Yardney - Don't Invest in Mining Towns

[Doovalacky]

Port Hedland has a number of mines in the area and is a major harbor for exporting goods from the area. Its not going to disappear overnight like some mining towns could.

I certainly would be careful buying a house in a town that just had 1 mine supporting it. Ravensthorpe in South Wa springs to mind, they shut the nickel mine in 2009 for a while and prices crashed.

 

[agent007]

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

What about investing in a mining country? Will the same logic apply?

 

[Ian (WA)]

Sadly Metro Man has in this instance (like all the two bit, ill-researched, CBD and Urban journos that seem to profligate the pages of YIP Magazine with outdated, inaccurate, platitudinous bromidic sermons aka "Mining Towns - Hot Spotting") put every single class of Australias' natural resources sector and the particular industries that process them into one big bucket (man, that's a #@$%en biiiiiiiiiiig bucket).

He has then seen fit to reach into his trusty quiver, retrieve his huuuuuuuuuuuge broadsword and with one almighty blow, he thus smote the evil mining towns with a splotch of cold blancmange and preached to the masses of lemmings who so revere his every word to not go near this evil thing called........a "Mining Town".

That Metro Man article has as much credibility to it as the preceding raft of uninformed, uneducated statements in this thread coming from either some very young & inexperienced, or very poorly researched individuals who have most likely never set foot anywhere near the hundreds of rural, regional and God forbid, "mining towns" that thrive from the myriad of resources and other community related industries across this great brown land. I wonder if Metro Mans' blancmange blade smites all the evilness across all the agricultural sector based towns, or the marine activity related towns, or the viticulture sector towns.........there's sooooooo much evil out there people.......invest at your peril!!!!!!!

For sensibilities sake, you have all been sucked into that cerebrally vacant maelstrom, a vast vacuum devoid of any factual content which is the spawning ground for the Today Tonight styled sensationalist media (or should I say Media-ocrity) which feeds ravenously upon your gullible thought processes in order to survive......it is a leech which sucks deep into your lobal labyrinth until it has numbed your rational thought in order for it to finally lobotomise you into being subservient to the ***** you crave & lather from Good Morning Australia & Kerriannes' Kennel.

Please whatever you do, make sure you invest in your Docklands, Southbank and Brisvegas high-rise, over-supplied shoeboxes and rub your hands together as your CG & Yields will surely skyrocket. Of course there's no need to engage due diligence as there's no need to research any of these places because they're all within 10kms of their CBDs.......they're not like those evil mining towns.

Believe what you want to believe.

The content in the link below is six years out of date, but maybe there's enough there to make you think twice next time you read or hear of "Mining Boom / Mining Bust, Property Boom / Property Bust *****.......because that's all it is....*****!

http://www.dfat.gov.au/facts/resources_sector.html

Now if you've persevered and you notice your right eyelid developing a twitch, get yourself a map of OZ showing all the resources sector industries (note plural....not singular) and their locations, survey the whole bloody country and see what else is going on around all those evil mining towns.....at least then you might be better informed than Metro Man before opining your promulgations.

I hate blancmange and desk jockey experts.

Ian.

 

[Jaggannath]

//snip//

Please whatever you do, make sure you invest in your Docklands, Southbank and Brisvegas high-rise, over-supplied shoeboxes and rub your hands together as your CG & Yields will surely skyrocket. Of course there's no need to engage due diligence as there's no need to research any of these places because they're all within 10kms of their CBDs.......they're not like those evil mining towns.

Believe what you want to believe.

//snip//

Now if you've persevered and you notice your right eyelid developing a twitch, get yourself a map of OZ showing all the resources sector industries (note plural....not singular) and their locations, survey the whole bloody country and see what else is going on around all those evil mining towns.....at least then you might be better informed than Metro Man before opining your promulgations.

Ian.

Sorry, too wordy to quote you all. Most people here were putting forwards fairly reasonable arguments, most of which was a summary of do your due diligence. For instance, I would happily invest in the Hunter Valley area because it's a nice area and not dependent on one industry. Before buying, I'd do my own research on long term prospects, not just look at short term gains. Agreed a lot of these so-called experts talk garbage, but that diatribe was almost too much effort to read to find the occasional facts scattered throughout.

Just my $0.022

 

[Ian (WA)]

"..... but that diatribe was almost too much effort to read to find the occasional facts scattered throughout."

Whose diatribe? Mine or Metro Mans??? You may have keenly noted that both epistles were full of the same thing.......$hite!!

.....but his had more.

