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. Revision date: 3 Sep 2023

Are you better off investing in the stock market or properties? There are two ways to answer the questions:

Qualitatively. This focus on the pros and cons of investing in each.

Quantitatively. This looks at returns, volatility, and time to recover from drawdowns

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.

Read on if you want to know more. I have a 3-min video that gives an overview of this.

You will be surprised to find that the answer will also depend on where you are. This is because properties are more location-specific.

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

What have I found out? The chart above sums it up.

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.

In other words, if you are a long-term investor (think 30 years) you are better off investing in properties. Of course you should be looking for the best investment property in Malaysia. While this article is not about where you can find them, the various tables and charts can give clues to where to hunt for such properties.

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Qualitative analysis

Comparative Returns

National HPI vs KLCI

National HPI for different types of houses vs KLCI

Regional comparisons

Impact of rental and dividends

Properties vs REITS vs Stocks

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

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.

In Malaysia, which is better - Stock Market or Property?

Stocks and properties are different asset classes.

Stocks refer to the ownership of the company to the extent of shareholding. They are financial instruments. Within a particular stock exchange, there are many types of stocks. They can differ by sector, market capitalization, and location of business.

Properties are physical assets. They can be purchased for commercial purposes to get some monetary benefits or for personal use as well. Even within residential properties, we can have link houses, semi-Detached ones, and standalone bungalows.

Given the variety of each asset class, we need a way to compare them. One practical way is to compare the housing price index with the stock exchange index.

While they are different assets, they are strongly correlated. For example, from 1990 to 2019, there is a 0.85 correlation between the Malaysia Housing Price Index and Bursa Malaysia Composite Index. In other words, the indices tend to move together.

Qualitative analysis

There are several perspectives when comparing investing in properties and the stock market. Looking at the pros and cons is one way.

Table 1 summarizes the pros and cons of investing in properties. You can think of the cons in Table 1 as the advantages of investing in stocks.

This is a qualitative assessment and the answers are independent of where you are. They are generally also the criteria you would focus on if you are looking for the best investment property in Malaysia.

Table 1: Pros and Cons

There are also psychological benefits of owning a property that goes beyond the pros and cons.

My mother for example thinks that properties are real in the sense that she can touch and see it. But to her a stock is just a piece of paper.

There are also studies that show social benefits of owning properties:

“…Studies have shown that children of homeowners tend to score 9% better in math and 7% better in reading than children of non-homeowners…children of homeowners exhibit 1-3% fewer behavioural problems than children of non-homeowners...” Sold.com

“…Strong and consistent evidence indicates that homeowners are more likely to: a) be satisfied with their homes and neighborhoods; b) participate in voluntary and political activities; and c) stay in their homes longer, contributing to neighborhood stability…” The Social Benefits and Costs of Homeownership: A Critical Assessment of the Research, Joint Centre for Housing Studies, Harvard University.

But there are also behavioural aspects of investing in the stock market that make it challenging for many. Examples of these are:

“Loss aversion…where a real or potential loss is perceived… as more severe than an equivalent gain. For instance, the pain of losing $100 is often far greater than the joy gained in finding the same amount. This overwhelming fear of loss can cause investors to behave irrationally and make bad decisions…”. Investopedia

“Confirmation bias is the tendency to seek information that supports a person’s beliefs. This bias may lead investors to focus only on information that reinforces their opinions about an investment. Selectively choosing which information to use can lead to a lack of diversification and investments that are too risky.” Charles Schwab

Panic selling. This is a widespread selloff of a stock due to fear, rumour, or overreaction rather than reasoned analysis. Properties are less liquid and we often don’t see this among property investors.

I don’t think that there is any clear winner from the qualitative perspective. That is why I have an equal amount allocated for stocks and properties.

Comparative returns

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

If you are in the US or UK, you are better off investing in the stock market if you have a long-term investment horizon.

“…between 1975 and 2022. A $100 investment in the average home…in the fourth quarter of 1975 would have grown to about $928 by the first quarter of 2022. A similar $100 investment in the S&P 500 at the beginning of 1975 would yield approximately $19,351 in 2022, provided all dividends were reinvested” Investopedia

“…we have compared the average returns over various periods for the Halifax UK Property Index vs the Average UK Equity investment fund…Over 20 years…UK shares still beat property. An investment of £100,000 in UK shares would now be worth £390681, which is £59,971 or 18% more than in UK property” Woodruff

But in Malaysia, the opposite seems to be the case. I compared investing in Bursa Malaysia vs investing in residential properties in Malaysia.

I used the Bursa Malaysia Kuala Lumpur Composite Index (KLCI) to represent Malaysian stocks. The KLCI is a capitalization-weighted stock market index. It is 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 to 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 Note 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.

Table 2: HPI vs KLCI

Notes

1) Net Return = Capital gain less transaction costs c/w Original Cost. The 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

Malaysia Return from Property vs Stock Market

Chart 1: National Property Market vs Stock Market

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

Property prices differ by type of house. 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

Table 3: National House Type vs KLCI

Chart 2: National House Type vs Stock Market

As an aside, if you are looking for the best investment property in Malaysia, Table 3 can be a good source of where to look. Start with the Terrace houses as it delivered the best return during the 30 years period.

