homesales 2015 mining_report

Find all the tools you need to make an educated investment decision with homesales.com.au

Is it time to fly in or out of Australia’s mining towns?

1.Hometrack Australia, Growth Decline Report, June 2015. 2. SQM Research, National Vacancy Rate Report, June 14 – June 15.

3. http://www.bhpbilliton.com/home/investors/news/Pages/Articles/Appin-Area-9-Project-Approval.aspx

^ Median values are calculated as the median valuation of properties in the area, using the Hometrack automated valuation model (AVM). Median value gives a more accurate read and is less volatile than median sale price series, which typically make little or no adjustment for the mix of properties that are transacted each period.

IS IT TIME TO FLY IN OR OUT OF AUSTRALIA’S MINING TOWNS?1

Contents

Introduction �� 2

Taking a look back �� 2

Mining Towns: Winners & Losers in 2015 �� 3

Reducing risk and knowing when to bow out � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �7

Getting the best bang for your buck �� 11

Summary �� 12

Information provided in this document is general in nature and does not constitute financial advice. Information in this document can change without notice, and homesales.com.au does not guarantee the accuracy of information in the document, including information provided by third parties. Whilst homesales.com.au has used reasonable endeavours to ensure the accuracy of information in this document, you must not rely on this information to make a financial or investment decision. Before making an investment or financial decision, it is recommended to consult an independent financial adviser to take into account your particular investment objectives, financial situation and individual needs. Homesales.com.au does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Any forward looking statements in this presentation are not guarantees or predictions of future performance or the returns you may receive and involve risks and uncertainties and other factors. There is no assurance that actual outcomes will not differ materially from these forward looking statements. References to “homesales.com.au” shall mean carsales.com Limited, its directors, officers, employees, agents and contractors.





Australia’s housing market is driven predominantly

by investors and the construction of new units and

apartments, and compared to the rest of the world,

it is continuing to experience staggering growth�

However, when it comes to property investment,

the traditionally strong returns from mining towns

and regions have been feeling the effects of the

end of the mining boom for the last couple of years�

Real house prices, % change between Q1 2006 and Q4 2014

Source: The Economist (Australian Bureau of Statistics; OECD)

Over the past 10 years mining towns presented the

ultimate risk-return conundrum for property investors�

Whilst mining areas have had the highest capital

growth rates in Australia, as well as the highest

rental returns, they are also the riskiest options for

property investors; with single-industry economies

and often single-employer economies, and as

the country is now discovering, these areas are

vulnerable to economic factors outside investors’

control such as fluctuations (mainly down) in the

iron ore price� Many investors found out too late

that buying an investment property in a mining

town is not just about looking at the housing market

but also the global commodities market�

The end of Australia’s mining boom is having

notable impacts on all sections of the economy�

The risks and rewards of investing in property in

mining areas have been widely documented and

discussed in the media, but does this mean that

property investors should steer clear of mining areas

for good? Are there still good returns to be made in

Australia’s post-boom mining sector?

Data from homesales�com�au and Hometrack

Australia shows that Australia’s mining areas have

had mixed results over recent years�

Introduction

Taking a look back

Autralia

Ireland

Netherlands

Spain

UnitedStates

-40 -20 0 20 40





Appin on the ‘watch-list’

While investors have mainly been buying for capital

growth, there have been some major winners

and losers in mining towns over the past year� In

terms of annual growth, the suburb of Appin, NSW,

approximately 70 km south-west of Sydney, has

recorded strong growth for houses with an average

of 23�92%1 increase over the past 12 months, and a

low vacancy rate average of 1�5%2 in 2015�

In 2012 the BHP owned Illawarra Coal Mine in Appin

announced an investment of $833 million to open

a new mine known as “Area 9”� Whilst the Appin

mine has been in operation since 1962, the “Area

9” project is currently sitting at over 80% completion

and according to BHP3 is on track for full completion

in 2016� This coal mine accounts for over 2,200

employee and contractual jobs in the region�

Rhett Dallwitz, general manager of homesales�com�au

says “Looking deeper into the house price growth

trends for Appin, it still represents good value, strong

employment with low vacancy rates, only a 30

minute drive to Wollongong and 17 minute drive to

Campbelltown� We put Appin and the surrounding

suburbs on the ‘watch list’ as we believe it is still

likely to provide some good growth opportunities for

investors looking to invest in a mining area”�

Looking deeper into the house price growth trends for Appin, it still represents good value, strong employment with low vacancy rates…

“

Mining suburbs in decline – 12 months

Suburb Property Type

Value (May 14^)

Value (May 15^)

% Change YoY

Mining Classification

Appin, NSW House $521,871 $646,702 23�92% Mining - Metals/

Gems/Other

Muswellbrook, NSW Unit $209,358 $280,265 33�87% Mining -

Iron Ore/Coal

Mining Towns: Winners & Losers in 2015

”

1. Hometrack Australia, Growth Decline Report, June 2015. 2. SQM Research, National Vacancy Rate Report, June 14 – June 15. 3. http://www.bhpbilliton.com/home/investors/news/Pages/Articles/Appin-Area-9-Project-Approval.aspx


Source: Hometrack Australia, Mining Town Growth/Decline Report, June 2015.





