Commercial and industrial versus residential: total returns 2016–2026, and why the tax reforms stretch the gap further
Total returns (income plus capital growth) for commercial & industrial vs residential property, 2016–2026. Indicative national series.
A dollar invested across each model in 2016 tells the story cleanly. One hundred dollars in commercial and industrial property grew to roughly $289 over the decade – about 10.1% a year compounding – while the same hundred in residential grew to about $229, or roughly 7.8% a year. That 2.3% annual gap compounds into a 60-dollar difference on every hundred invested, and the source of it sits in plain sight: income. Commercial and industrial assets have paid a yield of 5-7% throughout the decade, so even in years where values went sideways, the investor was still being paid. Residential has leaned on capital growth to do almost all of the work, with a gross yield in the 3s and 4s that thins to very little once rates, insurance, maintenance and vacancies are paid.
The year-by-year panel shows both models took their hits – residential in the 2018 and 2022 downturns, commercial in the 2023 revaluation cycle as cap rates adjusted to higher interest rates. But the commercial line recovered on the strength of its income, while residential’s recoveries have depended each time on prices resuming their climb.
Gross figures flatter residential, because the two models are not equally gross. A commercial or industrial tenant typically pays the outgoings – rates, insurance, often maintenance – on a net lease running three, five or ten years. A residential landlord absorbs all of those costs themselves, on a lease that rolls every six to twelve months. The chart below adjusts both lines to a net basis: residential loses roughly 30% of its gross rent to management fees, rates, insurance, maintenance and vacancy, while commercial and industrial carries only a small management allowance because tenants pay most outgoings under net leases.
Net total returns after holding costs (pre-tax, ungeared). Dashed lines show the gross basis for comparison.
The result: the annual performance gap grows from 2.3 percentage points gross to 3.2 percentage points net. One hundred dollars invested in 2016 becomes $280 in commercial and industrial after costs, against $203 in residential – and that is before tax enters the conversation.
Tax now compounds the difference. Under the reforms legislated this year, an established residential property purchased after Budget night can no longer be negatively geared from 1 July 2027 – rental losses are quarantined against future residential income rather than deducted from salary. The 50% CGT discount that flattered every residential exit in the chart above is being replaced with CPI indexation and a 30% minimum tax on gains. In other words, the decade of residential returns shown here was earned under tax settings that no longer exist for new buyers. The historical orange line overstates what a residential investor can expect to keep going forward.
The commercial and industrial investor faces the same CGT indexation change on paper, but with structural outs residential no longer enjoys: interest remains fully deductible against other income, a company structure was never reliant on the discount, an SMSF retains both concessional gains treatment and – unlike residential – the ability to borrow. The green line’s advantage, in short, survives the reforms largely intact; the orange line’s does not.
Over the past decade, commercial and industrial property outperformed residential on gross returns, and by an even wider margin on net returns, with more of the return paid as income rather than promised as growth. Looking forward, the 2026 reforms strip residential of the two tax supports – negative gearing and the CGT discount – that helped close the gap, while leaving the commercial and industrial model essentially untouched. An investor comparing the two models today is not comparing like with like: one asset class is running the same race it always has, and the other has just had weights added.
General information only, not financial, tax or legal advice. Return series are indicative national composites built from MSCI/Property Council sector data and CoreLogic dwelling values and yields; net adjustments are assumption-based and individual assets vary widely. Past performance is not a reliable indicator of future performance. Obtain professional advice before acting.
Daniel Connolly brings decades of hands-on business and property experience to commercial real estate. After purchasing his first business in his early twenties, Daniel built a transport and earthmoving operation into a heavy engineering enterprise focused on designing and manufacturing solutions for complex client challenges. Following around 20 years in the engineering industry, he moved into property development, completing multi-unit and multi-storey projects in Newcastle as both a builder/developer and developer. This practical background informs his commercially grounded approach to property, development and investment.
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