How the SMSF Property Borrowing Changes Are Shifting Attention Towards Commercial Property
When the door closed on new residential borrowing inside self-managed super funds on 10 August 2026, it did not close on property borrowing altogether. Business real property remains a category a fund can still borrow to buy, and that has drawn fresh attention to commercial premises as an SMSF investment. For business owners in particular, the change has turned a familiar but often-overlooked strategy into the main remaining path to geared property in super. Understanding why attention is shifting, and what the category actually requires, helps trustees judge whether it fits their fund.
Why commercial is now in focus
The reform confined new limited recourse borrowing arrangements to real property used wholly and exclusively in carrying on a business. Residential Investment property is out; business real property is in. With residential gearing no longer available for new arrangements, trustees and advisers who still want leveraged property exposure are looking to the category that remains open.
This is less a sudden discovery than a change of emphasis. Business real property has always been available to SMSFs, and business owners have long used their fund to hold their own premises. What the borrowing change does is remove the residential alternative, making commercial property the default rather than one option among several.
What business real property means
Business real property is broadly land and buildings used wholly and exclusively in one or more businesses. It covers a wide range of premises: offices, warehouses, factories, retail shops, and consulting or medical rooms. Certain primary production land also qualifies, and it can include a modest private residence, such as a farm homestead, where the residential area does not exceed two hectares.
The wholly and exclusively test is strict, and whether a particular property meets it is a question of fact. Mixed-use properties, or premises with a significant residential component, can fall outside the definition. Trustees considering a commercial purchase need to be confident the asset genuinely qualifies before relying on it for borrowing.
The related-party advantage
Business real property has a feature that makes it especially attractive to business owners: unlike most assets, it can be acquired from a related party at Market Value and leased back to a related party, provided the arrangement is on genuine commercial terms. That lets a business owner hold their premises in their fund and pay rent to the fund rather than to an unrelated landlord.
Done properly, this can align a business’s occupancy with the members’ retirement savings. But the arm’s length requirement is real: the rent must be at market rates, documented and actually paid, and the Lease must be maintained on commercial terms. Getting this wrong risks breaching the rules that govern related-party dealings.
Risks that travel with commercial property
Commercial property is not a soft option. It can carry longer vacancy periods than residential, tenants can be harder to replace, and values can be more sensitive to economic conditions and the fortunes of a single business. For a fund whose main tenant is the members’ own business, the fund’s income and the business’s health become intertwined.
Concentration and Liquidity concerns apply just as they do to residential property. A single commercial asset can dominate a small fund, and it cannot be sold in part to raise cash for a pension or a member’s exit. The investment strategy needs to address these risks candidly rather than assume commercial property is inherently safer.
Funding and borrowing realities
Borrowing to buy business real property remains possible, but lenders apply their own criteria, and finance for specialised commercial Assets can be more conservative than for residential, with larger deposits and tighter serviceability tests. Trustees should confirm finance early and in writing rather than assume it will be available on familiar terms.
A fund can also buy commercial property outright with pooled member balances, avoiding borrowing entirely. For some funds, particularly where members have consolidated their super, that is a cleaner route than gearing. The right approach depends on the fund’s cash, its members and its strategy, not on a general rule.
Is it right for your fund?
Commercial property suits some funds well, especially where members run a business that needs premises and the numbers stack up on genuinely commercial terms. It suits others poorly, particularly smaller funds that would become dangerously concentrated or illiquid. The borrowing change has widened interest, but interest is not a substitute for a fund-specific assessment.
Because business real property, related-party leasing and borrowing each carry compliance requirements, this is an area where licensed advice and, where needed, legal input are worth the cost. This article is general information only and is not a recommendation to buy, lease or borrow against any particular property.
A final practical point concerns timing and process. Because the borrowing rules now hinge on the nature of the property and, for arrangements around the commencement date, on when a binding contract was signed, trustees pursuing commercial property should document each step carefully: confirmation that the asset meets the business real property test, the lease terms if a related party will occupy it, and evidence of finance. Building that discipline in from the start turns a compliance obligation into a straightforward record, rather than something to reconstruct anxiously if the fund is later questioned.
The wider picture is that the borrowing change has narrowed the menu but not removed the appetite for property in super. Where a fund and its members genuinely fit the commercial model, the strategy can work well and align a business’s premises with its owners’ retirement savings. Where they do not, chasing commercial property simply to keep a gearing strategy alive is the wrong reason to buy. The discipline the change encourages, matching the asset to the fund rather than the fund to a preferred asset, is ultimately a healthy one for trustees to adopt.
Practical takeaway
With new residential borrowing closed off, business real property has become the main remaining route to geared property in an SMSF, and its related-party leasing rules make it especially relevant to business owners. But the wholly and exclusively test is strict, commercial property carries its own vacancy, concentration and liquidity risks, and lender terms can be conservative. Trustees should confirm the asset qualifies and take licensed advice before treating commercial property as a simple substitute for residential.
