Mining towns back on the radar?

Investing in a mining town could be described as the property equivalent of investing in a high-risk stock. The returns can be significant however, there is also significant downside risk which is why timing and market knowledge is everything.

Now that the Government and the resources sector seem to have come up with an amiable solution to the RSPT a greater level of certainty is likely to improve market conditions in the mining and resource intensive areas. For this reason it may be a good time to consider investing in resource markets.

Commodity prices have taken off again in recent times after a substantial slump during late 2008 and 2009. At their worst, commodity prices fell by -35.3% however today, prices are just -5.2% below their all time high and have increased by 43.0% over the last year.

With commodity prices making a strong resurgence it is clear that demand for commodities is ramping up. Given this, there is likely to be a higher level of demand for Australian mines to pull resources out of the ground at a more rapid pace. That means more workers and more demand for housing in what are generally chronically undersupplied markets.

A number of regions appear to have stronger prospects than others based on current demand for Australian minerals.

The Roebourne LGA in north-west WA includes the townships of Karratha and Dampier. Dampier is a major shipping port for a number of different minerals but primarily iron ore. The region is right n the heart of a major iron ore mining region.

Median house prices within the region peaked at $910,000 in October 2008. During 2009 house prices fell by as much as -9.3% however, today they are just -3.3% below the peak at $880,000. The region is seeing huge demand for iron ore and the scope to extend the existing townships is significantly limited which results in the high house prices. It isn’t just the prospect of growth In house prices which may make investment in this region so attractive, median weekly advertised rents are recorded at $1,575 which suggests an indicative gross rental yield of 9.3%.

The Isaac LGA in Queensland’s Bowen Basin is a region which is well known for being abundant in coal. The Isaac LGA includes the townships of Moranbah, Dysart and Clermont.
Across the region median house prices are recorded at $405,000 and median prices are at their highest ever level despite a slight easing recorded last year. Like iron ore, demand for coal is also surging and the scope to extend many of these townships is also quite limited due to mining leases surrounding the townships. Also similar to the result for Roebourne LGA, Isaac has very impressive indicative gross rental yields which are recorded at 9.0% thanks to current median rents of $700/week.

The Western Downs region of Queensland is not yet a really well established mining or resource area however, it does have strong prospects. Located on the Surat Basin there is a significant amount of investigation being undertaken in the region, specifically for coal seam gas whilst it is already home to number of coal mines. The region is also a long established agricultural region. Western Downs house prices and indicative gross rental yields aren’t as high as some of the other regions we’ve highlighted, yet, but this region may be one of the key emerging resource driven markets likely to move from a low price base.

Median house prices sit at $263,000 and have increased by 9.5% over the last year. Meanwhile, indicative gross rental yields are recorded at 5.6%.

As mentioned at the outset, mining and resource towns are by no means a license to print money. These regions hold inherent risk due to their dependence on what is often a singular commodity. Any prospective investor should make an informed decision and make sure they have done their homework.

Some important things to consider before investing in a mining town include: what commodity is being extracted from the region, where is the demand coming from for these resources, how much supply is there, what scope is there for further residential development in the region and what is the worst case scenario if the mine(‘s) are closed down. Knowledge of any region you are investing in is always imperative but it is an absolute necessity in a mining region.

Tim Lawless is the Director of Property Research at RP Data.