Investing in mining town properties risky business

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Whenever I attend a property expo or homebuyer show, I am inundated with investors asking me about the potential to make money on a mining town property investment. Their eyes glitter as they recount the untold riches which they believe lie in such a purchase, and often they are fresh from listening to yet another spruiker peddling the benefits of a house and land package in a far flung mining town.

Big returns

It’s easy to understand their enthusiasm. Years ago a number of risk- taking investors made the fortuitous decision to buy the equivalent of a ‘donga’ (a mobile or prefabricated house) in towns like Karratha on the WA far north coast, for small sums of around $80 – $100,000k. Some 10 years later the aforesaid dongas fetch a cool $1m on the market and many have a whopping 13 – 14% return on that million – making the return on initial investment ten times that.

Who doesn’t want a few of those little gems in their portfolio?

Of course we all do, but in buying one an investor often ignores one of the most fundamental rules about investing – and that is to understand one’s own appetite for risk, and then purchase appropriate investments for that risk level.

A question of risk

Go to any financial planner and the first thing they will do is ask you to complete a risk profile questionnaire. Once you have done this, their subsequent recommendations will reflect a consideration of this profile – cash and fixed interest for those needing capital protection and the surety of a return of at least the entire invested principal, and managed funds and direct shares for those with longer investment periods and the potential to withstand short-term losses.

Why, then, don’t property investors consider each of their purchases with this same approach?

When I developed and included in all of my books a ‘property risk profile’ questionnaire, many property investors considered risk for the first time! That questionnaire forced them to consider that not all property is created equal and simply seeking the ‘highest’ returns possible in property could spell financial disaster to those who needed more protection around their invested capital.

Risks for mining town properties

There is no question that, particularly while we are experiencing a mining boom, a property in a mining town can provide a great return. However, a property in a mining town must be placed within the high-risk category of property investment. As with any investment, the higher the potential return, the higher the risk, and property in mining towns have more than their fair share of risks, including:

  • The lack of diversity of industry means the entire workforce’s reliance on a single industry places the security of the whole town at risk, should something adverse happen to that one industry
  • The prevalence of ‘fly-in, fly-out’ workers results in a weak underlying economy, as workers take their earnings out of town
  • That same economic weakness means most councils lack the financial resources to provide infrastructure to the community, meaning that the towns are often severely under-resourced
  • The entire town is highly exposed to ‘hidden risk’ – the risk that an unforeseen event, government decision or world economic turmoil impacts directly back on the only industry supporting the area.  This is a risk which cannot be mitigated as it most often cannot be foreseen, and in some cases has never actually happened before.

A gamble

If your risk profile is such that you have plenty of capital and loss would not cripple you, or you have ample time available as an income earner within which you could replace lost capital, then the potential for great yields and significant capital gains may well make these risks worth taking. Of course these days, few mining towns have the ‘cheap’ properties available, and you are likely to pay an already well inflated price to buy in to this risky investment.

However, if you are buying within your super fund, which you are likely to be doing if you are reading this article, you are gambling with what may become one of your only income sources, one which needs to last a significant length of time and will not be easily replaced if you are already close to retirement.

The surety of a house in an area with a growing population, diversity of industry and abundant infrastructure development is more likely to be the appropriate investment for your fund. You may not make as much money (although well- chosen property can still do really well), but the chances of you having both the capital and a reasonable amount of yield and growth available to use for all of your retirement years are much greater than these high risk mining town investments.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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