Property Game: It's more than the residentials

Is residential property really the only way to build long term wealth? A look at what the rest of the market is telling us, and why owning property does not have to mean owning a house.

Almost every week a client asks me a version of the same question. Should I buy another investment property? What they usually mean is a house or a unit. Something with a front door, a tenant, a mortgage, and a street they can drive past on a Sunday. In this country that instinct is in our blood. Property is our favourite topic at every barbecue, and bricks and mortar feel like the safest thing a family can own.

I understand it completely. But the question hides an assumption worth pulling apart, because the honest answer is no. Residential property is not the only way to build long term wealth through property. It is one room in a much larger house, and right now some of the other rooms are quietly doing the better work.

Let me walk you through what the market is actually saying in 2026, and then explain why, for a lot of families, an unlisted property fund does a job that a single rental house simply cannot.

01 / The team has more than one player

The Australian property market is not one thing. It is at least five things, and they rarely move together. The Australian Property Institute now surveys hundreds of professional valuers each quarter and scores the mood of each sector out of ten, where five is neutral. The spread tells the story better than any sentence I can write.

Residential leads, no surprise, but only just, and industrial is right on its shoulder. Office sits flat on the neutral line and is barely breathing in New South Wales and Victoria. The point is not that one sector is good and another is bad. The point is that the family who only owns a house has placed their entire property bet on the single most crowded, most rate sensitive corner of the market.

02 / Where the income lives

While everyone argued about the price of houses, unlisted commercial property in Australia got on with the job. As at March 2026, total returns over the previous twelve months had climbed to 8.1 percent, the strongest annual result since November 2022. Industrial funds did even better, posting 8.6 percent over the year with 21 straight months of gains. This happened in a year when the Reserve Bank started lifting rates again, not cutting them.

What is striking is how property held up against everything else. In the first quarter of 2026, as fresh inflation rattled both bond and share markets, property was one of the few places that finished the quarter in front.

The income from good commercial property tends to keep arriving even when capital values wobble. That is the whole point of it.

The reason is structural, and it is worth understanding. The big fall in value is already behind us. Between 2022 and 2024, rising interest rates dragged commercial property prices down hard. That correction has happened. The Reserve Bank has now lifted the cash rate back to 4.35 percent, the peak economists had pencilled in for this cycle, and it is worth remembering the market has stood at this level before.

Last time, 4.35 percent proved high enough to cool the economy, and investors grew comfortable owning property even with borrowing this expensive. Because today's prices and rents already reflect these higher rates, any further fall from here is expected to be far gentler than the painful slide of a few years ago. Meanwhile rents keep rising, very few new buildings are being built across warehouses, offices and housing alike, and the income just keeps landing in the account.

03 / House versus property fund

So if commercial property is doing the quiet work, how does an everyday investor get into it? You are not going to buy a logistics warehouse leased to Coles, or a government tenanted office tower in Brisbane, on your own. That is where an unlisted property fund earns its place. Rather than owning one building, you own a slice of a professionally managed portfolio of many.

Here is the comparison I draw on the whiteboard for clients, side by side.

I have put that last line in deliberately, because I never want to oversell. Unlisted funds are not a savings account. Your money is committed for a long stretch, and you should only invest what you can leave alone for years.

But notice the symmetry. The single house is illiquid too. You cannot sell the spare bedroom when you need cash. The difference is that the fund gives you diversification, professional management and far better tenants in exchange for that same patience.

And the returns have rewarded the patience. The chart below shows the total return, that is the income plus any change in value, for a range of unlisted Australian property funds over the year to March 2026, set against the wider industry average. They do not all win, and the office fund lagged, which is exactly the honesty you want in a chart. But the spread shows what a diversified set of holdings can deliver.

04 / The tax benefit of the unlisted property funds most people miss

Here is the piece that genuinely surprises clients. Many unlisted property funds pay income that is partly tax deferred. That sounds like accountant language, so let me make it plain.

