Capital Gains Tax (CGT) changes announced in last night’s Federal Budget will encourage more private investors to invest in commercial property, according to Knight Frank’s Chief Economist Ben Burston.
This is because of the commercial property sector’s yield advantage over residential stock, he explained.
“Commercial investment returns are typically driven to a much greater extent by income returns rather than capital growth, and 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,” Mr Burston said.
“In addition to the yield advantage, commercial investments are also still eligible for negative gearing, although this tends to be less commonly used given typically lower gearing levels compared to residential investments.
“We have already seen increased interest from private investors in the commercial market in recent years in response to the higher interest rate environment which has incentivised investors to acquire higher-yielding investments, and these changes will add further impetus to demand.
“They will translate into demand not only for standalone investments, but also for other ownership structures with less upfront capital required including real estate investment trusts and syndicates.”
What impact will the tax changes have on housing supply?
“In terms of housing supply, the government has maintained the existing tax rules for new stock to ensure continued investor participation and hence maintain rental supply, but the impact on the rental market will bear close watching given that established rental stock and new stock are not perfect substitutes,” Mr Burston said.
“The changes are likely to divert some investor demand toward new high-density stock along transport corridors but reduce the quantum of rental stock in established suburbs where families often prefer to live.
“The government and industry will need to closely monitor not only the effect on aggregate supply levels but also these compositional impacts and be prepared to adjust policy further if the changes have adverse impacts on the rental availability and pricing.
“If the changes reduce availability of established rentals, this will potentially increase the importance of build-to-rent as an alternate means to generate new rental supply, but the sector is subject to the same feasibility constraints as traditional build-to-sell development.
“In addition, the implementation of the performance test for superannuation funds has arguably had the unintended consequence of reducing some funds appetite to invest in new BTR developments because of the uncertain return profile in the early years of what are inherently long-term investments.
“With this in mind, the proposed review of the super funds performance test to remove unintended barriers to investment is a welcome development.”