Moranbah: sell up or prepare for a loss

However, with the highs come the lows� Moranbah,

the former home to the Peak Downs Mine in the

Bowen Basin, is now proving to be an area of

largest capital loss for Australian investors of houses

(over 42%4), since transitioning to a 100% fly-in fly-out

(FIFO) mining town in early 2015� This recent decline

in capital growth shows that there is, more often

than not, a direct link between prosperity and

down times that mining brings to a community�

Similarly for investors in Ooralea, Bakers Creek, QLD

(west of Mackay), another iron ore mining town,

investors are experiencing losses in capital of more

than 43%5�

“Moranbah is a clear example that investors need to

have either an exit strategy or a diverse investment

property portfolio� With the current vacancy rate

around 7%5 for those ‘mum and dad’ or first time

investors, there will be very little choice – sell the

property with a potential loss or be prepared to

accept a lower rental income” Rhett Dallwitz said�

Appin NSW (Source: Google Maps) Muswellbrook NSW (Source: Google Maps)

4. Hometrack Australia, Growth Decline Report, June 2015. 5. SQM Research, National Vacancy Rate Report, June 14 – June 15.


Mining suburbs in decline – 12 months

Suburb Property Type

Value (May 14^)

Value (May 15^)

% Change YoY

Mining Classification

Moranbah, QLD House $462,849 $267,433 -42�22% Mining - Iron Ore/Coal

Ooralea - Bakers Creek Unit $307,594 $173,928 -43�45% Mining -

Iron Ore/Coal

Source: Hometrack Australia, Mining Town Growth/Decline Report, June 2015.





Moranbah QLD (Source: Google Maps) Ooralea – Bakers, QLD Creek (Source: Google Maps)

Rental yields in decline

Whilst capital growth has been strong in specific

mining regions across Australia, for a majority of

investors it’s the year round rental yield which needs

to stack up�

In 2014, the average rental yield per annum for

houses and units was on par, 5�16%5 and 5�14%6

respectively, and this trend has continued into the

first quarter of 2015� However over the past four

years, rental yields have been in steady decline -

down by more than 1% per annum since 2011�

5. Hometrack Australia, SQM Research, Mining Town Rental Yield Report (Houses), June 2015. 6. Hometrack Australia, SQM Research, Mining Town Rental Yield Report (Units), June 2015.

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2011 2012 2013 2014

Average Rental Yield (House) Average Rental Yield (Unit)

Source: Hometrack Australia, SQM Research, Mining Town Rental Yield Report, June 2015.





Whilst most investment properties are bought with

the intention of having paying tenants lowering the

mortgage or at least adding to a negative geared

tax break, those investing in mining towns must

consider the point at which a rental yield becomes

too low� Ask yourself the question, what vacancy

rate can you afford to live with?

Since 2011, the average yield for a house and unit

has declined by more than 1% - hovering around

5�12% per annum� Coupled with this, vacancy

rates have increased which has resulted in many

investment properties in formerly ‘booming’ mining

towns now gathering dust�

Whilst few investors may be able to keep a house

afloat with no tenants, you should consider:

- How low are you prepared to drop rents?

- Are you prepared to let your asset depreciate if the primary industry around you falters?





Buying a property, even if buying into a booming

market is a large investment and it pays to do

your research to ensure you aren’t purchasing

a ‘quick-win’�

The difference with investing in mining towns as

opposed to any other suburb across Australia is that

with any mining town the extreme highs come with

extreme lows�

Whether you’re investing yourself or enlisting the help

of someone who knows the game, it’s important

that some simple factors are identified and taken

into account before committing to any property (be

it an investment or not)� Identifying these tips will not

only help you reduce the risk of investing in a mining

town but will also enable you to develop an exit

strategy if the market goes pear shaped�

Considerations for reducing risk and developing an exit strategy

Changing rental yields

Changing rental yields are a good indicator of the

value of your property� If a rental yield changes

during the life of your investment, elements to

assess include occupancy rate, if expenses on your

property have increased, and if the value of the

postcode your property is in has depreciated�

Whilst the rental yield is generally not directly

manageable by a property’s owner, understanding

the signs and what a changing yield means will be

beneficial in assessing the immediate and long term

viability of your investment property�

Reducing risk and knowing when to bow out

A ‘rental yield’ is a measure of how much cash an income generating asset produces each year, as a percentage of that asset’s value. It’s calculated differently depending on the type of asset (i.e. property, shares, etc.) and is a useful measure for investors with a diversified portfolio to compare various asset classes and their performance





