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The Move To Commercial Investment

ByAndrew Mirams

It’s safe to say the Federal Budget’s property changes are heartily disliked by almost every property expert in the business, including myself.

It’s true these changes are officially still only proposals, and not law; but I’m cynical when it comes to this Budget, so I wasn’t surprised to read a Financial Review article, and others, wherein Albo and his Treasurer hope to push their ideas past Parliament before its winter break in July. 

Regardless of when and how the Budget reforms will become law, it’s very unlikely that they’ll make life easier, or cheaper, for the residential market.

What about our commercial market though? Well, along with other asset classes, such as shares, commercial property investments will, in the government’s own words, “remain subject to existing arrangements”…  when it comes to negative gearing, that is.

But commercial property investors should take note that in relation to the Budget’s new capital gains tax (CGT) reforms, they’ll impact both their commercial and residential portfolios.

The changes that are coming

From July 1, 2027, our “blanket” 50 per cent CGT discount for all property and other asset investments will be replaced by a cost-base indexation system, with a minimum tax rate of 30 per cent on net capital gains.

Basically, commercial investors who plan to sell a property after July 1, 2027, won’t enjoy their usual 50 per cent CGT benefit. But you’ll still be able to enjoy any CGT gains your property accrues before this date.

And make no mistake: this tax benefit could still offer serious financial returns, especially if the property has been held for a long period – and most commercial properties usually are.

Commercial property investors can also still utilise negative gearing beyond July 1, 2027.

Other positives for commercial investors include the ability to use companies or trusts for further asset protection, whereas there are now some constraints on this in our residential space.

Plus, commercial investors can borrow up to an 80% loan-to-value ratio (LVR) as standalone security and, in certain circumstances, up to 100% of the property’s value.

So, in our new post-Budget reality, there are good reasons to expect an upward shift in the commercial property investment market. 

Moving forward, I certainly expect many residential investors to move toward commercial ownership in order to both balance their investment portfolio but also to continue to enjoy the negative gearing benefits that remain available for commercial property types.

Why commercial property investments make sense right now

I agree with Ray White’s Vanessa Radar, when she told realcommercial.com.au that the proposed Budget changes had created a “meaningful incentive shift”, which could see commercial property investment attracting more buyer interest than residential opportunities.

Ms Radar said commercial investors would still enjoy full deductibility of losses against other income, with no restrictions on the type of commercial asset they buy. The assets expected to become particularly attractive to investors include industrial and essential service properties and neighbourhood retail centres.

REA Group senior economist, Anne Flaherty, also believes the Budget will mean “more flows” to commercial property investment, especially for those keen on “stronger yields and less exposure to changing housing policies”.

The benefits in this environment are obvious. Commercial properties often enjoy higher net rental returns, longer leases, and in some, but not all, better depreciation benefits than residential.

Commercial vs residential: what you should know

One commercial buyer’s agent recently described how the announced budget has improved the appeal of commercial investment relative to residential, without directly tinkering with the budget settings applied to commercial.

The keyword here is “relative”, because in terms of tax benefits, commercial investment now wins the day over residential opportunities. 

I expect plenty of long-term residential investors will likely enter the commercial market now. But they need to consider a few important details before buying.

First and foremost, don’t expect this move to be easy or straightforward. Long-term experience in residential investment doesn’t automatically translate into a simple shift to commercial investment. In short, commercial leases, tenants, legalities, and expenses are very different to residential ones.

Commercial properties can be more expensive than residential properties and are at greater risk of longer vacancy periods, which will add to investors’ financial concerns.

So, potential first-time commercial investors, be prepared to enter a whole new world of investing fundamentals, regardless of your residential investing experience.
And current commercial investors, be ready to compete with these new buyers, but rest assured that your experience and understanding of the sector will be an advantage.

Both commercial and residential investors should reassess their portfolios and the Budget’s implications. These are not small-time issues we’re talking about here, but ones that, for residential investors in particular, will impact your future finances.

Fortunately, you’re not alone in this post-Budget world. The savvy team at Intuitive Finance is ready and waiting to help you and your residential or commercial property portfolio. So, give us a call today to organise a complimentary strategy session.

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