Yardney - Don't Invest in Mining Towns

[mattnz]

Definitely time for MY to start looking in his own backyard, rather than worrying about the mining boom.

http://www.macrobusiness.com.au/2011/11/melbourne-housing-supply-goes-ballistic/

 

[Bigtone]

I disagree completely.

It is all about diversity and a balanced portfolio.

One good purchase in a hot spot location can fast track ur portfolio 10 years and allow you to buy many properties in blue chip locations years before u otherwise could have.

it is a way to broad sweeping statement and is complete nonsense

 

[Jaggannath]

"..... 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.

I didn't really read his, I know better than to bother, but you I usually like

I was just teasing about the wall of text... late at night, my eyes are bad enough

 

[Michael Yardney]

There have been some great comments in this thread

Sure I made some broad generalizations.

Clearly some better performing mining towns have outperformed some poorly performing capital city locations.

And there is no shortage of under performing locations in our capital cities - so obviously you can't just invest anywhere or in any property.

While some forum members have done well and will continue to do well in mining towns - that's great to hear - overall I have found them more volatile and more speculative.

 

[Ausprop]

personally I have made way more in 'mining towns' than elsewhere. Consistent mediocre performance is not a good quality in my book - and that's being kind. These days anything that drains the budget is a dog with fleas, be it greek or aussie.

With all that said there are a few limited circumstances when buying an inner city house would make sense

 

[Belbo]

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).

Well JIT, assuming 10% rental growth (which is my target, but which may of course may not eventuate) the yeilds would look as follows -

Property 1: Bought Mar 11 for $930K, real net yeild of 2.1%, with depreciation added, 4.1%.

Property 2: Bought July 11 for 610K, real net yeild of 1.2%, with depreciation added, 2.9%.

The second property was clearly a less attractive buy (a 2-bed strata villa with staggering body corp fees, vs a 4-bed stand-alone property 1), but it fit what I had to spend, let's just say. In hindsight though I think I should have waited longer and saved a deposit adequate to get another like property 1. This would be my advice to others considering buying there (buy as big and as new as you can go - managers' family houses with pools and plenty of land, basically - these won't be easily replicated by new builds).

But, as you helpfully recollect JIT, offsetting negatively-geared Sydney property was my own main imperative in investing in Hedland. Buying the heavily NG'd semi adjoining my Sydney PPOR a few years ago was either enlightened genuis or pure madness, depending on how CG evolves and how an eventual DA for these council heritage-listed properties plays out.

Let me say though, if I had my time over again, I'd avoid buying anything negatively geared like the plague; buy my PPOR last and not first; and invest in mining centres (note: not one-horse mining towns, really!) earlier rather than later. If anything is known apriori, it is that we will only ever live and learn.

 

[JIT]

The second property was clearly a less attractive buy (a 2-bed strata villa with staggering body corp fees, vs a 4-bed stand-alone property 1), but it fit what I had to spend, let's just say. In hindsight though I think I should have waited longer and saved a deposit adequate to get another like property 1. This would be my advice to others considering buying there (buy as big and as new as you can go - managers' family houses with pools and plenty of land, basically - these won't be easily replicated by new builds).

...

Let me say though, if I had my time over again, I'd avoid buying anything negatively geared like the plague; buy my PPOR last and not first; and invest in mining centres (note: not one-horse mining towns, really!) earlier rather than later. If anything is known apriori, it is that we will only ever live and learn.

Good advice there Belbo.

I agree, a big 4 bed house and newer is better, avoiding body corporate fees (especially for interstate buyers as you don't have to fly up for the meetings each year) and lower maintenance expenses, and catering to executives/managers.

 

[Peter Parker]

There's mining towns and there's mining towns.

Some have been around for 100 years, have diverse industries, established services and populations in the tens of thousands.

Others sprung up faster, are less diverse, have few services and have just hundreds of people.


And the properties in them vary. Some cost more than capital city prices. I wouldn't touch them either.

But others (when and where bought) cost a third of city prices but got about the same rents.

Although if you do reckon there's the opportunity to sell at a significant profit, I wouldn't necessarily turn that down, especially if you've identified areas of value to buy in and it's the same or lower risk.

For a while Melbourne outer suburbs looked good value when you compared established home prices with facilities available, vacant land costs and distance from the CBD.

