Recently there have been some stirrings around mining town investments as vacancy rates in key areas have started to increase. Combine this with the recent findings in the ABS’s Australian Social Trends Report and we start to get a clearer picture that the tide may be turning for mining towns.
Measuring risk has always been an essential component for responsible investing. However for the last 10 years those who have invested in mining towns have probably been so elated with the results they’ve barely stopped to consider what kind of risk they were entering into.
Local economies relying primarily on one industry, combined with small populations and a lack of surrounding infrastructure would all be top of the list for cautionary signs, yet yearly asset growth of 20% in some areas has pushed all those considerations to the back of the mind.
We now have 3 and 4 bedroom homes in dusty remote communities fetching prices that would rival any harbor side developments in our capital cities.
This year however, SQM Research flagged increasing vacancy rates in areas like Gladstone, Kalgoorlie and Port Hedland.
Louis Christopher of SQM noted – “Property investors over the last 10 years have done extraordinarily well if they held real estate in mining towns. However, there is always a risk that when the downturn arrives that these markets could have a very rapid and severe correction”.
In line with this comment, the ABS recently released its paper on Australian Social Trends, highlighting dwelling statistics and related costs for mining related communities and their employees.
It was noted that while mining related workers were paid extremely well relative to the general population, and that mining towns were indeed growing as the industry continued to grow stronger, the cost of housing for employees was significantly higher (130%) than the rest of the country.
For companies that have been under increasing pressure through big taxes and falling commodity prices, the increasing cost of housing for their employees has no doubt been a red flag to a bull for their bean counters looking to reduce their overheads. As a result, more cost effective, temporary camps and housing, or drive or fly in and out arrangements have become increasingly popular.
I recently sat with Ms X, a property investor who had bought a house and land package in one of Queensland’s better-known mining towns only to find that she was exposed to a lot more risk than she had expected.
Ms X had done all her research and understood that the coal market on which the town relied was set to grow for years to come.
While the returns were amazing in the beginning, she then encountered what she called the “perfect storm”.
The high prices of the commodities market started coming off their peak, supply contracts that were put in place started being pulled off the table and the major mining company that employed the majority of workers decided to “boycott” the rental market and provide their own cheaper forms of housing in order to reduce costs.
Rental properties achieving a stratospheric $2,400 per week were now reduced by 50% to $1,200 per week, and while Ms X had a 3-year guarantee from her tenant, the tenant threatened to sue if she insisted on keeping the rent at the previously high levels. (New buyers are now being told to expect $500 per week).
On the supply side, while she reasoned the property available to develop was landlocked, keeping upward pressure on prices, the State Land Development Authority (ULDA) decided to override council zonings and release more land. Such a release will no doubt work in favour of the mining company, diluting the market with further development to let the steam out of high prices. Already, houses that were bought for $670,000 are now selling for $400,000.
Not all mining areas will undergo such dramatic upheavals. There is still plenty of business in mining and it remains one of Australia’s largest industries. However, mining companies are now under increasing pressure to keep profits high in an environment where the value of their commodity is falling. This will undoubtedly lead to greater cost efficiencies when it comes to their involvement in the property market and investors need to be mindful that the golden years may indeed be over.