Investors need to change their mindset. · Getty/Rethink Property
For years, Australian property investors were rewarded for one thing above almost everything else. Simply holding on.
Cheap debt, rising house prices and a strong belief that residential property would keep climbing encouraged many investors to accept weak rental returns, negative cash flow and high leverage in exchange for the promise of future capital growth. But the investment equation is changing.
The Reserve Bank of Australia (RBA) has lifted the cash rate to 4.35%, following a 25 basis point increase in May, after also raising rates in February and March this year. The move has put renewed pressure on mortgage holders and investors already managing higher repayments, elevated living costs and softer consumer confidence.
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Australia’s household debt-to-income ratio remains among the highest in the developed world, with RBA data showing household debt sitting at roughly 180%-plus of disposable income. That level of debt matters because it directly affects disposable income, household spending and the willingness of investors to keep funding assets that rely heavily on future price growth rather than income today.
It is one reason cash flow is becoming the metric investors are watching more closely.
In Sydney and Melbourne, where residential property values remain high, gross rental yields commonly sit around the low-to-mid 3% range, and can be materially lower once costs such as rates, insurance, maintenance, strata and property management are included. By contrast, many commercial assets are still offering materially higher net income, particularly in sectors such as industrial, neighbourhood retail, medical, childcare and service-based property.
That gap is changing investor behaviour.
What investors are now looking for
Rethink Group has seen a clear shift in the type of investor entering the market. The speculative buyer chasing off-the-plan stock or development upside has become less prominent. In their place is a more disciplined investor looking for income-producing assets, stronger tenant covenants, longer leases and markets where supply is constrained.
The appeal is not difficult to understand. A negatively geared residential property may still deliver long-term capital growth, but it requires the investor to fund the shortfall every month. In a higher rate environment, that shortfall has become harder to ignore.
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Commercial property, by comparison, can offer a different equation. Many leases are structured so tenants cover some or all outgoings, meaning the income investors see on paper is often closer to the income they receive. For investors managing higher borrowing costs, that cash flow can be the difference between holding comfortably and holding under stress.
The broader market data suggests this is not an isolated trend. Australia’s commercial property market recorded $85.58 billion across 9,015 sales in 2025, a 27% increase on 2024. The “other” category, which includes childcare, service stations and aged care, jumped 80.5% to $9.04 billion as investors chased defensive income and essential-service tenants.
Retail property has also rebounded from the “retail apocalypse” narrative that dominated during and after the pandemic. KPMG’s commercial property market update found retail delivered a 7.3% total return in the September quarter of 2025, making it the strongest performing of the three major commercial property sectors for six consecutive quarters.
The strongest pockets of retail are not necessarily discretionary shopping strips. They are assets anchored by essential spending: supermarkets, medical services, convenience retail, large-format operators and everyday services that households continue using even when budgets tighten.
Higher building costs make new supply harder
Construction costs are another important part of the story. ABS analysis shows prices received by building construction businesses rose 31.1% between the September quarter of 2020 and the June quarter of 2024. House construction prices rose 40.8% over that period, while non-residential building construction rose 27.1%.
That cost escalation has made new supply harder to justify in many markets. For commercial property investors, that can create a structural advantage for existing assets. If new stock cannot be built economically at current rents and yields, existing well-located assets become more valuable to tenants and investors alike.
This is where the cash flow argument becomes more compelling. Investors are not simply buying a higher yield. They are buying income in markets where replacement supply is difficult, tenant demand remains resilient and lease structures may provide annual rental increases.
‘The key question has shifted’
Rethink Group’s position is that 2026 is likely to reward investors who focus less on what an asset might be worth in three years and more on what it can reliably pay over the next decade.
That does not mean commercial property is without risk. Tenant quality, lease length, vacancy risk, location, building condition and debt structure all matter. A weak commercial asset with a high headline yield can still be a poor investment if the tenant leaves or the building requires significant capital expenditure.
But the direction of travel is clear. In a market shaped by higher interest rates, stretched household balance sheets and elevated construction costs, income has become more than a nice-to-have. It has become a form of protection.
For investors, the key question has shifted.
It is no longer simply: “What could this asset be worth if the market rises?”
It is: “What will this asset pay me each month if the market does not?”
That discipline may be what separates investors who build wealth through the next cycle from those still relying on the conditions of the last one.
Scott O’Neill is a prominent Australian property investor featured in AFR’s Young Rich List four years in a row. He is an entrepreneur and Founder & CEO of Rethink Group a premium property investment group, host of the top commercial property podcast “Rethink Investing’s Inside Commercial Property”, co-author of “Rethink Property Investing” Australia’s number one commercial property investing book.