Are REITs really a good investment?
Yes and no. Yes, REITs do pay higher than market average dividends. They generate income primarily through rental collections and typically distribute most of this income as dividends to unitholders. This high payout ratio stems from tax regulations that allow REITs to deduct dividend payments from taxable income when they distribute over 90% of their earnings. Due to the belief that rental income is more stable than a typical company’s fluctuating earnings, and the consistent dividend payouts, REITs have long been viewed as relatively safe, high-yield investments. They are particularly popular with investors seeking regular cash flow, such as retirees or income-focused funds. In reality, though, REIT dividends are also dependent on their earnings and will drop in line with profitability. For instance, dividends fell sharply in 2020-2021, during the pandemic.
And yes, REITs have outperformed the broader market. The Bursa Malaysia REIT Index is up 39.5% since October 2017 — the earliest available data for the REIT Index — compared to 15.3% and 17.5% total returns for the FBM KLCI and FBM Emas Index respectively (at the point of writing). And it has done even better in the first seven months of this year — up 11.5% versus the FBM KLCI and FBM Emas Index’s declines of 5.8% and 7.6% respectively — against the backdrop of heightened uncertainties and expectations of falling interest rates. That said, size matters.
The REIT Index aggregates REITs of all sizes, and performance varies significantly between the largest and smallest players. For example, the five largest REITs — KLCCP Stapled Group, IGB REIT, Sunway REIT, Pavilion REIT and Axis REIT — delivered a total return of 137% since January 2015. In contrast, the five smallest REITs — Atrium REIT, Hektar REIT, AmanahRaya REIT, AmFIRST REIT and Tower REIT — posted a total loss of 26% over the same period (see Chart 1). This disparity reflects fundamental differences in asset quality and tenant demand.
The top REITs own marquee properties with strong tenant appeal such as Suria KLCC, Mid Valley Megamall, Pavilion Bukit Bintang and Sunway Pyramid. These flagship malls are not only gathering spots for locals but also major tourist attractions, ensuring consistently high foot traffic. Demand for retail space is so strong that there is often a waiting list of merchants eager to secure a spot. This translates into high occupancy rates and gives the owners considerable pricing power when negotiating rental terms.
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Conversely, smaller REITs often struggle with poor occupancy. Take AmFIRST REIT’s Prima 10 office building, for example — only 16% of the building is occupied. Tower REIT’s Menara HLX managed to fill just over a third of its office, while AmanahRaya REIT’s Wisma Comcorp struggles to reach even half capacity at 46%. There is also nearly half of retail spaces at Hektar REIT’s Segamat Central shopping complex that remained unleased at an occupancy rate of 58%. These properties are either situated in less desirable locations or have suffered years of underinvestment and physical deterioration, making them far less attractive to potential tenants. As a result, owners struggle to fill vacancies, and when tenants do come in, they often demand lower rents or shorter leases. In some cases, the underutilisation is so severe that the empty space becomes more of a liability than an asset — so much so that converting them into haunted-house adventure parks might actually be a more profitable use of the premises! Clearly, smaller REITs lack the asset quality and tenant profile of their large counterparts, making them poor choices for investors seeking high yields with relative safety.
REITs are ‘cashing out’ machines for developers
Why do we then say REITs are not good investments? Because many of the REITs, including the large ones, are effectively “cashing out machines” for their major shareholders. Basically, a way for developers to monetise their assets and reduce leverage.
Here’s how it works: Consider a company that holds commercial properties worth RM1 billion on its balance sheet, financed by RM700 million in debt. When the company seeks additional financing for new projects, its high gearing makes securing loans difficult or expensive. To solve this problem, the company sells its properties into a REIT. Proceeds from the sale allows the company to reduce debts, thereby lowering gearing, and/or recycle the capital into other investments. If the properties are sold for more than RM1 billion, the company can even recognise a capital gain. Given these benefits, it is no surprise that many companies increasingly turn to REITs for asset monetisation (see collage of news headlines).
And when the property sales are priced at or above fair valuations, it leaves little to nothing on the table for retail investors, in terms of future growth, be it in terms of capital gains or dividend yield increases. For REITs to deliver higher yields, to compensate for their slower long-term growth, companies would need to sell their properties at lower valuations. The reality is few, if any, companies would be willing to do so. To demonstrate our point, let’s compare REITs and banks.
REITs have underperformed banks financially — yet are trading at higher valuations
First, why compare with banks? Surely banks are riskier and, therefore, even if they outperform in absolute terms, REITs are still better investments in terms of risk-adjusted returns. At least, that would be the popular perception. We beg to differ.
