In Malaysia, which has better returns; Stock market or Property?

Case Notes 03:  Comparing the returns from investing in residential properties in Malaysia with those from investing in Bursa Malaysia

We are always looking for better assets to invest in.  One frequent question is which is a better investment - property or the stock market.

In researching the web to find the answer, I have found that the responses generally fall into 2 categories

• Analyses that give the pros and cons of each type. 

• Those that focus on the comparative returns between stocks and property

Furthermore, the answers will also differ depending on the type of investors

• A layman may be interested to compare residential properties with the stock market

• An institutional investor is more likely to compare the stock market with commercial properties. 

In this post, I will take the view of the layman.  I will compare the returns from the Malaysia stock market with those from residential properties.

What have I found out?

For Malaysia, the return analyses suggest that if you don’t have a 30 years’ time frame, you are better off investing in the stock market.  The exceptions here are for Semi-Detached and Detached houses in the capital city of Kuala Lumpur.

Read on if you want to know more. 

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.

Contents

• Pros and Cons

• Comparative Returns 

• National HPI vs KLCI 

• National HPI for different types of houses vs KLCI 

• Regional comparisons 

• Impact of rental and dividends

• Pulling it all together

• Notes

• Appendix 1 - Capital gain 
• HPI vs KLCI - National 
• HPI vs KLCI - Regional
• HPI vs KLCI - Type of Residences, National 
• HPI vs KLCI - Type of Residences, Regional

• Appendix 2: Sites with pro and con analysis

Pros and Cons

The table summarizes the pros and cons of investing in properties.

Pros	Cons
Passive income	More work than buying stocks
Hedge against inflation	Illiquid
Able to leverage	High transaction costs
Less volatile price movements	Difficult to diversity
More difficult to be defrauded	Continued costs eg insurance
	Higher tax
	Longer transaction time

This is a qualitative assessment and the answers are independent of where you are. 

In this case, the wisdom of the crowd is apt.  I don’t think there is any value-add for me to discuss the advantages and disadvantages of each. 

Rather I have listed in Appendix 2 the URLs of some webpages that discuss the pros and cons.   You can go through them yourself. 

These are sites ranked on the first page of Google under the following search phrases:

• Which is better property or stocks?

• Which is better real estate or stocks?

Comparative returns

There are more sites discussing qualitative aspects compared to those that discussed returns. 

Those that covered returns tend to be about the US or European markets. 

Return from investing in properties tends to depend on the location. Any meaningful comparative return analyses have to be location-specific.

As such I compared investing in Bursa Malaysia vs investing in residential properties in Malaysia. 

• I used the Kuala Lumpur Composite Index (KLCI) to represent Malaysian stocks. The KLCI is a capitalization-weighted stock market index. It composed of the 30 largest companies in Bursa Malaysia. (Refer to Notes 1)

• I used the Malaysian Housing Price Index (HPI) to represent residential properties.  The HPI measures the changes in prices paid for an “average” house.  It is updated by the Malaysian Valuation and Property Services Department.  (Refer to Notes 2)  

I then looked at the comparative returns of buying properties in 1990 vs the stock market in 1990. These are held for 10 years, 20 years, and 30 years before selling them off.

In practice, the gains from properties would differ by location as well as the type of residence. As such, I also compared the returns for 

• 4 regions in the country - Kuala Lumpur (KL), Selangor, Johore, and Penang

• 4 types of properties - Terrace, Sem-Detached, Detached and High Rise

I also factored in the transaction costs of buying and selling the various assets:

• Properties - property agent's commission, stamp duty, legal fees, and real property gains tax.

• Equities - brokerage fees and stamp duty

I have assumed that transaction rates are the same throughout the comparison period.  The exception is for real property gains tax as this applies only for properties sold in 2019. (Refer to Notes 3 and 4 for the transaction cost assumptions).

I also assumed that both the property and equity transactions are in cash ie there are no borrowings.  (Refer to Notes 5 for a worked example to determine the return).

National HPI vs KLCI (net of transaction costs) 

What can we conclude from the analysis? 

At the end of 30 years, the returns from investing in properties are better than from the stock market. 

But for 20 years or less, the returns from investing in properties are only marginally better. 

 

However, the stock market requires stronger nerves as it has a larger peak to trough drawdown.  It also took a much longer time to regain back the losses.

