Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 29 October 2014

SQM warns on regional towns

SQM warns on regional towns

SQM Research are always worth a follow for independent property market news - subscribe to their free newsletter here. This week, SQM warns on regional towns.

In this week's newsletter, SQM looks at town with a resources focus.

The challenges variously facing Gladstone, Bowen, Emerald and Moranbah have been well documented elsewhere, implying that the potential for fast returns can sometimes also come with equivalent downside risks when the tide reverses or when sentiment is low.

The reasons for a reversal can vary - a property boom can result in a new supply of dwellings taking pressure off rents, the transition from the construction phase of a major project to to the less labour-intensive production phase can reduce demand for property, or a flood of commodity supply can see commodity prices tank making projects unviable at certain stages of the commodities cycle (as is happening right now with coal prices).

The areas covered off in this week's SQM newsletter read like a list of 2012's hotspots: Muswellbrook, Orange, Olympic Dam, Port Hedland...

On Port Hedland, SQM reports asking prices as down by 40 percent from their peak and house rents having collapsed in half.

It is painful to observe as someone with a background in mining myself, but it appears to me that the
coal industry in Australia is heading for quite a bust, since the key commodity prices of coking coal and thermal are simply much too low to support our relatively high cash costs of production (see link for more on this).

Related to that point, here is SQM on Muswellbrook, which has recently been further adversely impacted by the rejection of the Drayton mine expansion:

SQM reports house rents in Muswellbrook as having been "pulverised" by 31.9 percent in the last three years. 3 bedders have fared little better, falling by 25.4 percent.

Investors may be able to stomach falling rents but it is vacancies which can really hurt landlords. Vacancy rates in Muswellbrook spiralled to 14 percent but have now come back into orbit at a still very high 9.2 percent per SQM. 

By way of contrast, suburbs within Sydney's inner west have sustained vacancy rates as low as 0.6 to 0.8 percent, which is essentially as close to zero as you will ever see. 

Chasing superficially higher yields may appear to be a safer approach to investing (in any asset class), but it is not necessarily so, although lower entry prices can no doubt at times seem appealing.

And here is SQM on Orange where previously sharply declining rents may now be stabilising:

The message from SQM seems to be clear. Investing in property in resources towns, in particular those with an iron ore or coal focus, is likely to be risky. Subscribe for more of their thoughts here.

Personally I look mainly towards capital cities which are due to experience strong long term population growth. 

New properties in capital cities are constructed for the growing population at today's labour and materials costs, and thus over the long term well located capital city property tends to act as an effective inflation hedge. 

Due to high transaction costs property as an asset class generally doesn't lend itself so well to short term speculation.