What the tax shake-up could mean for institutional BTR investment and development

Negative Gearing – Investment properties (excluding new build) operating at a net loss will no longer be able to offset those losses against taxable income from 1st July 2027. Established properties purchased before 12th May 2026 will be grandfathered under the current arrangements. 

Capital Gains Tax (CGT) – The flat 50% CGT discount (applied to a seller’s marginal tax rate) on assets held for over 12 months will be scrapped, from 1st July 2027. It will be replaced with a 30% minimum tax on gains made above inflation, rising to marginal income tax levels for higher earners. New build purchasers can opt to keep the 50% CGT discount, or choose the new model at point of sale, depending on which produces a better tax outcome.

Together, these measures are designed to reduce the after-tax appeal of investing in established housing, with the government seeking to improve access for first home buyers while supporting its target of delivering 1.2 million homes over five years.

While debate has focused on affordability and investor demand, there is a useful international case study. In the UK, tax changes affecting individual landlords materially weakened the economics of Buy-to-Let (BTL refers to individual investors, akin to mum-and-dad investors in Australia) and contributed to a long-term restructuring of the private rental sector.

For Australian developers, institutional investors and policy makers, the UK experience provides a guide to how investor behaviour, housing delivery and Build-to-Rent (BTR) could evolve if the reforms proceed.

CASE STUDY: LESSONS FROM THE UK

The past decade has seen a sustained decline in UK BTL lending as cumulative tax and regulatory changes, including the removal of full mortgage interest relief and additional stamp duty on investment purchases, reduced the sector’s attractiveness. Market impacts are described in further detail as follows:

• In 2014, prior to the introduction of regulatory changes, the mortgaged BTL market grew by 125,400 outstanding loans. 
• In 2016, an additional 3% stamp duty surcharge on second homeowners was introduced together with a phase out of the ability for BTL landlords to deduct mortgage costs from rental earnings. This rose to 5% in 2024.
• As a result, the number of outstanding BTL mortgages decreased by 69% between 2016 and 2021. 
• Since 2023, increasing mortgage costs (that can no longer be offset against rental income) have impacted landlord profits. Some have opted to reduce their portfolios and the total number of outstanding mortgages shrunk by 126,700 between 2023 and 2025.
• Individual BTL landlords are now selling properties at a faster rate than they are buying, placing additional pressure on the UK rental market.

In Australia, investor lending remains far more prominent. ABS data shows that loans for investment properties hit an all-time high in 2025, with c.217,000 new home loans granted to investors, representing almost 40% of the new mortgaged market, according to ABS. This is over four times the share of the UK (only 8.5% of new loans went to investors in the year to March 2026, according to UK Finance) and has been fuelled by strong capital value and rental growth in recent years. The proposed changes to negative gearing and CGT are intended to reduce mainstream investor demand for established housing rather than trigger an immediate exit. But initial investor reaction has been negative towards the proposals, with Westpac reporting that housing investor loan applications have fallen 20% in the three weeks since the budget.

Australia’s proposed reforms are less punitive than the UK’s current BTL regime. Mortgage interest would still be deductible from rental income, unlike in the UK, and grandfathering should limit the risk of a rapid sell-off by existing investors. Even so, the policy direction is clear: established housing is likely to become less compelling on an after-tax basis for new private investors, particularly in lower-yielding markets.

As individual landlord participation weakened in the UK, institutional capital expanded into rental housing through BTR. Over the past decade, professionally managed BTR funded by pension funds, sovereign wealth funds and other institutions has become an established part of the UK residential investment market. Institutional investors were better placed to fill part of the supply gap, given their focus on long-term income and their ability to operate at scale.

BTR also became a more important source of development funding. In London, in particular, forward-funding from institutional BTR investors has supported schemes that might previously have relied on pre-sales to individual investors. BTR has not replaced BTL capital entirely, nor solved the housing shortage, but it has slowed the net decline in private rental stock as traditional investor demand has weakened.

THE IMPACT IN AUSTRALIA IS LIKELY TO BE GRADUAL, NOT ABRUPT

Australia is unlikely to see a UK-style exodus of private landlords in the near term. Grandfathering provisions should preserve the current tax treatment for existing investors, reducing the incentive for a rapid exit (or sell-off) and limiting immediate disruption to rental supply. At the same time, underlying demand fundamentals, supported by population growth and constrained supply, remain intact.

However, the reforms are likely to influence future investment decisions at the margin. By reducing the after-tax appeal of established housing, they may temper new investor demand, particularly among highly leveraged buyers, prompting a more selective approach to residential investment. This does not necessarily imply a broad withdrawal of capital, but rather a shift in how and where it is deployed.

The reforms may be felt most acutely or likely to be more pronounced in lower-yielding markets such as Sydney, where investment performance has historically relied on negative gearing and capital growth. That could reduce the appeal of rent-vesting strategies and reinforce investor preference for higher-yielding regional or suburban markets.

Over time, the effects are likely to emerge gradually as owners of grandfathered assets review their portfolios and sell as they approach retirement. In tightly supplied inner-urban rental markets, where new supply remains limited, even a modest pullback in private investor activity could widen the gap between rental demand and available listings. This would highlight the strength of underlying demand rather than point to weaker market fundamentals.

While Australia’s reforms are less severe, the direction of travel to the UK is similar - gradually reshaping the role of private investors and increasing the relevance of institutional rental models.

Emily Gold, Director, Capital Markets - Living

STRENGTHENING THE LONG-TERM CASE FOR BUILD-TO-RENT

BTR is structurally better positioned to capture a greater share of future rental demand. As tax settings reduce the attractiveness of established housing for new private investors, a greater share of rental supply is likely to come from institutional capital operating at scale. Recent federal tax changes have reinforced this shift: while investor incentives for existing housing are being curtailed, active BTR developments benefit from targeted concessions within the Managed Investment Trust (MIT) regime -including a reduced 15% withholding tax rate (down from 30%) and accelerated depreciation - bringing BTR more in line with other commercial real estate asset classes. Alongside improving planning recognition, these settings are helping to unlock institutional capital, although rising construction costs and feasibility constraints remain significant headwinds.

BTR remains small relative to the wider Australian rental market, but the direction of policy strengthens its strategic relevance. Where for-sale absorption weakens and rental demand remains deep, institutional rental housing is increasingly well placed to provide both delivery and long-term income.

For investors and developers, the implication is not that tax reform will trigger an immediate step change, but that it improves the relative investment case for BTR over time. If private investor demand for established housing moderates, while rental demand remains structurally strong, BTR’s role in funding and delivering new supply is likely to grow, just as it has in the UK.