Corporate Leasing Agreements

Investing in a mining town means there are opportunities to lease your investment directly to the intended

tenant, or alternatively through a corporate structure where you don’t ever deal with your tenant directly�

Looking at the Census data we can see that there are pros and cons for leasing direct versus through a third party�

It’s clear that deciding whether to go private or corporate is a fine balancing act, and you’ll need to weigh

up the odds� Will the price you can afford to charge on a weekly basis ensure you continue to get tenants

through the door?

Corporate leasing: the Pros and Cons

Large companies have strong control

over the rental market in mining towns

which means aligning with them can

ensure a steady flow/changeover of tenants� The

census data shows there is a significant appetite

for corporate leasing, with approximately 35%6 of

people living in mining towns renting their home/

unit from an employer (government and non-

government employer)�

The average weekly rental price for

houses where the owner directly deals

with the tenant is significantly higher

versus dwellings managed through a company�

This difference is clearly visible in towns such

as Karatha (WA), where rentals are as high

as $1,200 a week, compared to a national

average of private versus corporate rental

management in non-mining towns of 2:17�

People buying and renting housing - August 2011 Median weekly rent paid for a separate house by who it was rented from - August 2011

6. ABS Census of Population and Housing, “People Buying and Renting Housing”, August 2011. 7. 2011 ABS Census of Population and Housing, “Median Weekly Rent Paid for a Separate House by who it was rented from”, August 2011.

Karratha

$1400

1200

1000

800

600

400

200

0Newman

MoranbahPort Hedland

(a) Comprises real estate agents, unrelated persons outside the household, and related persons outside the household.

(b) Comprises goverment employers (including the Defence Housing Authority) and non-goverment employers.

Source: ABS Census of Population nand Housing

DysartWeipa

Roxby DownsEmerald

ClermontMiddlemount

Australia

Private landlord(a)

Employer(b)

In a private dwellingowned outright

In a private dwellingbeing purchased (a)

In a private dwellingbeing rented(b) froma private landlord(c)

In a private dwellingbeing rented(b) from

an employer(d)

In a private dwellingbeing rented(b) froman other landlord(e)

%60

50

40

30

20

10

0

(a) Comprises peolpe staying in the listed location on Census Night in a private dwelling owned with a mortgage or a private dwelling purchased under a rent/buy scheme.

(b) Comprises people staying in the listed location on Census Night in a private dwelling being rented or a private dwelling being occupied rent-free

(c) A real estate agent, an unrelated person outside the household, or a related person outside the household.

(d) A government employer (including the Defence Housing Authority), or a non-goverment employer.

(e) A state or territory housing authority, a housing co-operative, a community group, a church group, a residential park, a caravan park or a marina.

Source: ABC Census of Population and Housing

High growth mining towns

Australia





Like any significant investment (property or another

commodity), taking the time to assess the pros and

cons of the decision plays a large factor in getting

it right�

Mines are extremely volatile commodities in terms

of their global market value, the perceived value

nationally, supply and demand requirements and

overall, the fact that they are at the mercy of nature

(more often than not)� Therefore, when investing in a

mining town, you should asses:

- What period in the cycle are you buying at?

- Has the area peaked?

- What phase of the mine development are you buying at?

Whilst simple in theory, these questions can be hard

to answer and an informed but calculated guess

sometimes has to suffice�

According to a whitepaper released by the Reserve

Bank of Australia in 2014, The Effect of the Mining

Boom on the Australian Economy8, Australia’s

decade of mining prosperity has caused overly

inflated effects on income levels� After hitting a high

in 2015, disposable income is and will continue to

slow down� Whether mines are reducing salaries or

taking on less staff, this change in the prosperity of

the industry at an individual level is set to affect the

viability of the industry and associated benefits�

As an investor you should review multiple resources

and speak with accredited advisors to effectively

forecast the viability of an investment property in an

Australian mining town�

Figure 4: Effects of the Mining Boom on Income

8. http://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-08.pdf 8. http://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-08.pdf

%

12

10

8

6

4

2

0

%

12

10

8

6

4

2

0In a private dwelling

owned outright

Note:

Sources:

Percentage deviation of baseline estimates from the no-mining-boom counterfactual

ABS; Authors’ calculations and AUS-M model database and simulations

Change in real household percapita disposable income

Purchasing power e�ect(trading gain)

Volume e�ect(change in real GDP)





What type of mining is involved?