When a fund owns newer buildings, the tax rules let it claim big deductions for wear and tear, what accountants call depreciation. Those deductions shrink the fund's taxable income without shrinking the actual cash it collects. So part of the income paid to you is not taxed in the year you receive it. Instead, it quietly lowers the price the tax office treats you as having paid for your investment. The tax is not wiped out. It is simply parked, to be settled later, as tax on your profit, only when you eventually sell.

Why does parking the tax matter? Two reasons. First, you keep more cash in your hand today to reinvest or spend. Second, and this is the clever part, a capital gain on an asset held more than twelve months gets the capital gains discount, and if you happen to be in the retirement phase of superannuation when you sell, that gain can be taxed at zero. You turn income that would have been taxed every year into a gain that may never be taxed at all.

Client Case: Margaret saves tax on the property fund investment

Margaret is sixty one and winding down. She has started a transition to retirement strategy, working three days a week while drawing a modest income from her super fund. Rather than buying another rental house in her own name, she has placed $300,000 into units of a managed industrial property fund inside her superannuation.

The fund pays her an income of around 6 percent a year, and roughly 40 percent of it arrives tax free for now, thanks to the wear and tear deductions on its newer warehouses.

Through her working years, that tax free portion is not counted as income. It steadily lowers the price the tax office treats her as having paid for the units. By the time she reaches 65 and fully retires, her super fund moves into what is called the retirement/pension phase, where the income and any profit on a sale are taxed at zero percent.

When the fund reaches the end of its term and the units are sold, her profit on paper is larger, because those years of reductions lowered her starting price. But because she sells once she is in the retirement phase, Margaret pays no tax on the profit, and no tax on the income she enjoyed tax free along the way.

05 / The ground is shifting after the 2026 Budget

There is one more reason the residential only strategy deserves a fresh look this year, and it comes from Canberra rather than the market. The 2026 Federal Budget put forward changes that strike at the very heart of why so many families borrow heavily to buy a rental house in the first place.

Two proposals matter most for residential investors. The first cuts the long standing tax break that, for decades, has roughly halved the tax owed when you sell a property you have held for years at a profit. The second tightens the rules that let an investor claim the shortfall on a loss making rental against the rest of their income.

Together they take aim at the two things that make a heavily borrowed rental property pay off once tax is taken into account, which is exactly how most of these purchases are justified in the first place.

These measures have passed the lower house and will be decided by the Senate in the coming weeks. But the direction of travel is clear, and it points squarely at the residential investor. Just as importantly, it leaves property held inside superannuation, and commercial property held through a fund, sitting in a very different and largely untouched tax position. When the referee penalises one player, don't forget the team has got other four players.

06 / The tide can still go out

Our newsletter is named for Warren Buffett's line that you only find out who has been swimming naked when the tide goes out. So I will not let myself off the hook. None of this is free of risk.

The Reserve Bank has lifted the cash rate to 4.35 percent, and with inflation still running hot and not expected back inside the target band until well into next year, the door to further tightening is not closed. Higher rates pressure every property value.

Unlisted funds are genuinely illiquid, so your capital is tied up for years and you should never invest money you may need soon.

Listed property securities, by contrast, can swing violently, as one listed fund did when it fell more than 17 percent in a single quarter. Office remains the weak sector, particularly in the southern capitals.

The Budget proposals could still change shape, or stall, before they become law. And every figure I have shown you describes the past, which is never a promise about the future.

The lesson is not to abandon the house. It is to stop assuming the house is the only room.

So back to the question I am asked at every barbecue. Is residential the only property investment for building long term wealth? No. It is a fine room, but the family that owns only a house is concentrated, undiversified, doing their own maintenance, exposed to the most rate sensitive part of the market, and now squarely in the sights of the Budget. An unlisted property fund offers a way to own the warehouses, the supermarkets and the government offices alongside the professionals who run them, to spread the risk across many tenants and cities, to receive steady and often tax friendly income, and, with the right structure, to hand a great deal less of it to the tax office.

None of this replaces a conversation about your own circumstances. It is simply a reminder that the property market is far larger than the street you live on, and that some of its best rooms are ones most families never think to open.