The likes of Wakelin, Yardney & Co didn't see this value and their clients may have been poorer as a result (or are at least suffering heavier cashflow losses than is necessary to hold a portfolio of a given size).

I am not saying that mining towns are good value or not, and circumstances vary by town.

I too share a wariness of tiny populations, limited services, vacancy risks, expensive (monopoly) tradies and prices higher than capital cities.

But given that Wakelin, Yardney & Co have little record of seeing value outside their own patches, yet claim value in low yield areas with high holding costs (sorry, but to me it's like looking at abstract art - I don't see it), I'd also be reluctant to take their word as gospel.

 

[sash]

Great....Michael..would you care to share where you would be buying then??

Would be particularly interested to see if you are recommending the inner south eastern suburbs of Melbourne...given that 99% of property experts are saying not to touch that part of Melbourne.

Please do share!!

There have been some great comments in this thread

Sure I made some broad generalizations.

Clearly some better performing mining towns have outperformed some poorly performing capital city locations.

And there is no shortage of under performing locations in our capital cities - so obviously you can't just invest anywhere or in any property.

While some forum members have done well and will continue to do well in mining towns - that's great to hear - overall I have found them more volatile and more speculative.

Amen to that Spiderman.....

There's mining towns and there's mining towns.

Some have been around for 100 years, have diverse industries, established services and populations in the tens of thousands.

Others sprung up faster, are less diverse, have few services and have just hundreds of people.


And the properties in them vary. Some cost more than capital city prices. I wouldn't touch them either.

But others (when and where bought) cost a third of city prices but got about the same rents.

Although if you do reckon there's the opportunity to sell at a significant profit, I wouldn't necessarily turn that down, especially if you've identified areas of value to buy in and it's the same or lower risk.

For a while Melbourne outer suburbs looked good value when you compared established home prices with facilities available, vacant land costs and distance from the CBD.

The likes of Wakelin, Yardney & Co didn't see this value and their clients may have been poorer as a result (or are at least suffering heavier cashflow losses than is necessary to hold a portfolio of a given size).

I am not saying that mining towns are good value or not, and circumstances vary by town.

I too share a wariness of tiny populations, limited services, vacancy risks, expensive (monopoly) tradies and prices higher than capital cities.

But given that Wakelin, Yardney & Co have little record of seeing value outside their own patches, yet claim value in low yield areas with high holding costs (sorry, but to me it's like looking at abstract art - I don't see it), I'd also be reluctant to take their word as gospel.

 

[Seabreeze]

What's a mining town? Gladstone? Karratha? Hedland? The Hunter? Latrobe? Kalgoorlie? Onslow? Broken Hill? Mt Isa? Anywhere near Olympic Dam? Anywhere in the Surat Basin?

Some of the comments around this show a massive lack of understanding on resource industry issues such as industry diversity, commodity price certainty, volume certainty, resource certainty, etc etc etc. Just for one example oil and gas projects often have price and volume certainty for 15 years. These days iron ore prices and volumes are getting reviewed every month. A bit of a difference there... to take just one. Not to mention the number of mines serviced by a particular centre or their comparative cost of production compared to their global competitors. The lowest short run marginal cost mines will be the last to stop production in any downturn...

These towns encompass a multitude of real industries and enterprises where real people provide real commodities of real value. Properties are available at high yields rented to profitable and responsible companies, for whom paying the rent isn't a question and there is next to no limit on the amounts they will pay to house their workforce. Accommodation is a fly on the bum of their operating expenses.

Versus

Melbourne. Where financial engineers go to drink lattes. Low yields and often questionable tenants.

In a world where the abilities of the financial engineers are likely to be of lower value compared to those who deliver real commodities, I know where I won't be investing.

Disclaimer: The author owns properties in "mining towns" (whatever that means) and has been very happy with their performance.

 

[sash]

Could not agree more......

Melbourne is also home to questionable property spruikers....I'll let you digest that one....some of them are in business and some aren't any more!!

Melbourne. Where financial engineers go to drink lattes. Low yields and often questionable tenants.

In a world where the abilities of the financial engineers are likely to be of lower value compared to those who deliver real commodities, I know where I won't be investing.

Disclaimer: The author owns properties in "mining towns" (whatever that means) and has been very happy with their performance.

 

[knightm]

There have been some great comments in this thread

Sure I made some broad generalizations.