Do you have an understanding of where this

commodity sits on the global commodities market?

Has it hit its peak and how large a player in Australia

is this particular mineral?

How many mines does the town have?

Whilst it may seem logical to purchase an investment

in a town that’s owned by one of Australia’s largest

mining companies, it’s also important to assess how

many mines are in that town and how different their

offering is� For example, you’ll need to be careful of

buying into a town with only one mine operator, as

if that mine goes out of business, then so does your

investment property� The more there are, the better

the odds are�

How much infrastructure spending is there for the local mine(s)?

It’s important to understand current, as well as

potential future plans for the mining industry in the

town you intend to invest in� If companies are putting

more money into their businesses, then it may be

a good indication that they intend to continue to

invest in that area�

Other considerations when investing in a property in a mining town:





The term “negative gearing” is certainly part of

today’s modern vocabulary for people of all ages

and income brackets, and for most part, this is for

good reason�

As housing affordability across Australia continues

to reach new heights in respect to annual CPI

and wage growth, the ability to offset the cost

of owning a property - including the interest

paid on a loan - against assessable incomes,

can make negative gearing an attractive strategy

in certain circumstances�

However, difficulties can arise in mining towns if

you choose a negative gearing strategy,

particularly for those towns at the middle to end of

their life cycle� As soon as the loan cost become

less than the rental income, or the price of the

investment generates significant capital growth

that it outweighs a reasonable rental return,

the negative soon becomes positive gearing

and the ball game changes�

So, whilst negative gearing can be considered a

tax strategy, it is important to assess a strategy that

includes all influencing factors to ensure buying into

a mining town can achieve your objectives� Whilst

buying into a buoyant mining town is a strategy that

benefits many ‘savvy investors’ who have been able

to successfully assess the cycle, the diversity and the

global commoditisation of that particular mining

industry, betting on capital gains from a property in

a time of political and economic uncertainty can be

a risky and in many ways, outdated strategy�

Getting the best bang for your buck

As soon as the loan cost becomes less than the rental income, or the price of the investment generates significant capital growth that it outweighs a reasonable rental return, the negative soon becomes positive gearing and the ball game changes.

“

”

Negatively Geared – Where the incomings

are less than your outgoings after all tax

deductions have been claimed� For example,

you receive rent on a property of $600 a

month, but your mortgage repayments are

$900 a month�





Making the right decision about property is as much

about making an informed decision as it is about

taking a calculated guess� And, whilst Australia’s

mining boom has seen prosperity for many

individuals across the country in terms of personal

finance and also investment strategy, it’s important

to remember that like any investment - be that a

global commodity or your first home - the market

can change at any time and in any direction�

By using data available to you, ascertaining a real

time account of the strengths and weaknesses of

Australia’s mining towns, their proven and predicated

performance, and the investment strategies

available to savvy and unsophisticated buyers,

buying an investment in an Australian mining town

should be no different to buying any other home�

Summary





homesales.com.au provides property investors with

the essential tools they need to make educated

investment decisions� Our unique investment

search engine means you can find a property

that perfectly matches your investment strategy,

whether it be positive or negative cash flow, rental

yields, suburb capital growth, suburb population

trends, borrowing criteria and more�

With over 200,000 property listings online* and

backed by carsales�com�au, it’s no wonder more

and more property investors are finding great

investment properties through homesales�

*homesales Internal Reporting, July 2015

How can we help?

Information provided in this document is general in nature and does not constitute financial advice. Information in this document can change without notice, and homesales.com.au does not guarantee the accuracy of information in the document, including information provided by third parties. Whilst homesales.com.au has used reasonable endeavours to ensure the accuracy of information in this document, you must not rely on this information to make a financial or investment decision. Before making an investment or financial decision, it is recommended to consult an independent financial adviser to take into account your particular investment objectives, financial situation and individual needs. Homesales.com.au does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Any forward looking statements in this presentation are not guarantees or predictions of future performance or the returns you may receive and involve risks and uncertainties and other factors. There is no assurance that actual outcomes will not differ materially from these forward looking statements. References to “homesales.com.au” shall mean carsales.com Limited, its directors, officers, employees, agents and contractors.

homesales.com.au is proudly part of the carsales.com Network�Backed by an innovative market leader, homesales is part of the carsales Network of websites, which is accessed by millions of Australians each month* *Neilsen Online Ratings, carsales Network, Jan-Mar 2015.

homesales 2015 mining_report

Investor Relations

median valuation of

median values

accuracy of information

australias mining towns

financial decision

completeness of information

median sale price series

mining boom