although the trend by mining companies towards FIFO workforces means it may never reach those previous heights.

Bottom line: mining towns are only for experienced investors with large portfolios and cast-iron temperaments.

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Catherine Cashmore: Independent market analyst

Is it ever a good time to 'invest' in a mining town? If it was, the time to do so has passed.

However, let's be clear - nothing of value is being 'invested' – the price escalation in a mining town comes from a self-feeding, virtuous cycle of irrational exuberance, taking a short-term bet on continuing rapid 'capital gains' at the expense of a new wave of speculative investors and the creation of more debt.

During the construction phase of the cycle (which typically employs a larger workforce than the current production phase), the surge in demand from fly in, fly out workers initially rises faster than supply can accommodate.  This drives up rents on existing sites, and attracts an increasing inflow of yield seeking investors.

The beneficial effects to the surrounding town and nearby localities, comes in the form of infrastructure contributions – ports, railroads, hotels, schools and so forth, which naturally boosts employment and can aid the long term viability of a region once the boom has surpassed.

However, the steep escalation created by speculative exuberance cannot be sustained. Timing therefore is crucial – and the losses significant.

A change in market prices can happen over night – Moranbah in Queensland for example – where houses renting for $1,200 - $1,800 per week in 2012, were barely able to attract $200-$300 per week in 2013.  Rumour has it that some properties were even offered 'free' for a short period of time, simply to gain tenancy.

The length of the cycle within any given area is determined by feasibility and long-term sustainability of a project.  New mines are planned years in advance, taking factors into account such as quantity and quality of deposits, milling processes, operating costs, capital costs, staffing, access to facilities (roads, rail etc.) and obviously continued demand from offshore markets. However, even assuming a feasibility study passes all the necessary criteria (and few presently are) – it does not guarantee the mine will be successful – or even commence.

To the peak of 2011, high-prices for resources such as iron ore, base metals and coal, were driven overwhelmingly by emerging markets such as China through heavy investment into infrastructure to accommodate rapid urbanisation of a large rural population.

However, China is undergoing structural changes to its economy – the effects of which are hard to predict over the longer term.  The subsequent dampening of its property market and therefore construction, has seen the price of iron ore plummet over recent months. Demand for scarce commodities is likely to continue, however it's not going to buoy a boom of speculative investment into the mining-town real estate sector as was previously the case.

Gamble your dollars elsewhere.

Damian Collins: Momentum Wealth managing director

Mining towns certainly can be quite cash flow positive in a lot of cases. But people need to be aware there are a lot of risks associated with that. Particularly if it's a mining town that's associated with one mine or a single commodity, and the commodity drops in value and they cut their workforce.

To some degree you're speculating on a particular commodity. And in some cases, even if the commodity is fairly well priced, the mine can still be fail if it's not profitable.

That's what happened with the BHP Ravensthorpe nickel project. Basically, they shut the thing down eight months later because it wasn't profitable.

The other risk is extra supply coming off the market. Often the towns are fairly small - 20,000 or 30,000 people. It doesn't take a whole lot of extra land supply to come off the market in order to effect rental yields and prices, like it did in Port Headland and Karratha. That's caused rental yields and prices to drop quite significantly, even though the industries are quite strong up there.

Certainly, you need to be very cautious. Our recommendation is that mining towns are not for the first time investor. They're for investors with a decent sized portfolio, with five or six properties, who willing to take on that risk as part of their property strategy.

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Pete Wargent: Author and AllenWargent property buyers co-founder

It's possible, yes, if investors buy an asset using an appropriately financed deal, for the right price, at the right stage in the cycle, provided there is some tolerance for price volatility and possible vacancies.

Generally speaking, an investor or speculator buys property in a mining town in anticipation of a new project passing its feasibility studies and progressing to the construction stage, bringing new labour into town and higher demand for housing.

With the China boom really having taken off over the past decade, commodity prices went skyward – iron ore prices between 2007 and 2010, for example, doubled and then more than doubled again - and Australia embarked on a vast and unprecedented frenzy of mining construction.

But the commodities sector naturally cycles, and look at the macroeconomic picture in late 2014.

We have now transitioned into the less labour-intensive production phase of the boom, and as the new producers really begin to hit their straps there is a tremendous glut of supply hitting global commodities markets placing relentless downwards pressure on commodity prices.

Fewer and fewer significant projects will pass feasibility, particularly copper/silver/gold projects, and in the bulk commodity sectors of coal and iron ore.

In short, mining construction activity will drop off a cliff over the next three years, especially in Queensland, Western Australia and, to a lesser extent, New South Wales.

Property investment is generally most effective as a long-term play.

Capital cities with rapidly growing populations tend to be an effective inflation hedge since the required supply of new dwellings must always built at in today's dollars incurring today's labour and construction costs, thus underpinning prices.

Mining towns and resources regions at this stage in the cycle are more likely to experience pain in the form of high vacancy rates, declining demand and falling prices.

Pass.

Todd Hunter: Buyer's agent, wHeregroup director

The only time mining towns can become good areas to invest in are when the towns are not sole mining towns and have some mining influence.

These locations have a lot more to offer than simply mining, so should mines close or commodity prices change, then the towns don't see the catostraphic fluctuations in house values like sole mining towns do. Some locations that offer this are Townsville, Bunbury, Mandurah (where many fly in, fly out workers live for lifestyle and are close enough to Perth airport to fly north).

The other major issue for mining towns is the huge availability of land which can see massive housing oversupply occur. At any stage large numbers of new blocks of land can be released and sold to interstate investors. In such small towns these large releases can take towns that have almost a zero vacancy rate to huge vacancy rates that see large rent reductions. We see this now in places like Gladstone, Chinchilla and Karratha.

Combine that with mining companies now opting for fly in, fly out labour forces rather than workers renting in town has seen populations reduce as well. In my eyes, it's way too risky!