Hi all,
Hoping to get some advice on my situation. Currently have a property in hedland, mortgage 600k, comparable sales at approx the 1mill mark, current rent $2600/wk gross leased until November 2013.
Originally wanted to hold the property for another 2-3 years however have been getting a bit nervous lately with the huge release of land happening in south hedland and the iron ore prices / wind down of expansion plans by BHP.
My partner says it's time to get out however the rental return is making me think twice (although I know it won't last forever) and I question whether my greed is getting in the way of getting out while the getting is good.
If you had (or have) a property in Hedland would you be holding or selling?
I have always been interested in mining property, I have seen a lot of people make a lot of money getting into the property BEFORE the rents become outrageously high. But from what I can gather, there just does not seem to be a long term potential.
Looking at your situation, $600k mortgage, 7% interest rate means $42,000 in interest only repayments a year.
$2,600 per week in rent gives $135,200 gross rent return per year.Gross profit will then be $93,200 per year. Taking away tax and other fees, will assume a net profit of $60,000? I could be very wrong there but let's just stick with that figure for now.
Now you say the property is worth $1,000,000 at the time being, but this value will one day become just about nothing, obviously I do not have details of your property, but eventually the mine will be finished and you will have a property in the middle of nowhere, probably only worth $150,000 if you are lucky?
So although you are making $60,000 per year from your rental returns, the capital value of your property will slowly degenerate down to this $150,000 value. I am not sure how quickly it would go down, but saying the mines will be lasting for 20 more years, assuming a linear devaluation of value. So a $850,000 capital drop over 20 years is a yearly loss of $42,500.
So your true return may only be $17,500 per year? Still a pretty decent return, especially given the market. But if you just sold the place, took away your $400,000 profit and invested it and got a 5% net return somewhere else, that would be $20,000 return.
Like I said I am not really sure if this is how mining properties work, but it just seems like the logical way for me. And I just do not see any true value in them over a long term, unless of course you are able to get into them before the mining operations start.
streamlineinvesting wrote:I have always been interested in mining property, I have seen a lot of people make a lot of money getting into the property BEFORE the rents become outrageously high. But from what I can gather, there just does not seem to be a long term potential.Looking at your situation, $600k mortgage, 7% interest rate means $42,000 in interest only repayments a year.
$2,600 per week in rent gives $135,200 gross rent return per year.Gross profit will then be $93,200 per year. Taking away tax and other fees, will assume a net profit of $60,000? I could be very wrong there but let's just stick with that figure for now.
Now you say the property is worth $1,000,000 at the time being, but this value will one day become just about nothing, obviously I do not have details of your property, but eventually the mine will be finished and you will have a property in the middle of nowhere, probably only worth $150,000 if you are lucky?
So although you are making $60,000 per year from your rental returns, the capital value of your property will slowly degenerate down to this $150,000 value. I am not sure how quickly it would go down, but saying the mines will be lasting for 20 more years, assuming a linear devaluation of value. So a $850,000 capital drop over 20 years is a yearly loss of $42,500.
So your true return may only be $17,500 per year? Still a pretty decent return, especially given the market. But if you just sold the place, took away your $400,000 profit and invested it and got a 5% net return somewhere else, that would be $20,000 return.
Like I said I am not really sure if this is how mining properties work, but it just seems like the logical way for me. And I just do not see any true value in them over a long term, unless of course you are able to get into them before the mining operations start.
Hi steamlineinvesting
Pilbara region is not going to die any day soon.
This will give you some perspective on what the Government is actually spending on this area to help meet the needs from impact from mining etc.
http://www.waconference.com.au/?q=News&id=5b36ae4c-b41e-5b22-d815-4ff0f02ecb2e
My concern with holding property in Port Hedland, Karratha, South Hedland is that its all about supply and demand. If the mining companies are buying up land and building houses for their employees then this could leave some investors out in the cold.
Cheers, WI
Hi WorldInvestor,
I had a look into the information on the Pilbara region, experts seem to suggest up to 50 years of supply left in the region. I guess this is dependent on the increase of technology to mine the areas. And also on the demand generated by the world.
There are a lot of factors involved, and I admit my assumption of 20 years was probably a bit too low, and looking at your link it seems there will at least be some social infrastructure developed there to try and build some sort of city. That being said there will still be an enormous supply of housing.
And I also agree with your point that the companies will simply start supplying their own housing with significant camps, it will definitely be cheaper than renting these places. I myself work on a mining project in QLD near Chinchilla, and the company set up a camp which houses about 1,000 people. All 1 bedroom with ensuite rooms, definitely not 5 star living but I am still not complaining. All the rooms are just demountable buildings, so they would cost very little to construct and install, and I would say provided the company has the land, this sort of set up would be a whole lot cheaper to run and maintain compared with renting out other properties for $2,500 a week.
I’ve just left Hedland after 4 years there. 4 Years ago rents were half of what they are now. BHP where doubling their rail capacity and FMG was just starting to ship ore. While there was demand on housing, accommodation was fairly easy to obtain then. Nothing like now.
Putting today into perspective BHP, FMG, Rio and a small miner Atlas are simultaneously in the process of almost doubling capacity. That’s unprecedented in Aus mining history. Every scrap of accommodation is being snapped up at ludicrous prices.
Globally ore prices are dropping along with demand as the world retrenches. By the time this expansion is finished in around 2 years I expect to see substantial over capacity in Pilbara iron ore mining operations. Given the global economic situation I see little to no expansion in the Pilbara for decades. Mining will still continue but I expect to see only the most profitable mines still operating while others will either close or go into care and maintenance.
Even the proposed gas hub at Broome, one of the largest in the world, won’t make up for any downturn in mining activity. Hedland is a an export port hub primarily for iron ore but also includes manganese and copper. It’s the only port facility (in the region) for large inbound infrastructure components, cement, fuel and nitrate.
Strip out construction and the Pilbara especially Hedland looses around 80% of its work force. A large percentage of that 80% are FIFO’s. It’s hard to quantify how many resident personell would disappear if construction stops. I tend to think we’ll go back to pre boom (early 00’s) prices and rents fairly quickly.
What people need to understand is that Hedland does not accommodate miners. They live on mine sites and fly in and out from mine airstrips. The closest mine to Hedland is 300km’s away.
The problem with mining in WA and consequently property investment is that statewide there is this unprecedented rush to expand simultaneously. That doesn’t jive with global economic conditions and a continuing deterioration in demand. That’s led to a gold rush moment where property has suddenly become scarce and consequently expensive. For the PI the returns are tantalizing but with all high return investments comes a concomitant rise in risk.
Personally I believe we are at the peak of mining activity now. I think we will probably hold this peak for another 6 – 12 months (barring a GFC like event) and then we will see an unwinding of mining related activity over the following 12 -18 months. However, in saying that I see the potential for a sudden collapsed in mining activity at any time if a GFC event unfolds. At the moment I see that as 50/50 rising to 80/20 over the next 6 months.
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