The publication this week by SQM Research of vacancy rate trends in mining-related cities and towns is a timely reminder to investors to check out supply-demand issues before buying.
The figures show that, in many important regional locations around Australia, oversupply is the issue, rather than the much touted “chronic housing shortage crisis” – just as it is for inner city unit markets in several capital cities.
Many investors consider demand factors, such as population growth, but forget to check out the level of supply in the market.
It’s difficult to imagine a place with more compelling demand factors than Gladstone, with massive levels of infrastructure development under way. Yet the Central Queensland city has a vacancy rate of 11%, according to Louis Christopher’s figures. Developers seeking to profit from the LNG boom went overboard and the Gladstone market has been sinking for the past 12-18 months.
Nearby Mackay has also suffered from an upsurge in new developer product and now has a vacancy rate around 7%.
Some markets have had a double whammy, with an increase in supply coinciding with a drop in demand. There is particularly true of Queensland coal mining towns, such as Dysart, Moranbah, Blackwater, Clermont and Capella.
Moranbah once ranked as the growth star of Australian real estate. In early 2012, its long-term capital growth rate (average annual growth in its median house price over the previous 10 years) was above 33% and its median weekly rent was $1,200. Before the end of 2012 its median house price would reach $750,000 – but, by then, rents were already falling and prices were soon to follow.
The demise of the Moranbah market was as spectacular as its rise. In the past 12 months its median price has dropped 42% to $435,000 and the median rent is now $520 per week. Median yields, which were 12% not so long ago, are now around 5%.
All manner of woes hit Moranbah. BHP and its partners refused to pay the astronomical rents being asked by investor landlords. Existing projects were downsized and new projects were deferred or progressed with 100% fly-in, fly-out workforces. And new dwelling supply hit the market.
Similar events have happened in other mining-related markets across Australia. In Roxby Downs in South Australia, where many investors bought in anticipation of a $30 billion expansion of the Olympic Dam mine, the vacancy rate has risen to 10% in the wake of BHP’s decision to defer the project.
Investors need to be aware of these issues because marketing companies continue to pump out promotional material for new developer product at high prices in mining-related markets that are in sharp decline.
One I received this week was touting two-bedroom units in Port Hedland for $715,000, claiming they would rent for $1,400 per week, provide a 10.2% return and earn up to $22,000 per year in profit – thereby providing the “perfect investment opportunity” for first-time investors.
The promo failed to mention that Port Hedland’s vacancy rate is now above 6%, that prices have dropped by up to 10% in the past 12 months and typical yields are now around 7% (and falling).
Similar propaganda comes in every week for highly-priced new product in Karratha and Newman (where the median price dropped from $850,000 to $450,000 in six months).
This is life in mining-impacted property markets. Many of the locations I’ve mentioned will recover, once the resources sector has finished the current phase of cost-cutting.
One tactic commonly being used is to shut down a mining project, sack all staff – and then, perhaps six months later, re-hire at lower pay rates and re-start the mining project. One town impacted by that is Collinsville in Queensland where, according to SQM Research data, the vacancy rate is currently 36%.
Moranbah, Newman and others will recover as there are big projects in advanced stages of planning. But in the short-term they are dangerous places to buy. Even investors who are happy to have some risk in their portfolio would be wise to wait and watch until the current phase is done and dusted.
By Terry Ryder
Thursday, 30 January 2014
Terry Ryder is the founder of hotspotting.com.au.