Boom town bonanzasHOTSPOTTING Terry Ryder November 18, 2006AMONG...

Boom town bonanzas
HOTSPOTTING
Terry Ryder
November 18, 2006

AMONG property investors there's a strange sub-species who gobble up real estate with the instincts of a wild animal. A characteristic of this animal is that it's easily stirred and prone to stampede.
It gets a sniff of a juicy prey and is off and running. Before the sun sets, a property has been hunted down and consumed.

Real estate agents in Western Australia and central Queensland tell me of fleeting encounters with these creatures.

They're shy and don't like to be seen. They're hungry and mean, always in a feverish hurry to devour something.

They also tend to be irrational, having expectations of immaculate houses for $100,000 which return 12 per cent.

They're the people responsible for creating a category of hotspots I call the boom towns.

These are places that were sitting around minding their own business, enjoying a Sleepy Hollow existence, until someone discovered big lumps of coal or iron ore in the ground nearby, or a government decided to build a monstrous industrial project on their doorstep.

Suddenly there are hundreds of highly paid workers looking for somewhere to live. Because these locations tend to be country towns, there aren't enough houses to go around.

The ones available for rent can easily fetch $400 or more a week, and if an investor can buy such a property for $200,000 or $300,000, they get a very good return.

Enter the ravenous sub-species that prowls the Australian landscape looking for such prey. These are people who turn all the rules of sound property investment upside down. They buy over the phone, site unseen.

The only person consulted is the agent selling the property. They're not looking for a solid, safe, long-term asset which will grow in value over 10 or more years -- they're looking to buy cheap before anyone else does, enjoy a high yield for a while and then sell out before the bubble bursts.

They're suss investors -- suss stands for Site-Unseen Scavengers. It also applies to their instinctive ability to suss out these morsels.

This style of investment is at the riskier end of the property investment spectrum.

To make a killing you need to get your timing right by buying and selling at just the right point.

There will come a time when the resources boom fades, or the mine closes, or the industrial project, once built, no longer needs the initial 1000 highly paid workers.

There are plenty doing it, which is why the boom towns are the hottest of hotspots in Australian real estate at present.

We're talking about places like Blackwater and Moranbah in central western Queensland, or Newman in the Pilbara region of Western Australia (described as one of the most isolated and inhospitable places on the continent). These are towns with massive mining action going on close by, where modest houses rent for $400 or $500 a week.

We're talking about the Queensland region surrounding Dalby, Chinchilla and Jandowae, where quiet country communities struggling with drought have been invaded by big ugly pieces of mining equipment because the area is rich in coal seam gas.

There are multiple mining operations plus several power stations, including Kogan Creek, which will be Australia's biggest power station when completed next year.

We're also talking about towns such as humble Mortlake, 230km west of Melbourne, where the 1000 or so locals never imagined anyone would want to dump a $1.5 billion project on their doorstep.

But the Victorian Government does. It is planning a gas-fired power station and Mortlake is deemed a good spot to build it because it's close to Port Campbell, the base of the Otway gas project and existing high-voltage transmission lines.

You can buy houses in Mortlake for less than $150,000, and the same house will be worth double that in a couple of years if the project proceeds. The key word in that sentence is "if".

There's always a chance that it won't, and suss investors who lap up a Mortlake house could find themselves with a bad case of indigestion.

A couple of new hotspots are emerging in Tasmania. Hands up anyone who has heard of Zeehan.

I visited the place a couple of years ago. You could make a Western movie there, complete with tumbleweeds and old folk in rocking chairs.

That's all changing because Zeehan has some mines opening up and suss investors are already on the phone buying houses for $80,000. Late in the 19th century Zeehan was a thriving mining town of 10,000 and had its own stock exchange.

Today it has about 1000 residents, but numbers are set to rise sharply and we can expect house prices to follow suit.

The other Tassie location ready to start pumping is George Town, named after the English king when it was first settled 200 years ago (which makes it one of the oldest towns in Australia).

It's on the Tamar River near Bass Strait and has a deepwater port and a fast catamaran connection to Melbourne. The town already has big industry, including an aluminium smelter, but it will soon be invaded by workers to build a $1.4 billion pulp mill and a $240 million power station. That's if the projects go ahead.

Apart from the fickle nature of the resources boom and the general economy that underpins such projects, a big danger for investors is the difference between the construction and operational phases of a major development.

There can be an influx of workers seeking digs for two or three years while the thing is being built, but when that's completed demand for houses falls sharply.

For example, the new gas turbine power station proposed for George Town will create 300 jobs during construction, but just 22 permanent jobs once operational.

Again, stage one of the Gladstone Pacific Nickel project is expected to create 1200 jobs during construction, but permanent operational employment will be a third of that level.

There are better ways to exploit the boom towns syndrome than buying in the towns most directly affected. Three safer and more sensible options are:

Buy in the capital city of a state full of boom towns.
Buy in the nearest sea change location.
Buy in the regional centre nearest to a boom town.
Two seaside locales doing well out of the resources boom are Sarina Shire in Queensland (nicely located to capture coal wealth pouring out of the Bowen Basin) and Esperance in Western Australia (the nearest beach location to Kalgoorlie), where the median house price soared 75 per cent in the 2006 financial year.

I'd rather buy in those kinds of places than the mining towns because they have other reasons to exist.

The health of their economies and property markets is not totally dependent on the resources boom. Rather than buy in Mortlake, I'd head down the road to nearby Warrnambool. Mortlake won't be able to provide the housing needed while the power station is built and workers will look to Warrnambool, a town of 30,000.

Many will prefer to live there anyway because it has much more to offer. It's on the water and has an economic life of its own.

There's a major mine developing in the Adelaide Hills near the small towns of Kanmantoo and Callington.

As a property investor I'd buy in nearby Mt Barker, which is a substantial growth centre with lots of facilities and amenities, almost zero residential vacancies and an economy that doesn't rely on the mine down the road.

I also like Gladstone, a substantial city with a huge list of big projects in development and in planning (totalling $10 billion) and soon to be the world's biggest coal export port. If only half these projects proceed, there will be thousands home-hunting in Gladstone.

I also favour Mildura, a substantial centre on the Murray River with a broad and diverse economy -- and soon to be boosted by construction of the world's largest solar power station.

Until recently, I would have said that the best way to exploit the resources boom was to buy in Perth and Darwin, but not any more.

Those markets have peaked. That hasn't shown up in the official statistics yet, but everyone working on the ground in those cities agrees the boom is over.

The capital city with the best prospects from the boom towns syndrome is now Brisbane, where the market has worked through its downturn after the boom and is showing signs of moving into the recovery phase.