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Investing In A Mining Region: Risky Or Resourceful?


There are many decisions to be made when investing in property, but perhaps the most difficult is deciding where to invest. Whether you opt for a popular seaside location, capital city or regional centre, all property investments contain an inherent degree of risk. In this edition of Property Insight, we shine the torch on mining regions and what to watch out for if you’re considering investing in a resource-rich area.

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Australia’s two-speed economy and the property market

Australia is experiencing a two-speed economy, which essentially means that various economic sectors are performing differently. In Australia today, mining-related industries are flourishing while manufacturing and domestic sectors, such as retail, are suffering.


As mining regions around Australia require an increased workforce, property markets in these areas are subsequently affected and we have seen a strong increase in housing demand. And while it’s true there are large numbers of FIFO (fly-in/fly-out) workers in these regions, there are also many who choose to live where they work. As a result, some areas, particularly in Queensland and Western Australia where the resource surge is most prominent, are starting to experience a massive housing shortfall. This is creating a ripe environment for property investors. However, as with any property market there are some rules to follow to minimise your exposure to risk.


‘Boom to bust’

You may have heard this term used in relation to property investment and mining towns. “Boom to bust” is essentially an investor’s worst nightmare; the term refers to a property market that experiences a substantial economic surge from the establishment of one or several mines. This leads to a tightening in the local property market due to a spike in demand, and increased rental returns and capital growth. This is the ‘boom’ phase.


But then the mining giants move on and their workforce follows, meaning a sudden decrease in tenants. Property investors then find themselves in an oversupplied property market, which leads to diminishing capital growth, high vacancy rates and low rental returns. The worst thing is that this scenario usually happens very quickly; it is known as the ‘bust’ phase.


The causes of a ‘bust’ are many and varied, but some of the main factors that affect a mining region’s continued success relate to fluctuations in foreign exchange rates, the value of specific minerals and the discovery of alternate mineral deposits.


Many commentators agree that Australia’s mining sector is not, in fact, considered to be in a ‘boom’ phase, as this implies short, sharp growth generally followed by a rapid decline. Instead, it is believed Australia’s mining sector is entering a long-term growth phase that will be sustained into the future. Some have gone so far as to refer to the economic growth in Australia’s mining regions as an ‘economic transformation’.


Choose the right location to minimise risk


As with any property investment, location is the single most important factor when it comes to investing in a mining region. If you are hoping to take advantage of Australia’s recent resource surge, there are three core rules to follow to reduce your risk:


1. Avoid locations with a single resource or mine

When mining towns rely on a single resource or mine, there is a higher risk of the resource diminishing or sudden mine closure. Instead, look to regional mining centres with a range of resources. Gladstone, for example, is home to a number of resources including coal, liquefied natural gas and nickel. Diversity is the key, and carefully selecting a location that is resource-rich will minimise your exposure to risk.

2. Steer clear of one-dimensional regions

Most mining towns that have experienced the ‘boom to bust’ scenario are one-dimensional, in that the town is solely reliant on the mine/s for economic growth. Once the resources are exhausted, the mining companies move on, leaving behind them a wake of financially distraught property investors with vacant properties.


Mount Isa in Queensland is an example of a town where the economy is almost entirely reliant on the mines. This is not to say that Mount Isa is a ‘bad investment’, however the property risk is inherently high.


Mining regions that are supported by various industries such as agriculture, tourism, education and manufacturing are much safer options. A region with multiple industries supporting its economy is less volatile; if there is a shift in the mining industry, the impact on an investment property is minimised.


3. Review mining contracts

Mining contract timeframes (completion dates) are of vital importance when selecting a mining region. By following the basic principles of supply and demand and ensuring several long-term mining contracts are in place, you can reduce the risk of a decrease in housing demand. Seek regions with long-term contracts of more than 10 years.


Something to consider when reviewing mining contracts is the configuration of the workforce. Projects usually have two types of workforces, construction and operation. The construction workforce is involved in the development and building of a project or mine; while the operational workforce are required once a project has reached the production phase.


In many cases, once a project is built, the remaining operational workforce can shrink to between 10 and 20 per cent of the initial workers. Bear this in mind when reviewing a prospective location.


For this reason, the best property investment opportunities can be found in developing mining regions that have both established, ongoing contracts (preferably with blue-chip mining companies such as BHP, Rio Tinto or Newcrest) and also new contracts in the pipeline. This shows the potential for future growth and development, proving economic longevity and reducing your risks further.


A careful choice

As with any investment, purchasing property in one of Australia’s mining regions comes with an inbuilt risk factor. However, these growing areas can offer fruitful returns for investors if the location and property are selected with caution.


Above, we have discussed how to choose a location that offers a lower risk. The rules of engagement when selecting a property are the same as with any real-estate market: select a quality property close to core infrastructure. Don’t fall into the trap of thinking mining towns only require basic accommodation far from the town and its facilities; remember that mining executives and well-paid operational staff actually have to live there, and that higher-quality properties attract higher-quality tenants. Do your homework, choose your location and property wisely and you too could take advantage of Australia’s resource surge by investing in a mining region.

 

DISCLAIMER: Whilst the publisher and author believe that the information contained in the publication is based on reliable and researched information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Anyone who intends to use the information as the basis for making financial or business decisions should first obtain advice from a qualified professional person. This article is published on the understanding that neither the publisher nor the author - is responsible for the results of any action taken on the basis of the information published; and is not engaged in rendering legal, accounting, professional or other advice or services. The publisher and author expressly disclaim all liability and responsibility to any reader of this publication as a consequence of anything done, or not done, by a reader relying upon any part of this publication. (C) This article may not be reproduced in full or in part without the specific written consent of Which Property? and the Author.

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