Risk versus reward - investing in WA’s resources-driven Pilbara

Massive spending in Western Australia’s mining sector is again pushing up property prices, and while investing in resources-reliant towns can be high-risk, it can also be high-reward. 

For every Pilbara property success story, it seems like there are several more tales of woe, with the resources-rich north-west of Western Australia having long held the title of the nation’s most volatile property market.

As recently as four years ago, the Pilbara mining towns of Karratha and Port Hedland were epicenters of property investment pain, with house prices falling by as much as 80 per cent between 2012 and 2017.

Weekly rents plunged in a similar manner from massive peaks.

In Port Hedland, rents fell from a peak of $2,500/week in the third quarter of 2012 to $350/week midway through 2017, while Karratha’s median rent fell from $1,800/week in the second quarter of 2011 to $390/week in June 2017.

The result of the rapid devaluation was a massive rise in investors being unable to keep up with mortgage repayments and banks repossessing homes.

Fast-forward to midway through 2021, and Port Hedland has claimed the title of WA’s fastest rising market, with median values up 57.8 per cent in the 12 months to the end of June, according to data from the Real Estate Institute of Western Australia. 

Karratha’s growth was more subdued, at 14.4 per cent for the year, but still indicated that the rapid boom-bust cycle that’s historically occurred in WA’s north was again on the upswing.

Rental market movements were similar, with Port Hedland’s median rent rising to $700/week at the end of the June quarter, from around $440/week at the same time last year, while Karratha’s median rent was up slightly, from $625/week midway through last year to $650/week at the end of June.

Fuelling the early-stage uplift is steadily rising investment by resources giants, particularly iron ore miners Rio Tinto, BHP and Fortescue Metals Group, as well as oil and gas producer Woodside Petroleum.

Data from WA’s Department of Mines, Industry, Regulation and Safety showed the value of resources projects in the state’s development pipeline were estimated to be worth $140 billion at the end of March, up from $129 billion in September last year.

Planned or possible projects increased from $100 billion to $103 billion over the same period, with that investment pointing towards the possibility of further uplifts in property prices and weekly asking rents.

But Damian Collins, managing director of fund manager and buyer’s agency Momentum Wealth, said the first thing to acknowledge about investing in mining towns was their inherent risk, with cycles that are much more volatile than capital cities or more diversified regional centres.

“Ultimately you are at the mercy of commodity cycles and what’s going to happen to production, new mining or new gas plant expansions,” Mr Collins said.

“You have got to go into it knowing that it is high risk, and be certain in what your objectives are.

“People in the last cycle in Karratha and Hedland were believing that it was just going to grow at 20 per cent per annum forever and that $2,000/week in rent was normal. 

“But it’s not, it’s not sustainable, so there will be a point where it will start to go down.”

Mr Collins said for any investor considering investing in the Pilbara, or any other resources-reliant centre, it was crucially important to dig into the drivers of housing demand.

He said at the peak of the market in 2011-12, housing demand was skyrocketing due to a nomadic construction workforce, which ultimately disappeared once mine expansion projects were completed.

“The biggest lesson for people in a mining town, is because of the volatility, an investment is never ‘set and forget’,” Mr Collins said.

“You might buy a new property in Perth or one of the other capitals and say ‘I’m going to set and forget, hold this for 20 years and it will be a long-term investment that will provide me with capital growth’. 

“I don’t think you can do that in a mining town, you need to be conscious that there might be a time where you regularly look at it and say ‘it is time to get out’.  That will obviously depend on people’s circumstances.

“If you buy at the right stage of the cycle, you can see some significant capital growth. 

“Certainly for people who bought in Karratha in the mid-2000s, around 2004-05, if you had bought then and you sold out at the peak, you would have made a fortune, with some really strong rental returns on the way through.

“But if you held on until the end, you would have seen an 80 per cent decline in values as well.

“Overall, the rental returns are pretty good, insurance costs are high and so forth, but the rental returns are much stronger.

“You can get a gross yield of close to 10 per cent, while your net yields are 5 per cent or 6 per cent, after expenses.

“That’s much stronger than Perth, where your net yields are closer to 3 per cent.”

A key metric, according to Mr Collins, is to look at the difference between median house prices and the cost to build a new house.

“Ultimately property prices in the long-run are a function of replacement value,” Mr Collins said.

“During the bust, they can go well under replacement value, as they did, but during the boom they can go well over replacement value. 

“When the median house price got to $900,000 in Hedland and in Karratha, that sort of price point was clearly unsustainable because the brand new replacement cost was probably around $500,000 to $550,000 at the time. 

“If prices get above replacement cost, that’s when you start to get a bit worried. 

“Now how far above replacement they can go is the question, but you have just got to understand that there is a lot of desert out there, there is a lot of land, so you don’t have a land supply issue in the long run, you just have to get the infrastructure and the services to it.”

Mr Collins said there was likely more room for growth, with REIWA data showing the Port Hedland median house price was $359,000 at the end of June, while Karratha’s median was $491,750.

“Currently it costs around $150,000 for a block of land up there and the cost to build a house is probably $450,000 right at the moment, so replacement cost is $600,000,” he said.

“That means if a 20-year-old house costs $450,000 to $500,000, people will start to look at building a new home. 

“That’s the really important metric to look at - what does it cost to replace the house? 

“Once prices get towards that point, more stock will come onto the market and you’re not likely to see much growth from there.”

And while mining towns may be tempting with the potential for strong capital gains on offer, Mr Collins still urged caution, particularly for inexperienced investors.

“My philosophy on it is you shouldn’t ever start in a mining town, it’s not for the faint-hearted,” he said.

“It’s not the place to start, but if you have got a few properties in your portfolio and a bit of wealth behind you, then if you do the homework you can get really good, risk-adjusted returns. 

“It’s something that you might look at if you have got a few properties and are willing to accept a bit of risk.”