Property V.S. Stocks – Which has better returns?

As a millennial living with almost every one that I know trying to keep up with the Joneses, it’s not surprising to see some of my friends spending a hell lot to get their first home. The concept is drilled into their heads that property is 99.9999% of the time the best investment that they can make in their entire lives. In fact, the price that they are willing to pay is sometimes something that my alter ego of Miss Niao will never approve of.

With the hefty loan that they have to take, after wiping off all their OA monies for the down-payment and still having to service part of their monthly installment with cash because their OA contribution isn’t high enough, where does this leave you?

For a freshly bought BTO, you have an “asset” on your balance sheet that is in need of renovation, maintenance fees and all that yada yada that is totally not going to generate any income for you in the next 5 years of MOP.

Plus, you’re also possibly losing out on all the accrued interest in your CPF!

While having a home is important, it is essential to consider a property that is within your means. BF and I have been discussing about this for some time now and we both  (or at least me, and I have brainwashed him) agree that a home is meant to be there, for us to build a family. We should not see it as an investment, and we should not have any intention to sell it, unless of course, things change advantageously. Hoping that the valuation of a house would appreciate in time to me is pure speculation, and I would not want to use a roof over my head to be a liability because of greed.

Richmond also feels the same way, and insists that if possible, real estate should only be bought when opportunities present themselves. I introduced him to the alternative of REITS, where you get to own real estate in a different way, but enjoying passive income at the same time with quarterly distributions without having to do as much work as a typical landlord. It also extends his investment boundaries out to other real estate options like commercial/retail/industrial/etc as compared to residential ones.

Now then, if having property is awesome and the best investment that you can have, then why aren’t the richest people in the world known for being rich because of real estate? Surely they must have multiple houses. But their main investment isn’t in real estate, but instead, in a business/enterprise, or more often than not, a combination of both.

Here’s a comparison of how stocks did in comparison to REITS from 1988 to 2016:

reitstable.PNG

nareit sp500.png

So it looks like the stock market is only slightly beating REITs with not even one percentage point! On an even brighter outlook, if we purely calculate how well REITs of the residential properties did, it would beat the S&P 500 a little bit more with annualized returns of 11.53% and 10.85% respectively from the period of 1994 to 2016.

What this concludes is that REITs (NOT personal property) could possibly be a viable option for investors who want to get decent returns over the long run which are similar to the stock market, and with the addition of frequent payouts from the distributions as passive income.

Of course, this also does not necessarily mean that you should jump onto the bandwagon and buy property immediately. REITs compared to owning your own property is very different, and all those not-so-obvious fees that I’ve mentioned before would not be reflected here in the returns, and can average from 1% to 4% of your yearly home value. And, like before, don’t forget about the opportunity costs like CPF interest.

reits vs property.jpg
Source: SIAS

Timing is also a very important factor. Just like the stock market, prices of property fall and rise with some relation to the general economy. NAREIT, notably, represents the entire world’s REITs performance, so to compare just how Singapore did may turn out to be a different story altogether, but that’s an analysis for another day. The S&P 500 also consists of a number of REITs, and still undoubtedly offers a wider diversity of industries/sectors.

But are you reading Miss Niao because you want to be the defensive investor? Check out my post on buying your first stock. With the creation of this blog, it is obvious that I am trying to beat the market, and it would take me some time to prove that I can do it. (If you’re doing the same, stay tuned for more articles, and bring some fresh perspectives into the comments if you have any). This is the reason why I will not heavily concentrate my capital on REITs, because I am aiming for something else.

In contrary, within both BF’s and my personal portfolio, we hold quite a huge chunk of REITs, but most of the capital used are from BF as they align more towards his investment objectives.

But to buy my own property? In our funny, sunny island, don’t you know that you have to get married first? :p

Thanks for reading!

Miss Niao xoxo

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Author: Miss Niao

Hello! I blog about financial matters and things that average people can do to have a better retirement. I want to inspire people to take control of their money and have a better understanding about it. If you are interested to know more, follow me @ missniao.wordpress.com! :)

8 thoughts on “Property V.S. Stocks – Which has better returns?”

  1. The difference between investing in real property and in REITS is the amount of leverage for real property enable you increase your returns. We all agree that borrowing money to buy stock (including Reit stock) are dangerous because you may be caught with a margin call. Morever, borrowing to buy Reits is riskier than buying property for 2 reasons. Mortgage is borrowing for long terms – >20 years – whereas borrowing for stock investment is for short term (less than a year or bank facility on call). Interest rate tends to be lower for mortgage than for stock investing. This distinction of tenure is importance – > 20 years vs short term. Even though Reits are less voliatile than normal stock but it still can drop 20% to 30% during a financial crisis and you may have come across some REITS like Cache and Sabana doing so badly that bother on frauds. For real property, even if its value drops, your investment is cushioned in 2 ways. Government intervention. In Singapore where house ownership is over 85%, Singapore government would never allows the property price to drop suddenly and substantially if it want to be re-elected. Moreover, Singapore is a financial hub and banking is the key industry. Majority of the bank loans are property loans. A big fall of property price would means lots of bad debts and will affect the stability of the banking industry and Singapore economy. Singapore government has the ability to intervene because it is the biggest land owner and HDB flat pricing will provide the floor to support the general property price. The goverment can also restrict land sales to limit supply that will affect pricing. So while REITS can be a good investmnet, because real property has the ability to leverage on long term commitment, it is still a safer investment.

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    1. Hi yevets,

      While I do agree that property prices can be protected by the government, but to say that one investment is safer than the other is by means a faulty statement to me. All investments come with risk, and it all depends on the price you pay which will determine the amount of risk that you take on.
      Even though REITs might fall 20-30% during a GFC, for someone who is Dollar Cost Averaging and investing for the long term (and maybe also to the value investor), this should bring more good news than bad, since there is an opportunity now to average down and buy more. In the long term, your P&L will average out to the predicted 10% from the above numbers.
      You have also mentioned on borrowing to buy REITs. There is really no need to do so. You can buy REITs without being in debt, and that itself has already placed you in a better position in your finances, as compared to taking up a big bank loan.
      I would like to view REITs and owning physical property as two different asset classes. While being relatively correlated, for the investor, both might serve very different purposes.

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  2. I believe one of the attractions of owning a real property is capital gain. Seeing how much property prices have gone up over the last 15 years, it’s understandable why it is deemed a good investment.

    However, I think many people today take 25 or 30-year loans to buy residential properties. If property prices continue to go up the same way as they have in the last 15 years, soon enough we’ll be looking at million dollar plus HDB flats. I’m extremely sceptical that our wages will increase anywhere near the same rate.

    If that is the case, most flats will be out of reach. I think most people don’t have rich enough parents to lower the loan substantially. So are we going to be looking at 35 or 40-year loans? That is why I’m wondering if capital gain will be
    as good as what we have seen previously. What do you think?

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    1. Exactly, which is why in Singapore, the government has taken measures to make sure property prices can’t go infinitely higher. When we purchase a flat, we should consider buying one only within our means. Having to rely on someone else to pay for your monthly installment or down payment would mean that you are not financially independent – you should have other more worrying issues.
      Did you know previously that the maximum HDB loan is 30 years? It is only recently that it has been reduced to 25 years.

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  3. In Singapore, with its finite land, ever growing population and increasing wealth of its populace, not to invest in REAL estate esp. a Singaporean with a privilege of going for subsidised BTO to enhance wealth building is tantamount to leaving money on the table. A HDB BTO is Govt giving money for your roof and at the same time assisting Sporeans to build wealth.

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