 

Duration (years)	Items	National HPI (All)	KLCI
30	Net Return                                     (1)	421 %	198 %
	Maximum drawdown                      (2)	(12) %	(53) %
	Time to recover from drawdown    (3)	6 yr	11 yr
20	Net Return	150 %	145 %
	Maximum drawdown	(12) %	(53) %
	Time to recover from drawdown	6 yr	11 yr
10	Net Return	81 %	79 %
	Maximum drawdown	(12) %	(53) %
	Time to recover from drawdown	Out of time	Out of time

Notes

1) Net Return = Capital gain less transaction costs c/w Original Cost. Original cost includes the buying transaction costs.

2) Max drawdown = difference between the peak and lowest trough (before any upturn)

3) Time to recover = Time taken to get back to the same level ie to the peak just before the start of the drawdown

National HPI for different types of houses vs KLCI (net of transaction costs) 

Property prices differ by types of houses.  Rather than looking at an All property price, it may be more appropriate to compare by types of houses.

The chart and table below show the comparisons for 4 types of houses on a national level.

As can be seen 

• After 30 years the returns from Terrace, Semi-Detached, and Detached houses out-performed the KLCI. The best return came from investing in a Terrace house. 

• At the end of 10 or 20 years, the returns from the stock market are generally better c/w the 4 different types of properties

Duration (years)	Net Return for different category of HPI				KLCI Net return
	Terrace	Semi-D	Detached	High rise
30	432 %	281 %	352 %	167 %	198 %
20	140 %	101 %	143 %	28 %	145 %
10	67 %	31 %	55 %	(6) %	79 %

 

Regional comparisons (net of transaction costs) 

Would the findings at the National level be different if we look at specific regions?

The charts and tables for the regional-property type comparisons are presented below.  To provide different perspectives, the charts are by regions and tables are by holding periods.

• For the KL region, you get better returns from Semi-Detached and Detached houses c/w the stock market irrespective of the holding periods.  

• If you hold for only 10 years, except for Semi-Detached and Detached houses in KL, you are better off investing in the stock market.

• If you are in Selangor, Johore, and Penang and you want to hold for 20 years or less, you get better returns from the stock market. The only exception is holding the Terrace house in Penang for 20 years. 

• The best returns come from investing in a Detached house in KL and holding it for 30 years

• The worst returns come from buying a High Rise in KL and holding it for 10 years only. You actually make a loss.  

At 30 years

Region	Net Return for different types of properties				KLCI Net Return
	Terrace	Semi-D	Detached	High rise
KL	560 %	811 %	967 %	147 %	198 %
Selangor	391 %	281 %	238 %	171 %	198 %
Johore	269 %	143 %	188 %	243 %	198 %
Penang	464 %	315 %	299 %	373 %	198 %

At 20 years

Region	Net Return for different types of properties				KLCI Net Return
	Terrace	Semi-D	Detached	High rise
KL	169 %	344 %	427 %	16 %	145 %
Selangor	107 %	126 %	83 %	32 %	145 %
Johore	48 %	42 %	36 %	46 %	145 %
Penang	205 %	97 %	101 %	125 %	145 %

At 10 years

Region	Net Return for different types of properties				KLCI Net Return
	Terrace	Semi-D	Detached	High rise
KL	58 %	125 %	143 %	(11) %	79 %
Selangor	45 %	14 %	19 %	10 %	79 %
Johore	47 %	36 %	46 %	45 %	79 %
Penang	52 %	59 %	63 %	54 %	79 %

Impact of rental and dividends

The analyses have ignored the impact of annual operating income and expenses eg

• Rental and other operating costs eg insurance for the properties

• Dividends from the companies making up the KLCI

Unfortunately, I do not have historical rental records for the various types of properties.

Similarly, I do not have the records of the dividends paid by the KLCI companies from 1990.

The info seemed to suggest that the rental yields are better than the dividend yield. For example, a Google search for the rental yield showed the following: 

• Property Guru May 2019 - a rental yield of 4% or more would be considered good in Malaysia.

• Globalpropertyguide.com Jan 2020 - 3.72 %. Nov 2017 Malaysia: gross rental yields have moderated, and are now 2.3% to 5.4%

At the same time, the past 10 years' dividend yield for the KLCI companies seemed to be about 3 %.  Refer to the chart below. 

