High growth, high returns and high risk

I always preach caution to investors lured by mining towns. They’re the ultimate risk-return conundrum for the mum-and-dad investor.
The considerable appeal of high rental yields and fast capital growth needs to be weighed against the risk of all that collapsing amid a GFC or a reversal of fortunes for a key employer.
The typical package for an investor buying a capital city suburban house in the past 10 years is rental yields around 4 per cent (which means a loss-making investment or, as the industry likes to term it, a negatively-geared one) and capital growth averaging 10 per cent a year.
Outside of the capital cities there are regional locations where capital growth has averaged better than 20 per cent a year over the past decade.
There are also places where you can get double-digit rental returns, delivering an investment that provides weekly income.
Here’s the thing: those high-capital-growth places and those high-rental-return places are the same places.
They’re all mining towns or regional centres which service mining towns.
One of them has averaged 33 per cent in annual growth in its median house price. It also can provide rental returns around 15 per cent.
This extraordinary place is Moranbah. It’s in the Bowen Basin, Australia’s greatest coal province, in central Queensland.
No one can say for sure what its population is, because so many people who work there don’t live there – or live there temporarily as fly-in-fly-out or drive-in-drive-out workers.
The permanent residential population is around 8,000 but there could be double that number in the town at any point in the working week.
Ten years ago you could have bought the typical Moranbah house for under $50,000. Today you pay twelve times as much.
As the town’s importance as a mining hub expanded, there was exponential price growth from 2003 to 2007. Growth stopped around the onset of the GFC, which put a dampener on the resources sector for a couple of years.
Unlike other mining towns, however, Moranbah did not suffer any noticeable loss of values – just a short-term pause in the growth. It resumed strongly last year and now appears headed for the stratosphere again.
Australian Property Monitors records a long-term growth average of 33 per cent a year, which means values doubling every two years or so.
The only other markets in Australia that come close to that performance are Dysart, another coal mining town in the Bowen Basin, and Port Hedland in Western Australia.
The other extraordinary thing about Moranbah is that rents have grown recently at an even faster pace than prices.
The Real Estate Institute of Queensland records a median rental yield for the Isaac Region (of which Moranbah is the key mining town) of 15.3 per cent. In 30 years of writing about Australian residential property I haven’t seen a number like that.
Properties currently for sale in Moranbah include a three-bedroom house tenanted at $2,000 per week and with an asking price of $820,000, which equates to a 13 per cent yield. Another rented at $1,900 per week had an asking price of $789,000, which equates to 12.5 per cent.
A four-bedroom house with an asking price of $920,000 has a two-year company lease in place at $3,100 per week. That’s $161,200 in annual rent and a yield of 17.5 per cent.
There are many others with similar numbers.
While the median price for Moranbah is now around $600,000, I can’t find anything for sale at the moment for less than $750,000 – and we’re not talking about palatial modern homes, in most cases.
This is why such investments are so risky. When you’re paying $800,000 in a small country town for a house that might fetch $350,000 in an outer Brisbane suburb, you known the values are at best tenuous.
They depend on the resources sector continuing to grow and also depend on the current lack of housing supply in Moranbah. Both situations could change in the future.
I do believe the current upturn in the resources sector has long-term horizons because the industrialization of new growth nations like India and China is only just beginning. And that’s where the demand for Bowen Basin coal originates.
Certainly BHP Billiton thinks so, moving forward with the $4 billion Caval Ridge project, while Anglo American is tipping $1.7 billion into the Grosvenor project.
These and other projects are forecast to bring another 10,000 FIFO workers into Moranbah, effectively doubling its population.
But be aware of the risks. BHP showed at Ravensthorpe in Western Australia, where it closed a $2 billion mine only months after completing its construction at a cost of 1,800 jobs, that it’s prepared to take ruthless action if the world economic climate turns south.
By Terry Ryder, 22nd March 2012