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 region and the 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 make a loss.

If you are looking for the best investment property in Malaysia, I would hunt in KL.

Chart 3: KL House Type vs Stock Market

Chart 4: Selangor House Type vs Stock Market

Chart 5: Johore House Type vs Stock Market

Chart 6: Penang House Type vs Stock Market

At 30 years

Table 4: Net Returns by House Type by Regions vs KLCI – 30 years

At 20 years

Table 5: Net Returns by House Type by Regions vs KLCI – 20 years

At 10 years

Table 6: Net Returns by House Type by Regions vs KLCI – 10 years

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.

Chart 7: Dividend Yield 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

Table 7: Total Transaction Costs as % of Total Gain – 30 years

At 20 years

Table 8: Total Transaction Costs as % of Total Gain – 20 years

At 10 years

Table 9: Total Transaction Costs as % of Total Gain – 10 years

Notes to Table 7 to 9.

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

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

Properties vs REITS vs Stocks

So far, we have only looked at physical properties and financial instruments (stocks). But there is a hybrid instrument known as Real Estate Investment Trusts (REITs).

“A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate…REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments - without having to buy, manage, or finance any properties themselves…” Investopedia

Unfortunately, there are no 30 years of history for the Malaysia REITs. The Securities Commission Malaysia only introduced its “Guidelines on Real Estate Investment Trusts” the after the mid-2000s. Bursa Malaysia REIT index was only established in 2017.

But Chart 8 gives you a sense of the comparative performance of the HPI, KLCI, and a sample of Bursa REITs. You can see that from 2007 to 2021.

The HPI grew at 6.1 % CAGR.

The KLCE grew at 0.6 % CAGR.

The market price of REITs grew at 5.3 % CAGR

If you want to know more about the comparison between properties, REITs, and the stock market, refer to “Bursa REITs, Property Stocks, or Properties – how to choose?”

Chart 8: HPI vs KLCI vs REIT

Note: The REIT Index was based on the median market cap for each year for the panel of 11 REITs. These were the REITs that had data from 2007 to 2021. The market cap was derived by taking the year-end prices multiplied by the number of shares (units) at the end of the year. Data for both were extracted from TIKR.com.

I have earlier mentioned that in the US and UK, it is better to invest in the stock market than in real properties. The examples below show that it is better to invest in REITs.

“However, research recently published by…NAREIT and by Cohen & Steers Capital Management… shows that…REITs have steadily outperformed private equity real estate funds, in good times and bad, over more than 30 years...” WSJ

“…over the past decade UK REITs recorded an annualised return of 9.7%. In comparison, between July 2009 and July 2019 UK equities returned 9.1% a year…and investments in the UK direct property sector returned 6.2% annualised” FT Adviser

The two charts below support these contentions.

Chart 9: US S&P 500 vs REIT Source: The Motley Fool

Table 10: UK Private Real Estate Index vs REIT Source: Schroders.

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, and house type but also by 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.

You not only get better returns from properties in the long run, but you also have a lower drawdown. It also takes a shorter time to get back from the drawdown. From an investing psychology basis, the property is better.

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.

The Malaysian results contrast with those for the US and UK. In those countries, the advice is to invest in the stock market. When you throw REITs into the equation, it is best to invest in REITs rather than the general stock market index when investing in the US or UK.

But Malaysia does not have 30 years of evidence for REITs. Over the 10 to 20 years period, properties did better than the KLCI and the REIT index.

But if you take a big-picture view, REITs are just a subset of the stocks. It should not change the conclusion of the stock market vs properties.

The above conclusions are on a net return basis. I have also presented in Appendix 1 the comparative return looking at just the index gains. On a national basis, the conclusion remains the same. But realistically you should look at the net return basis.

My original return study was based on the 1990 to 2019 data. Would another 3 years of data change the conclusion that if you have a 30 years investment horizon, you are better off with properties? No.

From 2019 to 2021, the indices changed as follows:

HPI grew at 1.5 % CAGR.

KLCI contracted at 0.6 % CAGR.

You can see that the returns from the HPI improved relative to the KLCI.

Best investment property in Malaysia

For those of you who are thinking of investing in properties, you should focus on the best investment property in Malaysia. Use the tables and charts above for this. Look at the house-type and regions with the best returns.

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, 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 multiplying 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 to compute 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

Table 10: Stamp duty - applicable for buying and selling

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

Table 11: Legal fees (Scale fees) - applicable for buying and selling

c) Legal fees - discount for buying under HDA

Table 12: Legal fees - discount for buying under HDA

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

Table 13: Worked example - Terrace House in KL

Note:

(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.

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

Chart 11: Trends of National HPI vs Trends of KLCI

Table 14: HPI vs KLCI – Index Gains

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.

Chart 12: Trends of All HPI by Region vs Trends of KLCI

Table 15: HPI by Region vs KLCI – Index Gains

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.

Chart 13: Trends of National HPI by House Types vs Trends of KLCI

Table 16: HPI by House Types vs KLCI – Index Gains