Even if you assumed that rental yield gives you an extra 1% return per annum it does not change the conclusions.

Source: www.ceicdata.com

Gains from HPI vs KLCI only

The returns presented both the capital gains net of the various transaction costs.

You may argue that the transaction costs especially the real property gain tax can be a large portion of the gain.

The tables below show the transaction costs as a % of the total gain before the transaction costs. 

You can see that it varies from 5 % to 39 % depending on the types of properties and/or holding periods. 

So you may want to compare just the HPI with the KLCI. 

But, I would argue that it is not realistic to compare the returns based on the indices only. In real life, there are transaction costs. 

However, for those who want to see just the gains from the indices, I have provided the information in Appendix 1.

At 30 years

Total transaction costs % of total gain before transaction cost
	Terrace	Semi D	Detached	High Rise	All
National	7%	7%	7%	9%	7%
KL	6%	5%	5%	9%	6%
Selangor	7%	6%	8%	8%	7%
Johore	8%	8%	8%	8%	8%
Penang	6%	7%	8%	7%	7%

At 20 years

Total transaction costs % of total gain before transaction cost
	Terrace	Semi D	Detached	High Rise	All
National	8%	9%	8%	20%	7%
KL	7%	6%	5%	31%	7%
Selangor	9%	8%	11%	18%	9%
Johore	14%	16%	18%	14%	15%
Penang	7%	10%	10%	8%	7%

 

At 10 years

Total transaction costs % of total gain before transaction cost
	Terrace	Semi D	Detached	High Rise	All
National	11%	19%	13%	(b)	10%
KL	13%	8%	8%	(b)	13%
Selangor	15%	34%	28%	39%	14%
Johore	14%	18%	16%	15%	15%
Penang	14%	13%	13%	13%	13%

Notes

(a) The total transaction costs include real property gains tax for the 30 years period

(b) There are losses here so that % transaction would be negative

Pulling it all together

• There are both qualitative and return factors to be considered when deciding whether to invest in the stock market or in properties. But I don’t think the Pros of investing in properties can offset the lower returns associated with a short holding period. 

• The returns are affected not only by the changes in the value of the assets but also by transaction costs and taxes.  They vary not only by location, house type but also by the tax structure. So returns comparison has to be specific for each country.  

• For Malaysia, the return analyses suggest that if you don’t have a 30 years’ time frame, you are better off investing in the stock market.  The exceptions here are for Semi-Detached and Detached houses in KL. 

• For Malaysia, if you can hold for 30 years, then Property is a better investment than the stock market. The exceptions are 
• High Rise in Selangor
• Semi-Detached and Detached in Johore

The Return analysis compared cash investment.  

• Would the Returns be different if you take a loan to buy properties?  

• Would the Returns be different if the timing of the purchases were different? For example, instead of starting in 1990, would the results be different if the start was in 2010?

These are valid questions, but it is an analysis for another post. 

Notes

1) Source of the KLCI info: Trading Economic.com

2) Derivation of the HPI

• There were 3 series of the HPI: 1990 to 2000, 2000 to 2010, and 2010 to 2019.  The start of each series had an index of 100.

• To derive a continuation over the 30 years period, we used the 1990 base of 100 as the starting point.

• The index for 1990 to 2000 was the initial index.

• 2000 to 2010.  We first divide the index for a particular year by the 2000 index in the 2000 to 2010 series. Then we multiplied it by the 2000 index from the 1990 to 2000 series.

• 2011 to 2019.  We first divide the index for a particular year by the 2010 index in the 2011 to 2019 series.  Then we multiplied it by the 2010 index derived above.

The annual index data for 2019 for the various houses in the various states were not yet available. What was available was the respective growth rate for 2019 c/w 2018. 

• We computed the 2019 index by multiply the 2018 index with the relevant growth rate weighted by the respective property weights as stated in the Property Price Index Report.  

• The weights were extracted from the 2018 report (which used the 2010 base weight). We ignored those districts where there was price change but no weight info

3) Property Transaction costs

• Buying will incur stamp duty

• Buying will incur legal fees at the Housing Developer Act (HDA) rate 

• Selling will incur legal fees at scale 

• Selling will incur an agency cost of 3% of the selling price

• Selling will incur real property gains tax at 5% of the gain if the property was sold in 2019.  There is no real property gains tax for properties sold in 1999 and 2009.

