Michael Bailey Deputy editor

Michael has been a business journalist for 12 years. He has extensive experience editing magazines covering funds management, commercial property and the travel industry. In 2011 he won a Citi Excellence in Financial Journalism award for a BRW cover story on economic indicators.

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Blue sky towns not immune from risks

Published 17 May 2012 05:10, Updated 17 May 2012 14:32

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Blue sky towns not immune from risks

Busted ... Stratospheric rental yields and capital growth bring investors to mining towns – but beware the risks when mines shut down. Photo: Peter Braig

When you’re lucky to be getting a 4 per cent rental yield from a suburban house in an Australian capital city, buying a house in a mining town looks a tempting investment strategy.

The numbers are eye-wateringly attractive. For instance, the Real Estate Institute of Queensland (REIQ) currently records a median rental yield for the Isaac region, around the Bowen Basin “coal bowl”, of 15.3 per cent. The median house price is $578,500 – that’s $79,500 higher than Brisbane – after 10 years of capital growth averaging more than 30 per cent annually for miner’s shacks in the region’s two main towns, Moranbah and Dysart.

The locals whose houses were worth just $50,000 as the new century dawned can scarcely believe their luck, and are taking the opportunity for a sea change.

“People from Moranbah are getting $3000 a week renting out their houses there, then coming to Mackay and using their rental income to cover the mortgage on a home here,’’ REIQ’s Sally Richards has told local press.

Drive-in, drive-out mineworkers relocating to the coast have pushed Mackay’s median house price up 2.4 per cent to $420,000 this past year.

And the twin mining towns of Port Hedland and South Hedland in Western Australia’s iron ore-rich Pilbara region have recorded capital growth that’s almost as impressive – 21 per cent and 23 per cent, respectively. Average rents there are now $2000 a week.

Such heady returns come with big risks, of course, no better illustrated than by BHP Billiton Mitsubishi Alliance’s (BMA’s) decision to close the Norwich Park coal mine in the Bowen Basin last week. Overnight, 1400 people in Dysart lost their jobs – in a town with a permanent population of less than 4000.

Property investors who’d been drawn by Dysart’s decade of massive growth got something of a reprieve – BMA said “99 per cent” of its workers in the town would be offered jobs at the nearby Saraji or Peak Downs mines – however uncertainty in the months leading up to the closure of the loss-making mine had already taken a toll.

“We’ve heard of investors having their houses vacated and not being able to rent them out again,” John Moore, head of property investment broker Forrester Cohen says. The closure of Norwich Park underscores the danger of investing in towns dominated by one industry, or in Dysart’s case only one company, he warns.

Investors in Moranbah have problems of their own, with BHP Billiton refusing to sign any new leases for employees in the town until the rents come down.

Investors are better off sticking to the regional centres, which benefit from mining, but don’t entirely depend on it, the founder of property research group Hotspotting, Terry Ryder, says.

“Mackay houses a lot of the fly-in, fly-out workers for the Bowen Basin, but it’s got export facilities down the road, it’s got sugar, tourism, it’s more diversified.”

At 2.4 per cent last year, Mackay’s capital growth is not as spectacular but rental yields are still well above those to be found in capital cities, Ryder says.

Townsville and Toowoomba are other examples of towns plugged into mining yet with diversified economic bases.

Moore says investing in mining towns requires as much research on the relevant commodities and companies as it does on the housing site itself.

“Watch the ratios of local employees compared with contractors and fly-in, fly-out employees,” he advises. “The higher it is, generally indicates a longer-term investment in the mine by the company, and hence greater longevity.”

Rio Tinto’s investment of $350 million to build worker accommodations in Wickham, south of Karratha in the Pilbara, is a good sign for investors, Ryder says. “It’s a sign they’re in it for the long haul . It’s also cheaper for them to build the housing themselves than pay the rents,” he says.

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