Investing in mining towns: is it the right strategy for you?
With a number of regional areas across WA experiencing early signs of price growth following an influx of activity in the State’s resources sector, investors are once again turning their attention towards mining towns and the potentially lucrative investment opportunities these areas offer. With the prospect of low entry points, high yields and large capital gains in a short-time frame, these areas understandably hold high appeal amongst investors. After all, you only have to look at history to understand the benefits they can bring.
The resources boom saw Australia’s mining regions take off in the mid-2000s, with this rising activity stimulating the local economy and fuelling record levels of growth in a number of rural towns – something which in turn drove property and rental prices in the surrounding areas to record highs. However, whilst these markets can bring great opportunities for the astute investor, this reward doesn’t come without risk, and buyers also need to be aware of the potential dangers of getting this strategy wrong.
What are the risks?
Lack of economic diversity
One of the biggest risks with investing in mining towns is that are in most cases heavily reliant on the resources industry. Whilst this stands the property market in good stead when the industry is performing well, it also essentially places the entire local economy at risk when it isn’t, and can be problematic to investors for a number of reasons.
A large proportion of the population in these mining towns will be temporary workers who are employed within the industry itself. This influx of workers can create significant demand for rental accommodation during periods of increased activity, in turn presenting lucrative opportunities for investors to take advantage of high rental yields and market growth. However, this same factor can also have detrimental effects on the local property market in the event that employment opportunities decrease due to mine closures or a reduction in labour requirements. With many people living in the area for work, these events can cause a dramatic decrease in the local population, in turn removing a significant source of demand from the local market.
Tip: If you’re looking to invest in a mining town, you may want to consider looking towards areas with a more diversified economy. Towns that have diversified into other industries (i.e. tourism) generally offer a more stable resident base, and won’t be as reliant on the ebbs and flows of a single industry. This will help mitigate your investment risk should one of these industries experience a downturn.
Getting the timing wrong
Given the nature of demand in many regional areas, mining towns tend to be fast moving markets. This means that investors generally won’t experience the same long-term growth as they might from other forms of property investment. Instead, their success will largely be determined by their ability to predict when to enter and exit the market – a decision that can be incredibly costly to get wrong (but equally rewarding to get right).
Take Port Hedland as an example – an investor buying before the mining boom in the mid-2000s might have seen property prices increase more than three-fold to $1.2 million by 2012. However, an investor who bought at the peak would have likely seen their property drop by the same amount (or more), and could be waiting years before they recoup this loss.
Tip: Typically, labour requirements will be far higher when a mining project is under construction, with fewer employees needed to operate sites once the project moves into production phase. This reduction in employment opportunities can result in a significant drop in demand within the local property market. By closely monitoring these projects, you can better gauge when this demand might fluctuate and time your exit from the market accordingly.
Another risk to be aware of when investing in mining towns is the impact of wider company decisions. As property prices and rents rise, there is always the risk that companies will seek alternative and more economical ways to accommodate their workforce. Rio Tinto is a prime example of this with its FIFO camps in Dampier and Pilbara, which have the capacity to house hundreds of local workers. Company decisions such as this can have crucial implications on property prices in the local area by removing a significant source of rental demand from the market.
Tip: As with individual projects, it’s equally important to monitor the movements of mining companies and any decisions they are making that might impact the local property market. Conducting thorough research into mining projects and talking to local sales agents is a great way to gain on-the-ground insights in regards to rental demand and other market trends, which can help you identify risks or events that might stifle demand in the surrounding area.
Is this the right investment strategy for you?
The number one factor you will need to consider in weighing up whether investing in mining towns is the right strategy for you is your own propensity for risk. Whilst investing in regional areas can offer significant returns with the right research and strategy in place, the dangers involved are also considerably higher than other forms of investment. As such, this strategy won’t be suitable for every investor.
If you are considering investing in mining towns, engaging a professional buyer’s agent could put you at a huge advantage when it comes to researching the local market, identifying the right area for investment and, most importantly, minimising the risks involved.
To speak to our property consultants about this strategy, contact our buyer’s agents for an obligation-free consultation.