What the discovery of oil at Arckaringa Basin means for property investors: Cameron McEvoy

There has been the recent discovery of shale oil deposits located in the Arckaringa Basin, in north-east South Australia. The discovery has been verified by geologists and independent researchers, and is expected to be in the value of AUD $20 trillion dollars. See further detail on the verification here.

Even at worst-case scenario, if the oil quality is poor, it is still expected to have a value and worth in the "low" trillions of dollars. In fact, this is such big news that it bumps Australia into second place on a chart where we once appeared at position number 29. Wikipedia is yet to update, but historically this is where Australia has ranked in terms of "proven" natural oil reserves.

We are now only second to Saudi Arabia in terms of sheer volume. The biggest question mark around it, though, is related to extraction. The shale rock is difficult to break up and extract oil from, making it a costly process. However, US technologies developed and in use in Canada/North America could ease the cost challenges of such drilling plans. Regardless, most experts are confident that any drilling project would be very profitable from day one onwards.

So just how significant is this discovery for Australian real estate investors? In my mind, the potential is huge for investors, for three reasons:

1. Unlike other resources boom areas around the country (such as the iron ore and uranium deposits), oil is the highest-demand of all of these resources yet. Additionally, the sheer volume of it means that these mining sites, once opened, won’t be drying up any time quickly. This means that much of the "high-risk" nature of investing in property located around mining sites is minimised, because these sites will likely be "in town" for decades to come, not just a handful of years.

2. Some resource-driven towns (but not all) only exist because of the mining discoveries made around them. This means that towns have had to pop up "overnight", with little to no infrastructure, town planning or resources available. With this comes a higher cost for property, due to the need to develop at least some minimal basic infrastructure in order to house those residents living in the mining town conditions. The Arckaringa Basin area has the benefit of having an existing town there, with already built infrastructure. Though the area is huge and there’s no way of yet knowing which towns specifically will become the unofficial "capital" of the Arckaringa region, the fact that some exist right in the centre already is music to a property investor’s ears.

3. This will very likely change the South Australian economy significantly. With the existing incentives that Adelaide city (along with the entire state government of SA) are offering interstate migrants already, in coming years SA could become one of the highest demand states for employment in Australia. The knock-on effect for subdued prices in Adelaide and other regional cities in SA such as Ceduna and Port Augusta is very significant, with capital growth and rental return figures alike both offering huge potential.

After digging deeper to find out the areas that could be in high demand for renters in coming years, I’ve come up with a short list of towns in South Australia that are worth keeping an eye on, along with an anecdote for each of where I see the biggest potential:

Coober Pedy, SA This is an established town that is pretty much in the heart of the Arckaringa Basin. Already benefiting from unrelated resources-driven operations in the vicinity, Coober Pedy has the benefit of being an established town with a population of 1,700 and is full of properties on the market that offer scope for extension, room-letting and renovation. With some of these properties, there is potential to cosmetically update them to achieve greater yields in the future, along with room additions (particularly for properties that are part above-ground, part underground ‘dugout’ style). Additionally, with median buy rates being $130,000 and median rent being $255 per week, strong rental return from day one is assured.

Marree, SA Maree is another established town which is around 375 kilometres due east of Coober Pedy. With a 2011 census population of just 70, Marree does not seem like it has the infrastructure needed to houses resources-worker tenants, however these numbers can be deceptive as the town does indeed have hundreds of resources-industry workers residing there.

Oodnadatta, SA This town is the northern-most town of the shale rock perimeter area of the Arckaringa Basin. It has a few hundred permanent residents, most of them working in the resources sector. The town also has adequate infrastructure considering its remote location; with twice-weekly trucks delivering food, petrol, and other supplies, along with a medical clinic and general store/post office. The township is heavily involved in mining sector, though the availability of property is the problem here.

Roxby Downs, SA Property investors have already entered this town in a big way due to the existing mining dominance. This means that rental returns can be expected to be in the 7-9% range, so not as glamorous as some of the above towns. Additionally, entry points are quite high, with median house rates around the $440,000 price point. However, further future growth could be possible if the shale oil projects extend as far south as Roxby Downs.

After reading through several forums and other blogs, the general feedback of investor experience in these areas can be summarised as being:

Pro: A high-risk area, but with great capital growth potential, and solid rental return rates.

Pro: Low entry-point buy rates, coupled with all-time-low finance costs, means the properties can be paid off very quickly, and are positively geared from day one.

Con: Tenant quality is consistently poor and cannot be easily improved due to the lack of good-quality managing agents operating in that region. Some towns do not even have any estate agents, meaning your manager could be working remotely from Adelaide. This means that inspections rarely ever occur and tenant screening can be very poor/non-existent.

Con: Repairs and works come at extortionately high costs. Investors are at the mercy of potentially "dodgy" repairmen who charge hundreds and thousands of dollars above acceptable rates to repair these properties.