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Property is often discussed as though it were one market.
It certainly isn’t.
Australia is currently experiencing a two-speed property market. Residential values are declining under the weight of higher interest rates and reduced borrowing capacity. Meanwhile, quality commercial property—particularly industrial, medical and essential-service retail—is generally maintaining or increasing in value.
Importantly, income yields are improving across parts of both markets, but through different mechanisms.
National home prices fell for a sixth consecutive month in September and are now 3.3% below their March 2026 peak. Across the combined capital cities, values are 4.3% below their peak, with Sydney and Melbourne down 5.5% and 5.7% respectively.
At the same time, rents continue to rise.
In Melbourne, median house rents increased by 3.4% over the year to August, while unit rents increased by 5.3%.
This means residential yields are improving from both directions: investors are paying less for the asset while receiving more rent.
For example, a residential property worth $1 million and generating $40,000 in annual rent has a gross yield of 4%.
If its value falls to $950,000 and its rent increases to $42,000, the yield rises to approximately 4.4%.
That may appear to be a modest movement, but it represents a meaningful improvement in income return and provides a stronger entry point for a long-term investor.
The commercial market is behaving differently.
Demand for well-located, functional assets remains strong, particularly where there is a quality tenant, secure lease income and limited competing supply.
Rather than values declining broadly, many quality commercial assets are maintaining or increasing their value as rental income grows.
Consider a commercial property worth $2 million and producing $100,000 in annual net income—a 5% yield.
If its rent increases to $110,000 and its value rises to $2.1 million, the yield still improves to approximately 5.24%.
The investor receives more income, the property increases in value and the yield strengthens.
This is being supported by the increasing cost and difficulty of creating new commercial property. CBRE estimates that existing commercial assets are priced approximately 30% below replacement cost, while the rents required to justify new development are currently 20% to 30% above prevailing market rents.
CBRE also expects new development supply across several sectors to fall between 20% and 50% below historical levels for the remainder of the decade.
Less development means less competition for existing buildings. This supports occupier demand, rental growth and, ultimately, the value of quality commercial assets.
We are therefore seeing returns improve through two different pathways:
This distinction matters.
A rising yield caused by falling demand, an unsuitable building or a weak tenant is not necessarily an opportunity. A rising yield supported by genuine rental growth, constrained supply and strong occupier demand is far more compelling.
The same discipline applies to residential property. Falling prices alone do not make an asset attractive. The property must still be in the right location, appeal to future buyers and tenants, and be acquired at the right price.
There are opportunities in both markets, but the strategy must reflect the different forces driving them.
In residential property, investors can benefit from reduced competition, adjusted prices and rising rents.
In commercial property, the opportunity is to secure quality income in sectors where rents are growing, replacement costs are high and new supply remains constrained.
The common theme is that income returns are becoming more attractive. The important question is why.
Don’t let the headlines spook you. Cycles of opportunity never feel comfortable.
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