Mining town high risks apply to Arckaringa, but even more than usual: Cameron McEvoy

Back in January 2013 I wrote (article found here) about the Arckaringa Basin area of South Australia from a property investment opportunity perspective.

Whilst I am not a micro-markets writer typically – I prefer to write on trends, techniques, and experience-based content pieces – I did take particular interest in this massive expanse of a region. This was in light of major breaking news earlier in January about the confirmed discovery of shale rock under the ground, in very large volumes.

With shale oil production ramping up globally, as the cost of traditional oil per barrel increases to be either on par with historically ‘expensive’ shale oil, it is clear that shale oil discoveries around the world will become significant mining and production sites.

In fact, you need look no further than northern USA (the Dakotas, Wyoming, etc) and southern Canada (Saskatchewan). Historically shale rock was difficult and expensive to extract, and equally challenging to refine into oil. Technological advancement has brought these costs down, whilst all the while, the price of regular oil has been sharply increasing due to the finite nature of the resource and increased global demand.

So with the discoveries in South Australia – and I use plural because over the past couple of years, multiple sites have been discovered and are now collectively referred to as the ‘Arckaringa Basin’ – there has been much talk since January about the dawning of a new age of the mining sector in Australia. The region is sizeable, it is roughly the land size equivalent of Poland, with shale rock deposits dotted throughout the area.

The Arckaringa Basin Area is about the size of Poland.

As most readers would be aware of, even without these discoveries, the mining sector for other minerals and resources outside of shale oil in Australia is in incredibly great shape.

Though there has been a mild stalling in profits and productivity posted (and forecasted) from the mining sector, the overall long term outlook is very positive indeed. Arckaringa, if realised properly, will only add to this strength.

So what role does property investment play in the Arckaringa region? And what are the risks in investing in residential real estate in this region?

Well, on the first question, when I wrote about five months ago on the state of the residential property market there, I did identify – from a pure property-investor/buyer ‘numbers’-based mindset – immediate opportunity. By that, I mean that rental return achievable in proportion to the outlay cost of purchasing a property there, was very significant:

-          The kinds of double-digit returns achievable was comparable to the 2009-2011 era of US residential property markets. We are talking rental returns of 20-30% and upwards.
-          Due to the very accessible cost of procuring tenant-ready properties there in comparison to capital city markets (we are talking 5-digit property costs versus 6-digit/half-a-million-dollar property costs), this means that two kinds of investment structures could be feasibly considered:
A) ‘Cash-on-cash’ investments whereby no mortgage is needed for the initial outlay, due to the very affordable entry-rate of purchasing property, and instant monthly rental return achieved due.
B) The more traditional mortgage-secured investment property structure. Securing even a 70/30 LVR (Loan to Value Ratio) loan would make for minimal risk/outlay, and maximum positively geared return.

This all sounds pretty great, right?

As mentioned last time though, this area is very high risk, and not for faint-hearted. With no personal investment experience there myself, I cannot commentate on the actual success of investing there, though I believe that it would be a very high-risk and high-maintenance location to invest in residential property.

Residential property in the Arckaringa Basin is mostly partially underground to minimise extreme heat outdoor conditions.

I am conscious that I intended today’s piece as a follow-up to January’s article, yet all I seem to have done is re-cap it.

Well, in the five months since, I’ve kept a casual eye on the investment property market in the major townships within the Arckaringa region. Here are some of my observations. As mentioned, I am not an expert on the region and can only claim to have a fleeting interest, but here is my view of the state of the market, risks, and opportunities:

Sales volumes on the up, but this doesn’t mean much:

Actual volume of property sales seems to have picked up in the last six months, compared to the six months before that. Using sales volume data from REA group, I can confirm that there were about 25% more residential properties purchased in the townships-regions in the last six months compared to the six months before that.

However, when dealing in such low-volume sales-data pools (these aren’t cities of millions of people and hundreds of thousands of dwellings, of which we can get reliable trended data, these are towns of perhaps only a dozen or less available properties for sale at any one moment), this data is neither conclusive nor even dependable as viewing it as a reflection of any real market sales ‘growth’.

Residential properties in the region now being more ‘investor’ targeted in their marketing:

What is more reliable that small-sales-pool volume data, is this: When looking at the volume of available properties for sale now compared to six months ago, the ‘marketing speak’ in the sales information on each property listing on both Domain and RealEstate.com.au is significantly different.

Where sales-speak six months ago was focused on language around ‘affordable’, or ‘keeps cool being semi-dugout underground’ or ‘close to town and employment centres’, and other such dwelling-specific rhetoric, most of the Coober Pedy and other Arckaringa regional towns noted here are now being heavily marketed as being very ‘investor friendly’, indicating that agents in the areas feel strongly enough that the mining industry growth will be reliable enough to sustain property investment growth, and soon.

Whilst sales agents are chiefly interested in just that, getting a sale over the line, we can sometimes also rely on sales agents to have more precise knowledge of their postcode regions than us outsiders ever could. 

Feasibility of regional growth occurring any time soon:

Beyond the property investment element of Arckaringa though, I’ve also been reading articles from several news sources questioning and criticising the viability of getting shale rock mining projects off the ground in the foreseeable future. There are a number of economic, political, and environmental issues cited as being barriers to getting the region to ‘take off’ any time soon.

Investors should be wary not to get caught up in the excitement of the ‘gold rush boom’ effect usually associated with the pending rapid growth of a mining town, as this could lead to disappointment when no dramatic improvements are seen in your desired time scales. 

But this may not be such a bad thing for longer term ‘buy and hold’ strategic property investors:

So it may take a bit longer to see any real capital growth in the region – fine – as long as it is assured that it will occur at some point in the ‘feasible’ future (say the next 5-10 years), if, and only if, property can be sourced that remains very cash-flow-positive over this 5-10 year period.

What I am suggesting is that if it is a low entry point/low-risk purchase, and though it does not show any capital growth over the next few years, if the rent more than covers the expenses and that cash-flow.

The same usual ‘mining town high risks’ apply to Arckaringa, but with even more than usual:

Back on the negative front now, all of the risks associated with any mining town investment property purchase exist in Arckaringa, but unfortunately with an added bunch of additional worrisome risks. This area is not for the faint-hearted investor. Such additional risks are as follows:

-          This area is one of the most remote, inaccessible, and infrastructure-lacking areas of Australia! Getting a busted pipe or leaking tap fixed there is a nightmare. The maintenance costs will be quite extortionate
-          Similarly, property management in these towns is very tough, with several of them not even possessing the infrastructure of having a real estate agency in town itself. This means that property managers are usually based as far away as Adelaide, and manage remotely. This adds additional risk to projects
-          Tenant quality appears to be very poor. I’ve been reading several blogs and forums on this area from people who already hold residential property there, and tenant quality is a challenge

In the future I will continue to check in on this area with increasing interest and report any further noteworthy observations. My view is that the area certainly does have potential, and those with the appropriate risk profile could do very well here, however for those property investors starting out, a high-yielding property buy here would not be advisable.

Seasoned and established investors who have had a few years’ experience would be better equipped to handle the volatility and management challenge that is holding property in the Arckaringa Basin region.