Yardney - Don't Invest in Mining Towns

[JIT]

Hi there,

I invite comments on this article below by Michael Yardney on investing in mining towns...

http://www.apimagazine.com.au/blog/...avoid-property-investments-near-the-coalface/

In particular, any comments from people who have invested in areas like Port Hedland WA, South Hedland WA and Gladstone QLD, or similar areas.

Thanks.

 

[Mick C]

I agree 100% with Yardney's view on mining towns.
Some are willing to take the risk for potential high returns, that's their strategy.

Regards
Michael

 

[units4me]

I don't normally agree too often with the MYs of this world, but on this one I do. What I have a issue with is how people can pay very high inner Sydney/Melb type prices for a modest house in the middle of woop woop. I know the rents/yields are very high, but given the very high buy prices, not sure it's worth the risk.
What if more homes built to address shortage, temporary housing introduced, mine closes (DISASTER-bye bye investment) or scales back?
Too many what ifs for me.
At least metro and regional centres have diversity.

 

[VYBerlinaV8]

No way would I invest in a mining town. If/when the mine shuts down, the investment would be practically worthless.

 

[Ideo]

I'd invest in a strong and viable regional centre (Orange, Tamworth etc) that happened to have some mining around it.

I would not invest in a mining town.

 

[Mick C]

dont mines have like a 25 years life only???

Regards
Michael

 

[Aaron Sice]

dont mines have like a 25 years life only???

Regards
Michael

....plus tails. most mines operate on a 20-45 year basis and then another 10-15 on tails.

Port Hedland is more than just Iron Ore - Yardney considers the whole of WA a "one horse town" - regardless fo the fact it's the size of NSW, Qld and Vic put together.

 

[james_w]

some mines have been around since 1919 and still going strong

I think what alot miss is the actual wages for most in these areas

is 80k for a rouse about 2nd year they are on about 130-140k
mining companies pay a subsidy in queensland anyway for there workers to buy there own homes.
also one pit may close but another opens

rents are subsidized and the majority of the time workers rent rooms not 1 house to themselves
so the rent they are paying is around $200 a week in some of these towns or is subsidized by the mining company.

If you do your own research mining towns can be very profitable.

 

[Mick C]

....plus tails. most mines operate on a 20-45 year basis and then another 10-15 on tails.

Port Hedland is more than just Iron Ore - Yardney considers the whole of WA a "one horse town" - regardless fo the fact it's the size of NSW, Qld and Vic put together.

What do you mean by tails? is it still operational/profitable during the tail period?

Regards
Michael

 

[singingtheblues]

i dont think you can be too prescriptive - depends if you actively manage your portfolio or just let the properties sit there from year to year without checking on what's going on - i bought a couple of properties a year or so ago in gladstone when it became apparent the amount of planned work there had gained critical mass - however rents were poor for the first 6mths but as expected the place has now gone bananas ! - the properties are up over 50% & so are rents - now this doesn't mean that i'll sit on the properties forever & assume that the exponential growth will continue indefinately - i'll wait a couple of years & flog them on - an easy few hundred thousand profit - yeah, i'll pay the tax but even paying that out, a 100%+ growth in 4 years aint bad ! (especially in a supposedly depressed property market!) - sure gladstone will go backwards at some point, but i'll be long gone by then!

 

[bene313]

Might be better to gain exposure to the resources sector through purchasing shares in mining companies.

 

[Aaron Sice]

What do you mean by tails? is it still operational/profitable during the tail period?

Regards
Michael

tails are the waste from mining - huge problem environmentally when mines shut up shop prematurely.

the idea is, you mine the best quality minerals first by diggin a hole in the ground. the second grade stuff goes on the tailings >

when the first grade ore is depleted, you put your tails through a much finer process to extract what little is left - often the mine is paid off by this stage so it's all profit and skeleton staff.

the tails from the tails go back into the hole you dug.

but mines are bought and sold in between all of this, so it's kind of a "fairytale" and oversimplification of the process and idea.

 

[Mick C]

Might be better to gain exposure to the resources sector through purchasing shares in mining companies.

Agree...even thought some of my mining shares haven't been doing that good lol


Arron- Thanks for the explanation and pic!!!

Regards
Michael

 

[eeew]

Agree...would avoid mining towns unless i had other investment assets already in my portfolio...or unless i had a stomach to take on enormous risks.

I would stick to the CBD's- more diversity of jobs, people, etc....= more demand and that too stable demand.

 

[Jimmi]

MY on Mining Towns

I agree with MY on this.

I have never really understood why people invest in relatively high risk mining towns. I question wether the high yields are high enough to justify the overinflated entry price and unpredictable market conditions.

I'd much prefer to pick up a well located commercial property, with a 3-5 yr lease and a yield of 10%. At least then you can achieve an standardised 4% growth (with rental increases). Plus, your tenant pays all out goings and the maintenance is basically zero.

 

[james_w]

I agree with MY on this.

I have never really understood why people invest in relatively high risk mining towns. I question wether the high yields are high enough to justify the overinflated entry price and unpredictable market conditions.

