Commercial property to emerge as quiet winner

Commercial property could emerge as one of the quieter winners from the federal budget, with experts suggesting the property tax overhaul may redirect investors towards shops, warehouses and more.  

While the budget delivered a major negative gearing hit to residential property investors, commercial real estate was left untouched and retained its negative gearing benefits. 

It comes as all assets were impacted with the budget’s capital gains tax (CGT) discount changes, reducing the tax concession from 50% to a pre-1999 indexation model.  

The federal government argued that the tax changes were part of its push to make housing more affordable by discouraging investment in established housing and encouraging investors towards new homes.  

Ray White head of research Vanessa Rader said the tax changes had created a “meaningful incentive shift” that could make commercial property comparatively more attractive than residential.

“Established residential property acquired after budget night is no longer negatively gearable, and the CGT treatment for residential investors choosing new builds remains more flexible than for commercial,” Ms Rader said. 

“For investors reassessing their portfolio strategy, commercial property retains full deductibility of losses against other income and offers no restriction on asset type.” 

Ms Rader said some investors who had traditionally relied on residential property to build wealth may now begin exploring commercial assets for the first time, attracted by stronger rental yields and longer lease terms. 

Commercial property income yields were generally higher than residential rental returns in many parts of Australia, while also offering investors longer leases normally.  

Industrial assets, neighbourhood retail centres and other essential-service commercial properties were the most likely to attract the strongest investor interest. 

Knight Frank’s Ben Burston says investors are looking for higher-yielding assets amid the elevated interest rate environment. Picture: Supplied

Knight Frank chief economist Ben Burston said the tax changes would likely accelerate a trend already underway as investors increasingly chased higher-yielding assets during the elevated interest rate environment. 

“Commercial investment returns are typically driven to a much greater extent by income returns rather than capital growth,” Mr Burston said. 

“The new method for calculating CGT liability favours this type of investment over other investments offering lower income but the potential for higher capital growth.” 

Raine & Horne executive chairman Angus Raine said commercial property was already considered attractive because tenants typically covered many outgoings, reducing ownership costs for landlords. 

He pointed to the federal government’s decision to make the $20,000 instant asset write-off (IAWO) permanent for small businesses, arguing it could further strengthen demand for commercial premises.  

CBRE’s Sameer Chopra says investors will have pay closer attention to how they structure commercial property acquisitions. Picture: Supplied

“The certainty of the IAWO will further add to the appeal of commercial property because small business tenants will be able to claim an instant tax break for fit-outs of their premises,” he said. 

Despite the optimism, commercial property can be significantly more expensive and exposed to economic conditions than residential real estate, among other factors. 

CBRE head of research, Pacific, Sameer Chopra said buyers would also need to pay closer attention to how they structured commercial property acquisitions, particularly those using discretionary trusts. 

“The main thing for anyone buying commercial real estate is going to be focusing on how you’re buying it,” Mr Chopra said. 

He said the introduction of a 30% minimum tax on trust income could reduce the appeal of some ownership structures. 

Raine & Horne’s Angus Raine says commercial property was already attractive because tenants typically covered many outgoings. Picture: Supplied

“What would have been a straightforward decision three months ago — now people are just going to have to get good advice to make sure that you’re structured right,” Mr Chopra said. 

While the budget changes may improve commercial property’s relative appeal, experts warned the sector was unlikely to become a straightforward replacement for residential investment. 

“For private investors without prior commercial exposure, the learning curve is steep,” Ms Rader said. 

“The opportunity is genuine but requires more considered due diligence than simply redirecting residential investment capital into the nearest commercial asset.”