Clearly some better performing mining towns have outperformed some poorly performing capital city locations.

And there is no shortage of under performing locations in our capital cities - so obviously you can't just invest anywhere or in any property.

While some forum members have done well and will continue to do well in mining towns - that's great to hear - overall I have found them more volatile and more speculative.

I appreciate the face that you are willing to come on the forum and clarify your statements.

I understand the need for a "property expert" in your shoes both to preach the relative safety (for those less educated) of capital cities in preference to mining towns generally and also to point in the direction of your own products. This forum is full of independent minds who want to genuinely learn their craft and make the most money possible from ips, not just buy something because they are told its a good idea.

The problem I have is the silence on certain topics like Melbourne, which has been raised by others as speaking volumes. If you were willing to come out and say (in general terms) "Melbourne is overpriced - don't buy in Melbourne right now" when it hits the top of its cycle then I for one would more interested in the products for sale.

 

[Dazz]

Sure I made some broad generalizations....

While some forum members have done well and will continue to do well in mining towns - that's great to hear - overall I have found them more volatile and more speculative.

I don't think you are either qualified nor experienced enough to actually comment on this subject in any authoritative manner. You're well out of your depth, as Seabreeze alluded to.

 

[JIT]

What's a mining town? Gladstone? Karratha? Hedland? The Hunter? Latrobe? Kalgoorlie? Onslow? Broken Hill? Mt Isa? Anywhere near Olympic Dam? Anywhere in the Surat Basin?...

Some of the comments around this show a massive lack of understanding...

...

Disclaimer: The author owns properties in "mining towns" (whatever that means) and has been very happy with their performance.

Seebreaze,

You're right, there is a lot of lack of understanding on this thread (myself included), but hopefully through some of the posts here we can all get a bit more enlightened...

Re. what is a mining town?

I don't really know... what do you consider a good mining town to invest in and which have you invested in?

What were your reasonings for investing in those as opposed to other mining towns?

What are your thoughts on Port/South Hedland and Gladstone?

These seem to have the biggest amount of spending committed to them ($60-80 billion according to one of the property mags I read recently).

Thanks.

 

[knightm]

Seebreaze,

what is a mining town?

I don't really know...
Thanks.

Me either.

I own in gladstone. I THINK its not a mining town. Its a diversified heavy industry and port town with processing facilities and exposure to the mines to the west.

I own in andamooka. Its an opal mining town that happens to be down the road from roxby downs which is a copper(and other things) mining town. There is not a lot going for this area if you subtract the primary mine. But with the mine and its upcomng major expansion I would argue there is a lot going for it.

I used to own in kalgoorlie - a gold mining town that has been around for a long time and has its own history and culture. I suspect it will still be around when the mine is less active but i don't imagine the prices of real estate will boom if that happens.

I want to own in lots of other places that have mines, and some that dont. Are they all mining towns? I don't know.

 

[Seabreeze]

Hedland is a gateway for many, many iron ore mines (and a bit of salt). One, two or three mines falling off the wagon re: resource availability would have little to no effect on it. There are massive expansions in play both at the port and mines - just look at the size of the outer harbour development. There are multiple ports, industries and railways. The BHP mines that feed it are some of the lowest cost producers in the world, thanks to their ore quality. FMG have a higher cost of production and much higher corporate leverage so would drop off first. Global iron ore demand and prices would have to fall a very long way to take most of these mines out of production. There are also multiple issues with increasing the supply of permanent accommodation - it can't be done cheaply. But there's high entry prices and high prices for everything else. You don't get something for nothing... but the yields still put money in your pocket.

Gladstone has massive projects underway and has a very well diversified industry base including hydrocarbon industries with secure cashflows (price and volume) for the next 15-20 years at a minimum. There's a massive price differential between east Australian gas prices and global gas prices and Gladstone is the avenue for oil and gas companies to make a lot of money out of that. Its future is very bright. But on the permanent accommodation side, there is a much higher capacity for new supply to be brought on cheaply, which will keep a lid on prices and rents. Nice for developers though! Yields aren't that flash either, at least on the resi side - you don't get something for nothing there either.