• The Gain for the purpose of computing real property gains tax in 2019 = 2019 Selling price - 2019 legal fees - 2013 price - legal fees on purchase - stamp duty on purchase - Schedule 4 exemption.  

• Schedule 4 exemption is RM 10,000 or an amount of RM10,000 or 10% of the gain, whichever is greater

a) Stamp duty - applicable for buying and selling

Amount (RM)	Rate
< 100,000	1 %
100,001 to 500,000	2 %
500,001 to 1,000,000	3 %
>1,000,000	4 %

b) Legal fees (Scale fees) - applicable for buying and selling

Amount (RM)	Rate
< 500,000	1 %
500,001 to 1,000,000	0.8 %
1,000,001 to 3,000,000	0.7 %
3,000,001 to 5,000,000	0.6 %
5,000,001 to 7,500,000	0.5 %
>7,500,001	Negotiable but shall not exceed 0.5 %

c) Legal fees - discount for buying under HDA

Amount (RM)	Rate
< 50,000	RM 300
50,001 to 250,000	75 % of scale fees
250,001 to 500,000	70 % of scale fees
>500,000	65 % of scale fees

4) Equities transaction costs - for buying and selling

• Assumed one buying or selling transaction
• Brokers commission of 0.5 %
• Stamp duty of RM 200 per contract.  
• Clearing fees of RM 1,000.  
• We ignore any income tax since we are holding it for long term

5) Worked example - Terrace House in KL

Item	Working	Amount
Computation of Return for Property Index
1990 index		100.00
1998 index		174.20
2013 index		460.014
2019 index		710.65
Cost of house - 1998       (a)		234,800
Cost of house - 1990	234,800 X 100 / 174.2	134,788
Legal fees - 1990	300 + (134,788 - 50,000) X 0.0075	936
Stamp duty - 1990	1,000 + (134,788 - 100,000) X 0.02	1,696
1990 property transaction cost	936 + 1696	2,632
1990 total property cost	134,788 + 2,632	137,420
Cost of house - 2019	234,800 X 710.65/174.2	957,862
Legal fees - 2019	5,000 + (957,862 - 500,000) X 0.008	8,663
Sales commission - 2019	957,862 X 0.03	28,736
Cost of house - 2013	234,800 X 460.014 / 174.20	620,041
Gain for RPGT	957,862 - 8,663 - 28,736 - 620,041 - 2632	297,790
Schedule 4	10 % of gain	29,779
RPGT - 2019	(297,790 - 29, 779) X 0.05	13,401
2019 property transaction cost	8,663 + 28,736 + 13,401	50,800
Net gain	957,862 - 137,420 - 50,800	769,642
% Return	769,642 / 137,420	560 %
Computation of Return for stock market
1990 index		100.00
2019 index		308.05
Amount for stock market 1990	Total property cost in 1990	137,420
Transaction cost on buying	1,200 + (137,420 X 0.005)	1,887
Equivalent amount in KLCI 1990	137,420 - 1887	135,533
Equivalent amount in KLCI 2019	135,533 X 308.05 / 100.00	417,509
Transaction cost on selling	1,200 + (417,506 X 0.005)	3,288
Net gain	417,509 - 3,288 - 137,420	276,801
% Return	276,801 / 137,420	201 %

Notes

(a) The relative house price for the various types of properties was tabulated in the 1998 report.  We used this to derive the price in 1990

Case Notes When you invest, I hope that you are not going to depend purely on luck. One way to ensure this is to analyze the investments first. I hope that this post shows you the importance of doing an analysis.  What would you do if you are not interested in doing your own analysis but still want to be an informed investor?   One way is to rely on other experts to assess and value companies for you.  Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can then just read their analysis and assessment.

Appendix 1: Gain from Index changes only

Note: The charts show the index values whereas the tables show % changes to the index values

HPI vs KLCI - National 

After 30 years from 1990 to 2019, the HPI (All) for all categories of residential properties outperformed the KLCI. 

• If you had invested RM 100,000 in the KLCI in 1990, this would have increased to RM 308,000 in 2019.

