Mining Towns Offer the next big returns on investment - Moranbah

Dotted through the Queensland hinterland are little towns that are playing host to major new mining enterprises. They are small towns that have had sleepy livelihoods and haven’t shown up on the hot spot radar compared to their glamorous coastal neighbours.

These communities are exploding at the seams as mining workers flood into the area to take up well paid jobs. Communities are being transformed as land prices increase dramatically; developers are creating five bedroom homes with five bathrooms and letting them to the mining companies at 10+% rental returns. An extraordinarily rapid, economically driven, infrastructure fuelled change is occurring in local property dynamics.

Let’s focus on Moranbah as a classic example. This town is two hours inland from Mackay right in the heart of the Bowen Basin with extensive coal reserves. There are three new mines planned for this immediate area with somewhere between 30 and 50 new mines opening in the greater region. This does not include further exploration, a Chinese company has just paid $1.5B for exploration rights in the Bowen basin1 and the existing operators have large exploration rights also. Moranbah North mine as a classic example has an estimated life of 20 years – well within housing investment time spans.

The factors that are driving capital gain in this area are infrastructure investment, land availability, population growth and increased salaries.

Infrastructure

Infrastructure to harvest coal reserves and natural gas are the domain of large multinational companies with access to large financial investments through share price or borrowings. They create the mining infrastructure. The Coal is shipped by road to the rail head in town and sent by rail to Mackay for shipping to its purchaser. BHP, which mines nearby, has requested that this infrastructure be increased to double the rail capacity.

The local shopping centre is being expanded. This was a purpose built mining town and a few years ago had a population of only 8000 people. Now the shopping centre is being expanded and both Coles and Woolworths store openings are scheduled.

BHP has apparently indicated that it needs 1500 new houses, presumably at least 4 bedroom, to be available as soon as possible. A local real estate agent has 30 potential tenants on their books waiting for property to become available.

Land and Housing Availability

Land is not readily available with council releasing 140 blocks in the second half of this year and another 100 planned for early next year. Private development is matching this and more land is being rezoned.

To reduce speculation driving housing prices too high, Council is selling land at 50% of value provided it is held for at least four years.

Local developers can see the opportunity and are scrambling to buy and hold land. The next issue that faces them is finding subcontractors who will work for their lower wages compared to the money paid to miners. It may take building companies that are profit sharing to attract and retain labourers to the create the required new homes. Given they are cash flow positive from day one there is no need for developers to sell them in a hurry so four years holding is fine – but they need more sources of finance. Joint Developments are being offered to sophisticated investors

Australia’s modular home industry is poised to meet this demand. These are not the clunky houses of old, but custom designed homes, with high green ratings, built to spec or architecturally designed, with quality fittings and finishes. These can be delivered on site and be habitable in two days. For the savvy investor acquiring some land, ordering some modular homes and sitting on the investment for 4 years with positive cash flow may offer a great opportunity

Population.

Figures on population growth are difficult to find. The Australian Bureau of Statistics has not caught up with this influx yet. We probably need to consider housing starts or land release and extrapolate.

Three hundred blocks of land released in the second half of 2008 with four bedrooms will provide a population increase of 1200 people. BHP needing 1500 homes may have implied they had 6000 people to house. Any way you look at it, this is extreme change in a short period of time. Population growths of 2% are above average and 5% is considered extreme for the strain on amenities. Figures published by the mine suggest that this town had a population of 8,000 in March 074. So these rates of growth are extraordinary.

Salaries

The other change that drives capital gains is salary growth. When salaries increase rapidly over time there is more money to spend and those that seek to buy their own home have more money to invest, sometimes this goes into extras and sometimes into more home square meters.

Salaries in these hinterland towns have changed from local businesses based on farming and communities incomes to mining wages. More disposable income drives housing sizes and fixtures and fittings as people trade up to what they would like to live in.

Increased salaries also change the business mix in the town. Imaging the profitability of a good take away business in a town with a large population of men tired after physical work, money in their pockets and needing to refuel.

Summary

The mining and resources boom creates many opportunities for investors. These hinterland towns in the Bowen Basin need capital to develop the land and create housing for the workers in the mines. It also stimulates coastal towns involved in the shipping and major infrastructure services. For the sophisticated investor this is a great opportunity to buy cash flow positive property with potential projected capital gains of 15% plus and create equity for other purchases. This type of property adds both value and cash to a well structured portfolio.

References & Reports:

http://www.topix.com/au/emerald/2008/09/linc-looks-to-1-5b-china-coal-deal

Personal conversation with local developer http://www.domusvicta.com/site/products/modular.php

http://www.anglocoal.com.au/wps/wcm/resources/file/eb1f5604024f4d1/ANG%200672%20FS%20MoranhbahNth%20DM-03.pdf