Investors accepted lower rental yields and often negative cash flow because the expectation of long term capital growth, supported by tax settings like negative gearing and the capital gains tax discount, justified the strategy.
The Federal Government’s latest housing policy reforms have fundamentally changed that equation.
With negative gearing to be limited to new residential builds from July 2027 and the longstanding 50 per cent CGT discount to be replaced by a significantly different framework, there is now a very real possibility that we may be witnessing the beginning of a structural shift in investor behaviour. Not necessarily away from property altogether, but away from passive residential investment as Australians have traditionally understood it.
In many ways, this could be less about the removal of tax incentives and more about a changing philosophy around investment itself. One could rationalise that these significant structural changes to our investment environment begin to reward yield, income and cash flow over speculative long term capital appreciation. When viewed through that lens, commercial property becomes increasingly difficult to ignore.
The reality is, most leveraged commercial property investments are not negatively geared in the same way residential assets often are. Commercial property has historically provided materially stronger rental yields, longer lease tenure, annual rent reviews and, in many cases, stronger income resilience. For sophisticated investors or multi property residential owners who have traditionally built wealth through residential accumulation, this new environment may create a compelling reason to reassess portfolio construction.
That does not mean there will suddenly be an exodus from residential property. Residential real estate will always remain a foundational asset class in Australia. However, the rationale for holding multiple passive residential assets may become increasingly challenged where the primary driver has been tax efficiency and capital growth rather than income performance.
The Government’s intention is understandable. Redirect capital toward new housing supply and reduce investor competition for established homes. Politically, that narrative is relatively straightforward. Economically, however, the housing system is more nuanced than that.
Australia’s affordability issue is not simply the result of investor participation. The core issue remains one of supply. We are not building enough housing in the locations where people need and want to live.
The risk with these reforms is that they may not remove housing pressure altogether, but simply relocate it.
If fewer investors participate in the established housing market, some moderation in price growth may occur. But because existing investments are grandfathered, many investors are unlikely to sell. At the same time, if rental stock gradually transitions into owner occupied housing, the rental pool contracts. The pressure that previously existed in purchase prices can quickly emerge in rental markets instead.
Victoria has already provided something of a case study for this dynamic. A combination of increased land taxes, tighter rental regulation and additional holding costs materially reduced the attractiveness of residential investment property ownership. The result was not necessarily broad based affordability improvement, but rather weaker price growth accompanied by significantly higher rents and tighter rental supply.
This is an important distinction because over a longer term sophisticated private investors tend to follow economic incentives with discipline rather than emotion.
If the environment increasingly penalises negatively geared residential investment while commercial property continues to offer stronger income returns, higher yields and more immediate cash flow, there is every chance we see a greater proportion of experienced investors allocating capital toward commercial assets.
Importantly, this may not only occur at the institutional end of the market.
The private investor segment between $2 million and $10 million has consistently been one of the most active and resilient parts of the commercial market across Australia. Many of these assets are accessible to successful business owners, professionals and experienced residential investors looking for diversification and stronger income production. In many respects, commercial property has historically been under allocated to by Australian investors relative to its income profile.
The irony in all of this is that attempts to reduce investor participation in residential property may unintentionally accelerate awareness and adoption of commercial property investment amongst private investors.
That is not necessarily a negative outcome for CRE in Australia. Commercial property plays a critical role in the broader economy and remains one of the few asset classes where investors can still achieve relatively strong passive income supported by tangible underlying assets.
But it does represent a meaningful shift in the investment landscape.
For many years, Australian property investment has been centred around capital growth first and yield second. The policy settings now emerging may well reverse that order of importance.
And if that happens, commercial property could become one of the major beneficiaries of the next phase of Australian investment behaviour.