 

[Rooster]

Sorry, too wordy to quote you all. Most people here were putting forwards fairly reasonable arguments, most of which was a summary of do your due diligence. For instance, I would happily invest in the Hunter Valley area because it's a nice area and not dependent on one industry. Before buying, I'd do my own research on long term prospects, not just look at short term gains. Agreed a lot of these so-called experts talk garbage, but that diatribe was almost too much effort to read to find the occasional facts scattered throughout.

Just my $0.022

I actually thought it was brilliant.

Generalisations abound in this thread and many more like it.


Rooster

 

[mattnz]

I loved this response to the article

"What absolute, scaremongering rubbish.

I’d rather my regional, resource sector driven properties over your over supplied, Melbourne shoebox apartments any day.

If you’re going to research this stuff Michael, then do it properly; get out of your office and open your eyes to what really is happening in regional Australia. Sorry, a two day whistle stop tour of the Pilbara doesn’t cut it for research.

Comment by Ian — November 3, 2011 @ 7:15 pm"

Mining towns will hugely outperform the Melbourne apartment market which is about to crash like parts of SE Queensland have, yet he continues to spruik it. There is no opportunity for growth there.

At the peak of the GFC in Melbourne, a first home buyer was eligible for a $32k grant for new property!! No wonder the market didn't crash!!

"Dear taxpayer, here have a $32k free deposit, but only if you buy an overpriced new apartment off plan in the next few months. Don't worry the rest of us will borrow billions to subsidise it for you and foot the bill, Uncle Kevin. Hmmm and now there is a speculative bubble in Melbourne apartments after a number of interest rate rises, I wonder why?"

By comparison, look at somewhere like Gladstone, you can still buy a 3 bedroom house for under $400k. They are investing $88 billion in the next few years and have forward contracts for the next 20 years. One deal alone for half the supply from one of the 4 major projects was worth $90 billion. It is a diversified economy with CSG, coal, agriculture, has a hospital and uni campus and is expected to double in population in the next few years. It is not reliant on a single mine, with many different mines exporting through the port.

The market there dropped marginally around 10% during GFC (was a fantastic buying opportunity for me) and has huge growth potential. Companies don't invest billions in projects unless they have a significant payback that will continue for decades into the future.

I would however agree that buying a $1.3 million house today and hoping it may increase in value is pure speculation, but that doesn't just apply to mining towns, but also his beloved inner Melbourne suburbs. This is not affordable or sustainable based on income multiples.

 

[buster]

I think Micheal knows there is better investing outside the areas he invests, he is a smart man, but his stategy relies on a ponzi scheme of encouraging more people to pay more money in the areas he invest in, to keep the continual CG going that is requied to make his own investments viable. He cant allow static growth in areas he invests in.

 

[VYBerlinaV8]

What about investing in a mining country? Will the same logic apply?

Depends what else the country had going.

FWIW, all my IPs are within 10 mins walk of a major city centre.

 

[locko24]

Great post Ian!
Personally, i have no short term plans to invest in a major city in the near future - the yeilds and CG are too good where i am right now!

 

[JIT]

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

Yes that's right, and not sure whether the PM fees are included in the outgoings or not, and all of these expenses sound like they are much higher than usual metro areas would be.

how stable is this sort of CF+ and rent after the contract with the company ends?

That's true, if the option isn't exercised for whatever reason and you have extended vacancy looking for another mining company to lease it (as opposed to joe bloggs), you go from a high yielding property to a zero yielding property with a large debt.

 

[JIT]

Port Hedland has a number of mines in the area and is a major harbor for exporting goods from the area. Its not going to disappear overnight like some mining towns could.

Good point, does MY's commentary on mining towns apply to towns with a number of mines, from different large mining companies, for different commodities, LNG, and with town centres/retail/residential/commercial developments etc. going on... ?

(Never seen the place myself, I so can't really comment on what it looks like.)

Are these towns reallly likely to disappear overnight?

 

[JIT]

put every single class of Australias' natural resources sector and the particular industries that process them into one big bucket...

...poorly researched individuals who have most likely never set foot anywhere near the hundreds of rural, regional and God forbid, "mining towns" that thrive from the myriad of resources and other community related industries across this great brown land

...Of course there's no need to engage due diligence as there's no need to research any of these places because they're all within 10kms of their CBDs.......they're not like those evil mining towns.

...Now if you've persevered and you notice your right eyelid developing a twitch, get yourself a map of OZ showing all the resources sector industries (note plural....not singular) and their locations, survey the whole bloody country and see what else is going on around all those evil mining towns.....at least then you might be better informed than Metro Man before opining your promulgations...

Thanks for your post Ian, and that informative link.

