Why the 2026 Federal Budget could increase investor interest in commercial property over residential

The 2026 Federal Budget has placed property investment tax settings back in focus, with proposed changes to negative gearing and capital gains tax set to influence how investors assess property. While the reforms do not create a simple shift from residential to commercial property, they may change how investors compare asset classes. As some tax advantages linked to established residential investments are reduced, investors may place greater emphasis on new builds, income, yield, lease security and long-term asset fundamentals.

Property tax changes are reshaping investor decisions

Residential property has traditionally been supported by a combination of capital growth expectations, accessibility and favourable tax treatment. Under the 2026 Federal Budget, negative gearing for residential property will be limited to new builds from 1 July 2027, with existing arrangements preserved for properties held before Budget night (2026 Federal Budget).

For established residential properties acquired after Budget night, rental losses will generally be quarantined and carried forward, rather than being used to reduce salary or other income in the same way (PwC, 2026). Capital gains tax settings are also changing. From 1 July 2027, the 50% CGT discount will be replaced with cost base indexation and a 30% minimum tax rate on capital gains for individuals, trusts and partnerships (2026 Federal Budget). Importantly, these CGT changes apply more broadly to CGT assets, not just residential property.

This distinction matters. Commercial property is not unaffected by the reform. However, the negative gearing changes are specifically targeted towards established residential property, which may prompt investors to reassess whether residential assets still offer the same relative appeal.

Why commercial property investment may attract more attention

As the investment case for established residential property changes, investors may begin to place greater weight on income performance. Commercial property is typically assessed through a different investment lens. Investors often focus on rental yield, lease term, tenant quality, annual rental increases, outgoings recovery, depreciation benefits, location fundamentals and future demand for the asset type.

For investors seeking income rather than relying primarily on capital growth, well-leased commercial assets may provide a clearer cash flow-driven investment case. Real Commercial senior economist Anne Flaherty has suggested the Budget changes could lead more investors to consider commercial property, noting:

“This could drive more people to consider investing in commercial assets which offer stronger income returns, longer lease profiles and better depreciation benefits.”

This supports the broader market implication. If investors can no longer rely on the same level of tax benefit from established residential property, some may look more closely at commercial assets with stronger income characteristics.

Why income security and yield matter more

Residential property will continue to play an important role in investor portfolios, particularly for those focused on new housing supply, long-term capital growth or lower entry price points. However, the 2026 Federal Budget may encourage investors to compare residential and commercial property more closely on after-tax returns, income security and portfolio diversification.

Commercial property often offers stronger income returns than residential property, although this varies by asset type, tenant profile, lease structure and location. A well-leased commercial asset with a quality tenant, fixed rental reviews and a longer lease term can provide more predictable income over the medium to long term.
This may support increased interest in industrial assets, essential-service retail and well-located office assets where tenant demand, lease security and income stability can be clearly demonstrated.

Key takeaway: Investors are likely to become more selective

Commercial property is not a like-for-like replacement for residential investment. It requires a clear understanding of tenant risk, vacancy periods, lease incentives, outgoings, make-good obligations, zoning and market depth. Entry costs can also be higher, particularly for freestanding assets or properties with secure lease income.

However, the 2026 Federal Budget may encourage more investors to review commercial property as part of a broader portfolio strategy. It may also increase interest in syndicates, managed funds and real estate investment trusts, which can provide exposure to commercial property without requiring direct ownership of an entire asset.
The broader implication is that investors may become more selective. As established residential property becomes less tax-advantaged, greater emphasis is likely to be placed on income reliability, tenant quality, lease structure and long-term asset performance.

The 2026 Federal Budget does not create a simple residential-versus-commercial outcome. However, it may increase the consideration of commercial property for investors seeking yield, income security and portfolio diversification in a changing tax environment.