In Malaysia, which has better returns; Stock market or Property?
- Analyses that give the pros and cons of each type.
- Those that focus on the comparative returns between stocks and property
- 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.
|
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
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 |
- Which is better property or stocks?
- Which is better real estate or stocks?
Comparative returns
- 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)
- 4 regions in the country - Kuala Lumpur (KL), Selangor, Johore, and Penang
- 4 types of properties - Terrace, Sem-Detached, Detached and High Rise
- Properties - property agent's commission, stamp duty, legal fees, and real property gains tax.
- Equities - brokerage fees and stamp duty
National HPI vs KLCI (net of transaction costs)
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)
- 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
Regional comparisons (net of transaction costs)
- 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
- Rental and other operating costs eg insurance for the properties
- Dividends from the companies making up the KLCI
- 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%
![]() |
Source: www.ceicdata.com |
Gains from HPI vs KLCI only
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% |
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
- 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?
Notes
- 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.
- 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
- 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
Amount (RM) |
Rate |
< 100,000 |
1 % |
100,001 to 500,000 |
2 % |
500,001 to 1,000,000 |
3 % |
>1,000,000 |
4 % |
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 % |
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 |
- 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
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 % |
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
HPI vs KLCI - National
- 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).
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
- 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
(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.
(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
- 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
% |
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