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Some suburbs that seem like good buys on paper have been deemed “no-go-zones” in new research. Picture: Sarah Wilson
Property investors trying to adapt to the loss of negative gearing benefits have been warned over emerging “no-go-zones” that are luring in new buyers with high returns that hide long-term risks.
The “no-go zones” were major real estate markets across regional Australia and major capitals where rental yields were as high as 9 per cent, but underlying conditions remained weak for long-term owners.
The areas were flagged in a study by investment group High Income Property, led by former senior banking executive Palash Dave, who warned investors to tread carefully.
Mr Dave noted gearing restrictions taking effect in 2027, along with higher interest rates, had pushed many investors into markets with higher rental returns.
But he explained that many of the properties in these markets were poor investments, offering minimal prospects of capital growth over time – or in some cases, there was a risk of values falling.
No go zones included parts of inner Melbourne. Picture: Yarra River City
“No-go zones” where headline-grabbing rental yields disguised weak growth fundamentals included parts of inner Melbourne and inner Sydney, along with some regional areas, the High Income Property analysis showed.
“The common thread is that the yield is high because the risk is high,” Mr Dave said.
“Either one industry drives the local economy, one type of property floods the market, or the buyer pool is made up largely of other investors.
“The question isn’t what the yield is. The question is why it’s high … If a property is yielding 8 or 9 per cent, that’s not automatically a buying signal.
“A yield can go up for two reasons – rents can rise, or prices can fall. Investors need to know which one they’re looking at.”
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High Income Property director Palash Dave said high yields often disguised poor fundamentals.
Topping the no-go list was Carlton’s apartment market in Melbourne, where units were producing a gross rental yield of 8.9 per cent, despite median values falling 43 per cent over the past decade.
Mr Dave, a former CBA executive, said yields in the Carlton market were only high because prices had fallen sharply and the market remained risky.
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There was a similar pattern in parts of Sydney’s inner-city apartment market, according to the analysis.
Haymarket units were currently yielding 5.9 per cent despite values remaining 13 per cent below their 2016 median.
Neighbouring Chippendale and Ultimo also failed to deliver meaningful capital growth over the same period.
“All three have bounced over five years, which is exactly when buyers get drawn back in,” Mr Dave said. “Ten years on, an owner is still behind.”
Areas in inner Sydney were also flagged in the research.
Mr Dave said far too many investors stopped at the gross yield number.
“They don’t look at insurance costs, council rates, vacancies, maintenance or the income they actually keep but gross is not net,” he said.
Regional mining markets also featured prominently on the no-go list.
Locations such as Parkside in Mount Isa and Roxby Downs in South Australia continue to attract investors with rental yields above 7 per cent, but were risky due to relying on a single industry, Mr Dave said.
“When one employer determines tenant demand, rental growth and resale demand, you’re carrying a level of risk many investors underestimate,” he said. “If the mine changes direction, the town changes direction.”
South Hedland rounded out the no-go list. Mr Dave said the market has posted strong long-term growth and currently delivers an eye-catching 11.6 per cent rental yield, but remained volatile.
Investors should not ignore that values declined by an average of 42 per cent in Port Hedland between 2016 and 2018, Mr Dave said.
“Yield tells you nothing about risk,” he said. “People see today’s numbers but often forget how volatile some of these markets can be over time.”
Better options exist, he said, including Elizabeth North in Adelaide, Morwell in Victoria, Berserker in Queensland, Lavington in NSW and Carey Park in Western Australia.
All of these areas delivered strong long-term growth while maintaining attractive rental yields, Mr Dave said.
“Investors should never chase the highest yield. They should always target the strongest combination of yield, capital growth, and long-term resilience.”