I have no idea whether I would buy property in either location right now. I am not in a position to safely leverage any further at the moment so I haven't taken a detailed look at either location. But it's the detail on each location that either makes it or breaks it. So in reality there's next to nothing that would be of any use to anybody in what I have said above. My only message is don't listen to silly generalisations. Do your own detailed research if you actually want to make money. Yes it's hard work but I haven't seen any short cuts to the process that have worked out yet.

 

[Michael Yardney]

I appreciate the face that you are willing to come on the forum and clarify your statements.

I understand the need for a "property expert" in your shoes both to preach the relative safety (for those less educated) of capital cities in preference to mining towns generally and also to point in the direction of your own products. This forum is full of independent minds who want to genuinely learn their craft and make the most money possible from ips, not just buy something because they are told its a good idea.

The problem I have is the silence on certain topics like Melbourne, which has been raised by others as speaking volumes. If you were willing to come out and say (in general terms) "Melbourne is overpriced - don't buy in Melbourne right now" when it hits the top of its cycle then I for one would more interested in the products for sale.

I haven't been silent on the topic of Melbourne. If you came to my seminars or were one of our clients you'd know exactly what I think.

However I've been silent on this forum because certain people who may not agree with my views on property, come out with comments about my weight etc. These comments are not really necessary are they?

Let's stick to discussing property rather than my looks.

Why I posted again today was because someone sent me a private message and wanted my thoughts. I'm happy to give my thoughts and I'm interested to hear your discussion - but let's play the ball not the man.

Having said that I've said publicly that the Melbourne market topped out in March last year.

If you've been following my blogs you'd know that I'm concerned about a significant oversupply of inner Melbourne CBD properties that will come on stream over the next 2 years.

I'm also concerned about an oversupply of new house and land packages in Melbourne's outer suburbs - particularity in the West.

I clearly recognise that the overall Melbourne boomed for a few years and got ahead of itself and properties at the upper end of the market have dropped around 10% (but these were never investment grade properties) Middle ring properties have fallen by close to 5% from their peak.

Lower end properties have not fallen as much in value (but this type of property tends not to fluctuate in value as much.

If you've read any of my work I've never suggested properties go up in a straight line. I learned all about the property cycle in a hard way in the early 1980's. Melbourne is going through the slump stage of it's cycle

Remember, as we have no properties for sale I have no vested interest recommending a particular area. And I have significant property assets in the suburbs I recommend to clients - I put my money where my mouth is.

If you've been to my seminars you'd know that for the last few years I have been recommending properties in Sydney's inner West and selected Eastern suburbs and those who've bought the right properties there have had significant capital growth and great rent returns

 

[mattnz]

Thanks for clarifying Michael. You are a class act and treat others with respect, we should provide the same courtesy to you.

 

[JIT]

Hi all,

I didn't for intend this thread to attack a particular person or their views (which are already well known to most) or business, but to generate an interesting and constructive discussion... thanks for the intelligent postings so far...

 

[Ian (WA)]

Evening All,

I've held off further contribution to this thread in order to wait on the thoughts of others. I'd like to put some real context to my previous ramble.

As some of you may well know from my previous posts on Karratha, I am not totally bullish on resi properties in such towns. My view includes Hedland, Broome, Moranbah, Gladstone, Roxby Downs, Kununurra, Townsville or Bathurst and scores of others. But I will stand up and say that if you do some basic quality research and try to understand each of these micro economies, there are still ample opportunities to do very well out of them.

I am extremely satisfied & confident in the long term viability and financials relating to the 3 dwellings we do have in Karratha. They were established with a very specific target and goal in mind.

Way back in 1998 there were constant rumblings & rumour of expansions and construction coming to Karratha. Blind Freddy could see the advent of Hammersley Iron (RIO) expanding Port Operations & throughput as well as Woodside gearing up to build LNG4 & 5 (with at that time, a possibility of 6 & 7)......but Woodsides' 100% exposure with Pluto & now Browse has seen them tack away from a NWS JVP approach to 6 & 7 and focus on their own back yard without Shell, BHP, BP, Chevron & MIMI as JVPs , but I digress.

At the time, a number of colleagues were divesting some of their properties feeling that LNG4 was doubtful and due also to the Dampier / Karratha real estate market having just had a run of some healthy CGs & Yields, they felt that things would take a turn for the worse.......and they did......for a short period of time, so a few guys sold up.

