'The highest yields don’t necessarily indicate the best investment': Be wary of the lure of mining towns

They look like heaven-sent investment opportunities – locations with properties boasting median gross rental yields of up to 9.66 per cent.

But is all that glistens truly gold? Sometimes it undoubtedly is, but at other times it is a case of buyer beware.

Take the small town of Wandoan, for instance, in Queensland’s Western Downs region, servicing a cattle area 400 kilometres north-west of Brisbane. It currently has Australia’s highest median gross yield at 9.66 per cent, as revealed by the latest Domain Rent Report for the December 2022 quarter.

With the median weekly rent at $300, up 20 per cent over the year, and properties advertised for sale like a four-bedroom family house at $160,000, it would look an excellent prospect.

“But it’s in the middle of nowhere and mightn’t look that good for too much longer,” says Elders Real Estate Miles’ property manager Tayla Daley. “We’ve had a lot of people come here and rent recently because of all the solar and wind farms being set up out that way. Now, however, they’re starting to wrap up.”

Other towns offering similar bumper yields might also depend on external features over which individual investors have little control. The second biggest yield is from homes in the West Australian mining town of Newman, in the inhospitable, sun-baked Pilbara, by BHP’s Mount Whaleback, the biggest open-pit iron ore mine in the world.

They’ve been delivering yields of 9.21 per cent on rents of $618 a week, up 12.3 per cent over the past 12 months. But while iron ore prices soared by 22 per cent at the end of 2022, rental demand and then yields could well drop as our biggest customer, China, struggles with its COVID outbreak.

Similarly, the small nickel mining town of Kambalda West, 60 kilometres from Kalgoorlie, with a 9.1 per cent yield and rents that have gone up 29.6 per cent over the past year, and coal mining’s Moura in Queensland, with an 8.9 per cent yield, are both places that could boom … or bust … according to the price of resources and unknowns like the outcome of the war in Ukraine.

“The highest yields don’t necessarily indicate the best investment properties, especially if they’re in mining towns,” says Matt Lewison, chief executive of property investment experts OpenCorp. “Our focus is on the long-term drivers of supply and demand and the problem with mining areas is that often they need a lot fewer workers to maintain the mines than to build them, so you end up with mass property vacancies.

“Also, every investor’s circumstances are different. Some on lower incomes might need higher yields to pay the mortgage, especially with higher rates of interest. Others on higher incomes might be looking for better tax deductions and higher capital growth.”

National buyers’ agents The Investors Agency director Darren Venter says at a time when many expect interest rates to be lowered by September or October 2023, cash flow is less important.

“That’s when more investors will come back and there’ll be a lot more traction in the market,” he says. “Areas that look less successful in terms of yield currently will then be driven up by buyer demand, which will increase value.

“Single economic interest towns and metropoles can go up when their industry does, and down again just as quickly. Multi-economy areas can be a much better environment for investors.”