I'd much prefer to pick up a well located commercial property, with a 3-5 yr lease and a yield of 10%. At least then you can achieve an standardised 4% growth (with rental increases). Plus, your tenant pays all out goings and the maintenance is basically zero.

You do realize that mining companies lease for 2-5years and pay all maintenance costs a lot of the time just sayin.

 

[JIT]

Thanks for the replies so far.

As an example, here is one property currently listed in Port Hedland WA:

http://www.realestate.com.au/property-house-wa-port+hedland-108505836

The details are:

A 4 x 2 x 2 (plus study and pool) house
Built in 2002
748 sqm
Asking price $1,300,000
Rent $9750 per month
9% net yield
Tenant pays all outgoings (except of a capital/structural nature)
Mining company lease of 5 years with a 5 year option
CPI and market rent reviews

Sounds good at face value...

At 90% LVR and borrowings of $1,170,000 at say a 3 year residential fixed rate of 6.30% pa, this is an interest expense of $73,710 pa, with rent of $9750 x 12 = $117,000 pa... so net return of $43,290.

Enough to retire on a very modest lifestyle in Aus. for the frugal, or like a king in a developing country.

Apart from the risks that have already been mentioned by some here, what's the catch here... ?

Sounds almost too good to be true, a highly leveraged residential property at residential lending rates, with a commercial style lease arrangement and large company tenant paying all outgoings, and positively geared...

Is $43,290 the true net return on this property?

 

[jaycee]

Thanks for the replies so far.

As an example, here is one property currently listed in Port Hedland WA:

http://www.realestate.com.au/property-house-wa-port+hedland-108505836

The details are:

A 4 x 2 x 2 (plus study and pool) house
Built in 2002
748 sqm
Asking price $1,300,000
Rent $9750 per month
9% net yield
Tenant pays all outgoings (except of a capital/structural nature)
Mining company lease of 5 years with a 5 year option
CPI and market rent reviews

Sounds good at face value...

At 90% LVR and borrowings of $1,170,000 at say a 3 year residential fixed rate of 6.30% pa, this is an interest expense of $73,710 pa, with rent of $9750 x 12 = $117,000 pa... so net return of $43,290...

Enough to retire on a very modest lifestyle in Aus. for the frugal, or like a king in a developing country.

Apart from the risks that have already been mentioned by some here, what's the catch here... ?

Sounds almost too good to be true, a highly leveraged residential property at residential lending rates, with a commercial style lease arrangement and large company tenant paying all outgoings, and positively geared...

It's out of my sphere of knowledge & comfort zone - therefore it's TOO RISKY

 

[Mick C]

1. If you can get 90% LVR- you need to have a very strong asset and income base for this sort of leverage - not rent dependent pretty much.
So ill say 80% LVR

2. You didn't include a lot of another cost involved - insurance, repairs, land tax etc...

Yes either way it will be positive +CF else nobody would buy in such a remote area, but one must question CG? how stable is this sort of CF+ and rent after the contract with the company ends? yes you may can sell it BEFORE the contract ends maybe with only a 2 years leases left??...but who's going to buy it off you ??? and at what price?


To risky for me as well

There's better place and ways to earn CF+ flow...may not be as high as this one; but i aren't greedy

Regards
Michael

 

[Belbo]

Apart from the risks that have already been mentioned by some here, what's the catch here... ?

Speaking for myself having bought two in South Hedland this year, there are a few minor 'catches'. The first is very high repair & maintenance costs, and the second is that these costs are not really deductible in the first year (as you know, the ATO will treat repairs and most maintenance in the first year at least as as a capital cost). As sellers will typically defer repairs and maintenance as much as possible leading up to selling, and given that the environment there is very tough on plant and equipment (think 24-hr multiple air cons, reticulation, rust on gates, etc), the first year of ownership will likely be less rewarding than you'd hope.

Another catch (maybe not applicable to your 9% 'net' income example, but valid to the 11% gross return typical properties) is high property management costs. Often the agencies require 8.8% mgt and 2 weeks' letting fee plus a whole plethora of sundries, and while this can be negotiated (i.e. subsequently letting through the selling agent, and then repeating this with the same agent), the best outcome available appears to be 7.7% and 1 weeks' letting fee, which is still a lot of money even on a typical 2-yr tenancy contract. (Remember too, they'll lease it at the highest possible rent then try to resist your efforts to increase the rent to reduce their own workload on grounds that existing rents are currently 'optimal'.)

As for economic and natural disaster risk to Hedland as a town, you can only be your own judge. Personally, I'm relaxed about the former, and have found re the latter that insurance costs can be very high unless you shop around (AAMI is by far the most reasonable I've found).

Unlike commercial PI, residential vacancy in Hedland is happily not a serious risk, at least while the developng world still wants our mineral resources (and who'll still have a decently-paying job anywhere in Aust if that fundamentally changes?).

Longer term, prospective very decent CG is icing on the cake, but equally longer term, sharp interest rate rises could be a serious threat, so I'm personally on the look-out to lock asap if and when the odds start looking good (of course, IR locking can be a serious hindrance to breaking for sale though, as any seasoned PI knows.)

So what's the catch? In a word, I think, SANF. You'd have to be crazy!!!