In a very similar fashion to "Big Tone" and I think "Rooster" recounting the roller-coaster days of investing in Gladstone not that very long ago, Karratha did likewise. Woodside temporarily shelved LNG4; the towns' population dropped from 8000 permanent to approx 5000 over about twelve months or so. Some small businesses packed up and headed elsewhere, but this exodus was very short lived.

The thing to remember here is to keep the dollar values of the day in perspective. We moved to Ktha in 1996 when I could buy a 600 sqm block for $27K and build a 4x2 for the huuuuuge sum of $225K - $250K........and it was huge because I had only just built a well fitted out 3x2 in Adelaide on 450sqm for $117K (incl land). So $250K out back of bum$%#K was obscene I can tell you..........just like $1.3M out back of bum$%#K is now.

Back then, to buy an old State house (15 yrs old - chocolate brick) would set you back $265K or so, but you could rent it out for $420 - $440/wk. Sensational money at the time. Metro Perth for a similar low end property you would pay $170/wk rent.

Anyway, based on heap of industry news sources, WA political machinations and my feel for what was starting to happen in Perth metro with a huge influx of South African & English workers there was a very clear groundswell under way. So in 2004, while some guys didn't feel they wanted to hang on for further gains & yields, I couldn't get in quick enough.

We built these dwellings for the Construction Workforce market and predominantly FIFO personnel (singles or couples). Turnkey fully kitted out $317K and expected rent of around $575-$600/wk leased to first company to come along basically. As it turned out, Landcorp took longer than expected to release titles and very wet summer delayed building so we were set back about 9 months, which worked out OK because we sat on 2 x $5000 deposits and watched everything sky rocket.

By time we got the villas to market I had leases in place with Woodside for 2yrs with 2yr options at $1200/wk each. We built a more high spec 2 x 2 in 2009 also leased to Woodside at $1300/wk. All three properties are still with Woodside and I have kept the rent capped at $1300 to maintain our ongoing business relationship, but I know full well that I could get $1400/wk easily once or if Woodside says times up. Conservative market vals on them today would be $715K each for the tin sheds and $740K for the newer brick place. So thats all in the space of 7 years.

Will the Ktha CG & yields continue upwards???......maybe, maybe not....but they definitely won't crash through the floor in a hurry.

Since then the WA Govt has thrown its' fiscal support behind the drive to develop further all WA regional enclaves into the future. This coupled with all the peripheral industry investment in WAs regions provides a level of comfort too. I would think the Ravensthorpe BHP tragedy won't happen again any time soon (but there's a lot of in house BHP asset write down stuff went on there - all was not as it seemed and it was opportune for that company to walk away from the asset when it did).

The goal, I spoke of before was to utilise the massive cash flows from these Ktha properties to buy a knock down / develop property in suburban Adelaide upon which we are now building 3 stand alone, two storey town houses for the long term urban capital gain and in time, positive rent returns too. We'll keep the Ktha cash cows to assist further ventures......this time commercial development is crying out for us 'elsewhere'.

I have for a couple of years now urged people tread warily WRT investing in high end dwellings in Karratha (and the same can be said for Hedland et al) because of some of the genuine fears people have alluded to in posts within this thread, but as I see in a post 'Seabreeze' has just submitted, if you make the effort to understand these individual markets & economies you can do very well, but you need to look deeper with your research than rely on the crud dished up in YIP magazine, I mean some of the bile in that magazine is actually embarrassing to read.....I don't know how they research their info other than 'Google' but I don't think i've read a totally factual article on regional locations ever in that magazine. I cringe when I continually see error after error in their supposedly researched overviews which are in essence huge barrows of toss dross put together by office bound meerkats and plonkers........it is utter, utter garbage, but it's still porn to me.

Would I buy In Ktha or Hedland now? No, because I can see sensational opportunities elsewhere round the country which although they might not provide the exciting results of our investments in Ktha, these new interests stand to do very, very well in their own right and even better in a SMSF environment. Yes we're still looking at an evil "mining town' (sorry Seabreeze, couldn't resist....I think it is a term left over from a 1940 Gene Autrey cowboy fillum about the Klondyke) but not at residential property.

So the game changes, our focus changes and our target market changes.......make sure you do the research, spread the risk, but whatever you do, make sure you take a risk or you'll forever have your thumb stuck up your bum hoping for a return on your Docklands apartment.

'Night!