• However, over the same period, the same initial investment in the HPI (All) in 1990 would have increased to RM 558,000 by 2019.  Of course, this assumed that you were able to invest in the HPI (All)

• In addition, both the maximum drawdown and the time to recover after the maximum drawdown are better for the HPI (All).

The better performance of the HPI (All) is dependent on investing in for a 30 years period.  

A shorter period would not have enabled the HPI to generate significantly better performance as can be seen from the table and chart. 

Duration (years)	Items	National HPI (All)	KLCI
30	Index Gain	458 %	208 %
	Maximum drawdown	(12) %	(53) %
	Time to recover from drawdown	6 yr	11 yr
20	Capital Gain	165 %	153 %
	Maximum drawdown	(12) %	(53) %
	Time to recover from the drawdown	6 yr	11 yr
10	Index Gain	92 %	86 %
	Maximum drawdown	(12) %	(53) %
	Time to recover from drawdown	Out of time	Out of time

HPI vs KLCI - Regional

As can be seen 

• The HPI (All) for all the regions after the 30 years period out-performed the KLCI

• At the end of  20 years, only the HPI (All) for KL and Penang out-performed the KLCI

• If your timeframe is 10 years, you are better off with the KLCI

 

Duration (years)	Index Gain for HPI (All)				KLCI Index Gain
	KL	Selangor	Johore	Penang
30	505 %	383 %	257 %	439 %	208 %
20	173 %	120 %	53 %	166 %	153 %
10	69 %	55 %	53 %	65 %	86 %

 

HPI vs KLCI - Type of Residences, National 

I compared the performance of the KLCI with the indices for different types of residences. 

• You are better off with the KLCI compared to investing in a High Rise for any holding period.

• Comparing property and stocks after 30 years, the best return is from investing in Terrace houses. 

• At the end of 20 years, there is no difference between investing in Terrace houses, Detached houses, or the KLCI.  For such a time frame, you would not invest in the Semi-Detached houses of High Rise. 

 

Duration (years)	Index Gain for different category of HPI				KLCI Index Gain
	Terrace	Semi-D	Detached	High rise
30	471 %	307 %	385 %	186 %	208 %
20	154 %	114 %	158 %	36 %	153 %
10	76 %	39 %	65 %	0 %	86 %

HPI vs KLCI - Type of Residences, Regional

The main findings are

• At the end of 30 years, a Terrace house would perform better than the KLCI irrespective of which regions your property is located

• After 30 years, the best investment was to buy a Detached house in Kuala Lumpur (KL).  The worst was to buy a Semi-Detached house in Johore.

• At the end of 20 years, the KLCI outperformed most of the properties in most regions.  The exception is for Terrace, Semi-Detached and Detached houses in KL and Terrace in Penang

• For a 10 years horizon, only the Semi-Detached and Detached houses in KL outperformed the KLCI

At 30 years

Region	Index Gain for different category of HPI				KLCI Index Gain
	Terrace	Semi-D	Detached	High rise
KL	611 %	876 %	1041 %	166 %	208 %
Selangor	428 %	307 %	263 %	190 %	208 %
Johore	298 %	159 %	210 %	268 %	208 %
Penang	503 %	347 %	331 %	407 %	208 %

 

At 20 years

Region	Index Gain for different category of HPI				KLCI Index Gain
	Terrace	Semi-D	Detached	High rise
KL	185 %	373 %	461 %	23 %	153 %
Selangor	120 %	141 %	95 %	40 %	153 %
Johore	56 %	51 %	46 %	54 %	153 %
Penang	223 %	110 %	114 %	139 %	153 %

 

At 10 years

Region	Index Gain for different category of HPI				KLCI Index Gain
	Terrace	Semi-D	Detached	High rise
KL	68 %	140 %	159 %	(5) %	86 %
Selangor	54 %	21 %	27 %	16 %	86 %
Johore	55 %	45 %	55 %	53%	86 %
Penang	61 %	69 %	73 %	63 %	86 %

Appendix 2: Sites with pro and con analysis

1. Nerdwallet 

2. The Balance  

3. Investopedia

4. Financial Samurai (It also provide a return comparison)  

5. Investor Junkie

6. Uown

7. Readwrite

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 

How to be an Authoritative Source, Share This Post

Disclaimer & Disclosure

I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.

Your link text