Investors achieve wealth quicker when they buy against the pack
Property investors in the nation’s mining towns have been faced with some negative market reports in recent weeks.
SQM Research reported rental vacancies in mining towns across Western Australia and Queensland had risen over the past 12 months, while the Pilbara Development Commission released its latest quarterly housing market update (based on data from REIWA) observing decreases in the average advertised prices for rentals and properties for sale in Hedland, Karratha and Newman.
Long term investors in these markets will have experienced several cycles over the years and will know that regular market movements and seasonal fluctuations are commonplace; understanding these markets’ unique characteristics and how market data correlates is the key to maximizing returns and minimizing risk.
Mining town markets differ significantly from capital cities. They can turn a full cycle in 12 to 18 months and downturns (lasting from three to 12 months) have occurred regularly over the past decade. In contrast, capital cities generally experience a full market cycle every five to eight years.
During a down cycle, prices and rents in a mining town may roll back 10% to 15% over a six month period providing opportunities for informed investors to take advantage of these short term market changes. Investors can make outstanding capital gains in short periods by purchasing in a slow market and waiting six to 12 months for the upswing – as opposed to waiting for capital growth in the slower capital city cycles. Buying against the pack is often the quickest road to wealth creation and well-researched investors are likely purchasing now in preparation for the next market upswing
Mining towns also typically experience two quiet and two busy quarters each year which can be used to investors’ advantage.
The Christmas period to March produces a larger supply of homes for sale and lease making it an ideal time to buy. The busy period, usually June to October, is generally a result of an increased workforce for new projects awarded in the towns which drives demand for sale and rental stock and creates a sellers’ market.
Looking at the workforce demands on these regional towns, the FIFO populations and their average wages in these towns have never been higher. And despite reports of an industry slow down, there is still significant current infrastructure spend, and plenty more in the pipeline. The government is also committed to transforming these towns into cities through a billion dollar civil infrastructure upgrade.
While recent reports should not be ignored, it is equally important to consider that these towns remain some of the best locations to build property wealth, with the highest yields in the country. Our investor clients continue to average 10% to 13% rental yields from their Pilbara investment properties.
How to Find a Hotspot
Research – The Key to finding positive property hotspots
Research is a critical part of the investment process. To ensure an informed decision is made there are some key areas to focus on when seeking to invest in positively geared property.
Historical growth rates should be investigated over 10 years to ascertain a sustainable growth path, rather than simply looking at the last 12 months, or the most recent quarters. As an example, over the last two quarters Port Hedland’s median house price has dropped 11%. The data over the past 10 years however shows the town has had an uninterrupted annual increase since 2003, growing by 18% over the period. The recent fall is due to seasonal movements and a pause between project developments – when the second phase of development commences this year, prices are expected to continue their steady rise.
Industrial growth & infrastructure investment
A severe housing supply/demand imbalance is most typically seen in smaller towns (populations between 5000 and 30,000) where the effects of industrial growth are greater due to smaller and less diversified industrial profiles. Industrial growth and the infrastructure development that follows can heavily influence population numbers as construction projects bring with them large workforces, increasing demand for accommodation.
Population trend & vacancy rate
The population trend should be examined to determine the sustainability of an increase. If a town’s population shows a historical downward trend then there is likely to be housing over supply which means the arrival of a new workforce will have less impact on demand. A town’s vacancy rate is also an indicator of an over or undersupply of rental stock. A consistent increase in population, such as that seen in the central Queensland industrial hub of Gladstone, suggests that (if new development is constrained) supply will struggle to keep up with demand.
Another factor to consider is whether more housing is in development and what onsite accommodation a construction project may supply to its workforce which will reduce pressure on rental stock.
Corporate tentants / Median wage
At the same time, many workers also have families and those that relocate with them will require proper housing. Construction and mining companies will source often high numbers of rental stock and pay premium rent to ensure they secure accommodation suitable for this portion of its workforce.
A high median income, such as that in Moranbah in central Queensland which is double the national average, is also good indicator that top rents are being paid.
The above information is all available on government websites, REIWA and through property research portals. CPG’s independent expert reports available on its website, are also a good starting point:
Don’t Risk Your Property Through Lack of Insurance
Buying a property (or portfolio of properties) is quite often the biggest investment you’ll make.
The natural disasters our country has faced in recent weeks highlights the importance of protecting your investment with adequate insurance cover.
With this in mind, it was worrying to note in a recent survey conducted by GIO and Reed Construction Data, the number of property owners around the country that are putting their investments at risk by not insuring – or under-insuring – their properties.
According to the survey, an estimated 70% of Australians have insufficient house and contents insurance. The problem is particularly prevalent in Western Australia, South Australia and Queensland.
The survey found Australian homes are under-insured by 20% on average, which means a shortfall of $100,000 on a $500,000 home.
Larger homes, homes built between 1914 and 1949, multi-level properties, those built on steeper land and those built of weatherboard are the most likely to lack the right levels of cover.
So why are we under-insuring? The reality is that many of us are underestimating the cost of repairing or rebuilding our homes and the value of our home contents.
Construction costs have risen sharply over the last decade, particularly in northern Australia where the resources boom is fuelling investment and cyclones are common.
We’re also failing to update our policies following an asset upgrade such as a renovation or the purchase of high value items for the home.
Plus if you rent your property out, you’ll want to consider rental insurance. It’s believed that only a very small proportion of investment properties have some form of rental cover to protect owners against malicious damage to the property, as well as loss of rent.
A bad tenant can cause thousands of dollars damage to a property and may owe several thousand dollars in rent before they can be evicted.
You can find out if you have the right level of cover for your home building and home contents – one of the easiest ways to do this is to use one of the online tools provided by insurers.
Yes, you may find you need to pay more. But if you ask those affected by the floods in Queensland or the bushfires in Victoria, I think they would say it’s worth it.
The Insurance Council of Australia has produced a useful leaflet highlighting tips on how to avoid under-insurance which can be downloaded here.