Property experts are predicting a mass exodus of residential investors pivoting to commercial real estate following Tuesday’s budget announcement on the abolition of negative gearing for established homes.
From July 2027, investors will only be able to claim negative gearing benefits on newly constructed residential properties, while commercial properties are not affected.
According to Angus Raine, executive chairman of Raine and Horne, the budget enhances the appeal of commercial property by making the Instant Asset Write-Off, a permanent tax deduction for small businesses, who can use it to claim fit-out costs.
Adding there was no mention of changes to capital gains tax arrangements for self-managed super funds (SMSFs), which are often active investors in the commercial property market.
“I think the only positive thing for property on Tuesday night was that it will redirect investors into the commercial asset class,” Mr Raine said.
“Traditionally, Australians look at residential because they’re comfortable with it, they know it and it’s easy to work out and to decipher.
“It’s a little bit more complicated in commercial, but consumers shouldn’t be worried at all.
“That could be from a storage unit worth $200,000, to a couple of strip shops in the main street, to a small neighbourhood shopping centre for $10m to $15m.”
Mr Raine said the changes to the taxation of residential property are likely to refocus investors towards commercial properties, particularly at the mid to lower end of the market.
He pointed to Federal Budget has made the $20,000 Instant Asset Write-Off (IAWO) a permanent tax deduction for small businesses.
“Commercial property is already a very cost-effective investment as the tenant, rather than the owner, normally pays many of the ongoing costs associated with the property,” he said.
“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.”
Mr Raine said the Budget does not mention changes to the capital gains tax arrangements for self-managed super funds (SMSFs).
“Feedback from commercial property experts across the Raine and Horne Group indicates that commercial property is often held in the name of a SMSF,” said Mr Raine. “The Budget reforms could increase the appeal of commercial property among SMSF investors.”
For mum and dad investors, he recommended starting with research online, getting a mortgage or finance broker involved and accountant to assist.
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Rethink Investing Founder and CEO Scott O’Neill said the budget’s “pain” will be felt across growth assets like crypto, also impacting residential property owners and tenants.
“I think they’re the main people that will suffer out of this and the feed that’ll gain out of it will be those who are investing in income stocks and any income related properties, so that might be like boarding houses and commercial property,” he said.
“Income is going to be a higher focused asset class because you’re not going to be relying on capital growth as much.
“So people will pivot as there’s no doubt about it.”
Mr O’Neill said his commercial investment company’s phones are currently “running off the hook”.
“Commercial was already becoming in vogue, because interest rates were going up,” he said.
“People were having more problems with residential and also the fact that the rents weren’t covering the mortgages by such a distance, those residential portfolios weren’t really making mathematical sense and commercial, on the other hand, it’s positively geared, so we don’t care about negative gearing, we don’t really care about capital gains taxes.
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“You’re not selling these things, you really want to hold them forever and pass them on to the next generation because commercial is the end game.”
He did, however, point to an “unfortunate reality” of commercial expense.
“There’s about $400,000 to $500,000 cash or equity needed to get into an entry-level deal,” he said.
“You can go into a syndicate with as little as a $100,000 but you often have to qualify as a wholesale investor for that.”
He recommended investors focus on fundamentals of good yields, well-priced assets under market value and buying into markets that are due for growth.
“Buy good yielding assets, target a minimum five per cent gross yield for residential, you want five or six per cent net yield for commercial,” he said.
“You want good areas, undersupplied markets, don’t buy high rise units, don’t buy buildings that have to be knocked down and you haven’t factored that into a feasibility study, don’t buy in a tiny regional town no one’s ever heard of.
“The basics all still work and these tax changes haven’t changed any of that.
“Don’t just sit on the same old strategy or give up. There’s going to be a flow of money towards different things at the moment and if you move before the crowd, you’ll collect the downstream effect of that.”
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Originally published as ‘We don’t care’: investors’ defiant plan to beat new tax reforms
