Budget tax cuts to push residential investors into commercial market
Investors are expected to switch from the residential market to commercial property after negative gearing was ditched in the suite of tax changes announced in yesterday’s federal budget.
Negative gearing has incentivised Australian residential investors for decades, but it was abolished from 7.30pm yesterday, with the only exception being new builds.
Market analysts predict the shake-up is likely to motivate investors to move their cash into commercial real estate.
“For investors reassessing their portfolio strategy, commercial property retains full deductibility of losses against other income and offers no restriction on asset type,” says Ray White head of research Vanessa Rader.
“Investors who previously used residential property as their primary wealth-building vehicle may find the commercial sector increasingly worth examining as the tax settings around residential tighten.”
Between 1.1 million and 1.2 million Australian taxpayers negatively geared their investment properties between 2022-23, according to the latest data from the Australian Taxation Office.
The commercial property market may now be a more attractive option for these residential investors, but it comes with a higher level of due diligence.
“For private investors without prior commercial exposure, the learning curve is real,” Rader explains. “Entry costs are higher, financing is more complex, and lease vacancies or tenant defaults can have a more immediate impact on cash flow than a vacant residential property.
“Asset selection requires a clearer understanding of location fundamentals, tenant covenant strength, and lease expiry profiles.
“Syndicates and unlisted funds offer a lower-barrier entry point, pooling capital across multiple assets and providing professional management, but they introduce liquidity constraints and manager risk that direct residential ownership does not.”
The 2026-27 budget largely took aim at stopping investors from competing with home buyers in the residential market to ease long-term supply issues. To this end, the capital gains tax (CGT) discount of 50 per cent will be replaced with a cost-base indexation from July 1, 2027.
Capital gains will be calculated against inflation and will be grandfathered for assets bought prior to the 2027 cut-off date. Investors backing new builds can choose between a 50 per cent discount and an inflation-based calculation when they sell.
Rental growth is silver lining
There was little in Treasurer Jim Chalmers’ budget to ease the already tough conditions the commercial market currently faces from high construction costs and economic pressures such as high inflation, rising interest rates and the Middle East conflict.
However, a silver lining can be found in the pressure these measures will apply to rental prices.
“I think rent growth will be very, very strong,” says CBRE head of research Pacific Sameer Chopra.
“Our view with what’s happening with construction cost and a little bit of this tax-related uncertainty is that supply will keep getting cuts, and so you can afford to be more optimistic around rent growth.”
CBRE data for Q1 this year shows commercial rent growth ticked up in every asset class in every state aside from industrial in Sydney (-3 per cent) and industrial in Melbourne (-2 per cent).
Rental growth peaked in Brisbane with rises in the office market (13 per cent), industrial (7 per cent) and retail (5 per cent). Perth also recorded favourable rent increases: 7 per cent in both retail and industrial, and 5 per cent in office.
“As the supply keeps getting cut, cut, cut, cut, these rents go higher, higher because there’s just no stock,” Chopra says.
Workforce incentives offer future relief
The budget has injected $722.8 million into creating apprenticeship pathways, including $10,000 for housing construction apprentices and $85.2 million to accelerate skills assessments for migrant trades workers.
The initiatives will remove barriers to alleviating labour shortages, but not quickly, says Ben Burston, Knight Frank’s chief economist, research and consulting.
“They’re not the sort of thing that are going to move the needle instantly, but over time, I think, it shows a recognition of those issues that the industry has faced for a number of years,” he says.
“I think it shows that those concerns are being taken seriously and steps are being taken to try to ease them. Over time, it will help mitigate some of the construction cost pressures, but it’s not going to immediately change the game because we’ve still got the wide headwinds of higher interest rates and higher material costs are still front of mind at the moment.”
Health care upheaval set to benefit aged care investment
Ballooning costs of the National Disability Insurance Scheme (NDIS) preempted budget moves to drive down participant payments by at least $37.8 billion in the years to 2030.
But the impact on investors in this sector is expected to be positive. Changes to the way health care is subsidised, particularly in aged care, provide an improved outlook for quality healthcare and aged care assets, Rader says.
“Taking some of that funding away from the home services that the NDIS provided may mean people are just forced to go into more of a higher-care situation rather than being at home, which will be a good news story for the aged care market because that market has been doing it so tough since the Royal Commission and during COVID, when there was such a spotlight on it,” she says.
“So it’s going to be a good income-generating asset class if you like, just like student accommodation, just like build to rent, on that big institutional level.”
