Why the new tax regime could spark a revival in AREITs

In the last seven months, Dexus has made the case that many Australian Real Estate Investment Trusts (AREITs) are trading at discounted valuations (see AREITs: The case for stability and growth and Through war and economic adjustments). Many AREITs remain undervalued.

The impact of higher interest rates hasn’t helped but last week’s budget may be an unexpected catalyst. Once investors understand how the proposed tax changes may quietly tilt the playing field in favour of institutional commercial property, a structural re-rating across the AREIT market could be possible.

The reason is simple. For decades, Australians have preferred to invest in growth, be that in housing or shares. The proposed tax changes have the potential to reverse this dynamic. There are no guarantees that the measures as proposed will make the final legislation, it is not unusual for details to be changed as the legislation progresses, but the broader policy trajectory is unlikely to. The Government intends to make residential housing more equitable and accessible to younger generations and to lessen the discrepancy between taxes on income and those on assets.

The method is clear. From 1 July 2027, the Government proposes replacing the current 50% capital gains tax (CGT) discount with a system that indexes an asset’s cost base to inflation, alongside a minimum 30% tax on nominal capital gains.

Existing property investors will be partially ‘grandfathered’, with capital gains accrued before 1 July 2027 continuing to receive the current 50% discount. Gains accrued after that date would generally fall under the new regime.

Negative gearing in residential property will also be largely restricted to new builds; only eligible newly-constructed housing will keep the favourable tax treatment. The aim is to incentivise new housing construction and reduce the attractiveness of established residential property as a tax shelter. With the same objective, the ban on foreign purchases of established homes has also been extended until 30 June 2029.

There are five ways in which the proposed new regime favours investors in structures like AREITs.

1. The return of positive gearing: The budget tax initiatives, including a minimum 30% tax on capital gains, make speculative asset flipping much less attractive. We expect more investors will turn to assets that generate immediate, positive cash flows. Commercial property funds, which aren’t subject to residential land taxes and direct maintenance costs, are a prime example because their focus is on high-quality, recurring rental income.
2. Higher distributions; better payout coverage: The new environment encourages listed Australian equities to prioritise dividend distributions to shareholders over hoarding capital or chasing speculative, high-risk growth. For an income-centric portfolio like the Dexus AREIT Fund, a market that embraces higher corporate payouts reinforces the attractions of predictable, growing income for our investors.
3. The appeal of the residential tax shelter is diminished: By eliminating the historical tax advantages that residential property investors have long enjoyed, its appeal as a tax shelter will be diminished. The budget announcement levels the playing field, making the transparent, hassle-free income from commercial real estate more competitive for everyday wealth creation.
4. AREITs insulated: While private buyers of established housing will be disadvantaged, the proposed budget changes insulate institutional property structures. Trusts, super funds and corporate build-to-rent (BTR) developments retain critical concessions. In addition, AREITs that undertake a component of residential build-to-sell (BTS) are likely to benefit from remaining investor interest, given the proposed changes to negative gearing do not apply to this sector.
5. Superior, growing yields: Premium commercial real estate funds consistently generate distribution yields comfortably above traditional equity benchmarks, with the historical performance of the Dexus AREIT Fund an example.

Since inception in January 2009, the fund has generated wealth overwhelmingly through regular, compounding monthly income distributions. As the chart shows, capital growth has played a diminishing role. This is likely to continue. Because the total return profile is weighted toward recurrent rents rather than asset appreciation, any tightening of the CGT regime delivers a relatively lower drag on investor total returns.