I think you're right in that we all need to do more research before making such broad-sweeping statements about all mining towns.

I think for most people it is just easier to follow the stock standard advice of buying within 10kms or so of a major metro CBD... certainly is for me!

It's the lack of knowledge or lack of desire to gain that knowledge that perhaps holds us back when considering such supposedly ''higher risk'' investments.

MY's commentary makes it easy for some to accept the logic and just put all mining towns into the '''too hard'' basket.

The main point about his article that did resonate with me though was his comments that mining towns are often ''investor-driven'', rather than driven by owner-occupiers, and this inherintly will create more risk/volatility in cash flows and capital growth, as when sentiment changes property values in these areas will more likely be driven by fear or greed.

Interested in your further thoughts...

 

[JIT]

By comparison, look at somewhere like Gladstone, you can still buy a 3 bedroom house for under $400k. They are investing $88 billion in the next few years and have forward contracts for the next 20 years. One deal alone for half the supply from one of the 4 major projects was worth $90 billion. It is a diversified economy with CSG, coal, agriculture, has a hospital and uni campus and is expected to double in population in the next few years. It is not reliant on a single mine, with many different mines exporting through the port.

The market there dropped marginally around 10% during GFC (was a fantastic buying opportunity for me) and has huge growth potential. Companies don't invest billions in projects unless they have a significant payback that will continue for decades into the future.

I would however agree that buying a $1.3 million house today and hoping it may increase in value is pure speculation, but that doesn't just apply to mining towns, but also his beloved inner Melbourne suburbs. This is not affordable or sustainable based on income multiples.

Very well said matt.

 

[JIT]

The first is very high repair & maintenance costs...

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...

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)...

Thanks Belbo,

Good to hear from someone who has invested in this area.

With your two purchases in South Hedland, what sort of net yield (gross rent MINUS all expenses eg. PM fees, repairs/maintenance allowance, land tax, council/water rates, insurance, owners corporation, travel/inspection costs etc... and not including borrowing costs) do you anticipated you will get in your second year of ownership?

I'm interested in what the real net yields on these properties are after taking into account all regular/usual expenses (and excluding depreciation benefits).

Clearly selling agents will often emphasise the gross yields, but if PM fees and all the other expenses are ramped up then the real net yields may not be so flash given the relative risks involved in such a purchase.

From your earlier posts on this also I think that if you already have a substantial metro portfolio, then spreading your exposure by having some properties in mining towns does make some sense, eg. having a portfolio of $4M in metro property and $1M (eg. 500k in South Hedland WA and 500k in Gladstone QLD) in more ''risky'' mining towns (so an 80%/20% split between the two types of property locations).

 

[JIT]

Hi there,

Some research on the incidence of cyclones in Port Hedland WA:

http://www.bom.gov.au/cyclone/history/wa/pthed.shtml

The Pilbara coast experiences more cyclones than any other part of Australia. Since 1910 there have been 49 cyclones that have caused gale-force winds at Port Hedland. On average this equates to about one every two years. About half of these cyclones have an impact equivalent to a category 1 cyclone. Seven of these, Jan. 1939, March 1942, Joan Dec. 1975, Leo March 1977, Dean Feb. 1980, Connie Jan. 1987 and George March 2007 caused very destructive wind gusts in excess of 170 km/h. Along the Pilbara coast the cyclone season runs from mid December to April peaking in February as shown in figure 2 below. The strongest wind gust recorded at Port Hedland during a cyclone is 208 km/h during Joan (1975).

Sure there's insurance, but it's still disruptive isn't it with the potential damage and loss of rent?

This would affect my SANF for sure!

 

[Aaron Sice]

Port Hedland has a number of mines in the area and is a major harbor for exporting goods from the area. Its not going to disappear overnight like some mining towns could.

I certainly would be careful buying a house in a town that just had 1 mine supporting it. Ravensthorpe in South Wa springs to mind, they shut the nickel mine in 2009 for a while and prices crashed.

SPOT ON.

PH exports, not mines.

 

[shuggy]

... 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.

I like the way you think

 

[james_w]

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?

The loan would most likely be more then that so no I would guestimate around 30k and where are you getting 6.3% from?

 

[JIT]

The loan would most likely be more then that so no I would guestimate around 30k and where are you getting 6.3% from?

That's true, there might be LMI to add on to the loan (???30-40k), and other initial costs eg. stamp duty (60k) etc... so maybe add another 100k to the borrowings and take away $6300 from the net income, giving $43,290 - $6300 = $36,990.

6.3% is approximately what's on offer for 3 year fixed rates at present.