Double-figure yields on properties in mining towns look attractive but need to be carefully approached like any other investment in terms of the risks involved
This article was produced in partnership with Citi
Matt Wood has been the Head of Mortgage Distribution at Citi for nearly seven years. Prior to that he held a number of senior property roles at Citi including National Head of Broker Distribution and National Head of Sales Operations.
People hoping for good returns on a property investment can be forgiven for drooling over the high yields typical in many Australian mining towns.
When Sydney and Melbourne properties are bringing in a measly 3% to 4%, a gross yield of over 10% in Broken Hill can seem like a no brainer.
But those who seek high yields need to understand that the risk/reward equation is the same as for any type of investment – the higher the yield the higher the risk, says head of mortgage distribution for Citi Branded Wealth Matt Wood.
Wood isn’t saying that people shouldn’t invest in mining towns – just to go in with a clear head and do your research.
“Taking on additional risk is fine as long as you are aware of the risks and how that may impact your investment,” he says.
Wood has seen less experienced investors replace proper advice and due diligence with information from family and friends.
“Unless those confidents happen to be experienced property investors, they may not expand [the investor’s] knowledge a great deal,” he says.
Advice from armchair experts can also be reinforced by data viewed selectively without looking at the broader picture.
The latest Highest Yielding Mining Towns suburbs report by PropTech Group and its Real Estate Investar subsidiary is a case in point.
The report calculates prices and yields for property investments categorised by suburb, number of bedrooms, and dwelling type (house, townhouse, or unit) for all listings on the market in the 12 months to 31 March 2022.
It shows that the highest yielding mining property investment in Australia currently is a two-bedroom house in Broken Hill, NSW, with a median price of just $129,500, compared to all-house asking price of $1.8 million in Sydney’s CBD and $874,000 in central Melbourne.
The Broken Hill house delivers a yield of 10.03%, more than twice the 3.4% gross yield for houses in Sydney or the 4% gross yield investors can obtain in Melbourne. The median yield of the top 50 mining yielding property categories nationally is 6.96%. Prices in some mining towns have climbed as much as 53.4% compared to a year earlier.
What’s not to like, right?
PropTech Group chief executive Joe Hanna says the data needs to be read in context and with a deep local and historical knowledge of the mining industry itself.
“We saw in the last mining boom that great yields and high price growth doesn’t necessarily endure,” says Hanna.
“Single industry towns can be risky. If the mine reduces production or shuts down entirely, your property may end up empty and worth much less.”
Another factor to consider is that mining towns see the greatest housing demand when new projects are being built. After initial construction, employment and population can drop because it takes fewer people to run operations.
Wood says the normal factors that make for a wise property investment decision include things like amenities, closeness to transport or good schools. Looking at yield alone is not enough.
It is fine to take a risk as long as it is an informed risk. A less experienced investor looking further afield for a better yield may wish to start out with small steps.
“It may be as simple as switching your focus from your own capital city in Melbourne to Hobart or Adelaide, because your research has identified locations presenting better rental yields,” he says.
“Or you may be in Sydney and identify opportunities nearby in Wollongong or Newcastle. This may not entail a big increase in risk but there is distance and other regional factors involved, so it’s just a matter of doing your research and being comfortable with your decision.”
Having a trusted advisor like a mortgage broker can also help with access to research, as well as provide a good sounding board to bounce strategies off or find out about market insights and under the radar opportunities, says Wood.
“Even in a rising interest rate environment there are many other considerations to property investment,” says Wood.
“Considering the options available and knowing your risk profile will help investors make good decisions.”
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