Deep, deep dive
Investing in REITs vs. Traditional Property and Stocks – A Comparison
While investing in a REIT is a form of property investing, it is also quite like investing in a dividend stock. While REIT investors will always receive dividends—which is their main appeal—they can also benefit from capital appreciation if the prices of the REIT’s shares increase (and sell it immediately if they so choose). This is more akin to a stock.
So, let’s look at some of the advantages and disadvantages of investing in REITs by comparing it to both stock investing and traditional property investing.
Traditional Property Investing vs. REITs Investing
Compared to traditional property investing, REITs investing has the following advantages:
- More Affordable: The minimum transaction size is 100 units. With most M-REITs having unit prices under RM2, a couple hundred ringgit is all you need to get started. There is no need to get into debt
- More Liquid: Unlike property which can take months to sell, you can buy and sell REIT units almost instantly so long as the market is open
- Diversification: You can get exposure to real estate sectors you would not normally be able to such as hospitals and hotels
- Less Hassle: No paying fees, chasing tenants, or worrying about property upkeep
On the other side of the coin, there are also some disadvantages:
- Less Control: Less hassle also means less control. You have no say over what properties the REIT decides to buy or sell
- More Volatile: More liquidity can also mean more volatility. REIT prices fluctuate daily
- No Exposure to Residential Sector: Currently, there are no residential REITs in Malaysia
Stock Investing vs. REITs Investing
A few reasons people may find REITs preferable to normal company stocks are:
- More Consistent Dividends: A company’s dividend is always optional; a REIT’s is not. In general—though there are exceptions—REITs also pay higher dividends than regular shares
- Less Volatility: The value of a REIT will always be largely based on the value of the underlying properties plus rental cashflows. This means REIT prices are generally less volatile compared to shares
But each strength has its own trade-offs. Compared to stocks, REITs are more stable, but this means they also generally have less potential upside in terms of price appreciation.