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We believe that REITs actually face greater earnings uncertainty than banks. Why? As the crucial pillar of the economy, providing credit and a safe place for savings, banks are subject to close regulatory oversight by Bank Negara. To ensure financial stability, the central bank ensures all banks earn a reasonable interest spread to remain profitable over the long term and it will intervene to prevent systemic crisis. This oversight essentially provides a safety net for banks, making their earnings more stable than the rental incomes of REITs. Close scrutiny by Bank Negara also suggests strong governance and accountability.
The resilience of banks was evident during the pandemic, when the five largest banks experienced a relatively modest 26% decline in earnings per share (EPS) in FY2020 compared to a severe 52% drop for the five largest REITs (see Chart 2). Banks also rebounded faster, regaining pre-pandemic earnings within a year, whereas REITs took two years to recover.
Ironically, bank share prices fell more sharply than REITs’ during the pandemic (see Chart 3) and are generally more volatile underscoring, we think, the market’s widespread misperception about the relative risks between these two sectors.
When we compare the Bursa Malaysia REIT Index to the Bursa Malaysia Financial Services Index over the last seven years, the REIT Index has significantly underperformed — REITs delivered total returns of 39.5% compared to 50.3% for the Financial Services Index. This underperformance is largely due to stagnant earnings in the REIT sector, which grew by only 3.5% from 2017 to 2024. In contrast, the earnings of the Financial Services Index rose 36.7% over the same period. One could argue that the REIT Index was being dragged down by the poor performances of the smaller REITs. So, let’s compare the performances of the five largest REITs versus the five largest banks.
Between FY2015 and FY2024, the five largest banks — Malayan Banking Bhd (Maybank), Public Bank Bhd, CIMB Group Holdings Bhd, Hong Leong Bank Bhd and RHB Bank Bhd — achieved EPS growth of 68%, significantly outpacing the 8% growth recorded by the five largest REITs over the same period (see Chart 2).
Critically, this stronger earnings performance also means that banks are growing their dividends faster. Case in point, dividend per share (DPS) increased 82% over the period, far exceeding the 23% DPS growth for comparable REITs. Despite starting with a higher dividend yield in 2015 (4.9% versus banks’ 4%), REITs’ slower subsequent dividend growth has left their investors worse off over time. For example, in 2015, REIT investors earned RM4.90 per RM100 invested, compared to RM4.00 for bank investors. However, as REITs’ dividends grew at a slower pace, the tables turned. By 2024, bank payouts had climbed to RM7.28 per RM100 investment, surpassing the RM6.03 paid by REITs. With banks’ earnings growth expected to continue outpacing that of REITs, this dividend gap is poised to widen even further in the years ahead (see Chart 4).
Why? REITs are structurally constrained in earnings growth, as they distribute over 90% of their income as dividends, leaving little capital for reinvestment. When REITs do pursue acquisitions to drive growth, they typically finance these through new share issuances, which creates a dilutive effect that offsets the incremental profits generated by the newly acquired properties. Unless they manage to acquire properties at a bargain. But as we mentioned, REITs are an asset monetisation tool for developers. Transactions are mostly fairly priced. This fundamentally limits the REITs’ ability to compound earnings growth compared to banks, which can retain and reinvest a larger portion of their profits. Because banks retain a larger share of their profits, their net asset value (NAV) per share also grew at a faster pace of 51%, compared to a 13% increase for REITs (see Chart 5).
Banks are better longer-term investments than REITs
REITs have outperformed banks in terms of cumulative share prices since January 2015 (see Chart 3), despite being fundamentally inferior. However, this should not be interpreted as evidence that REITs are a superior long-term investment, but rather as a reflection of how undervalued banks have become.
The relative outperformance of REITs share prices was driven largely by the sharp rally this year, while bank stocks fell. This divergence stems from expectations of central bank interest rate cuts, which are generally seen as benefiting REITs more than banks. Lower interest rates directly reduce REITs’ interest expenses, which are a major cost component. REITs tend to have higher gearing as most of their earnings are distributed rather than retained to pay down debts. Additionally, REIT property valuations — derived using discounted cash flow models based on future rental incomes — benefit from lower discount rates as the interest rate declines. In contrast, banks are expected to see net interest margin compression during falling interest rate cycles.
Thus, lower interest rates are seen to lift REITs earnings in the short term, though the extent of the boost will depend on the size of the cuts, which is probably limited. This is because Malaysia’s current OPR (at 2.75%) is already below its pre-pandemic level of 3%, unlike in the US where the current federal funds rate (4.33%) is well above its pre-pandemic average of 1.55%.
We believe that REITs have run far ahead of underlying fundamentals. As at July 2025, the market capitalisation-weighted average price-earnings ratio of the five largest banks is just 10 times — well below the average 17 times for the five largest REITs. On top of that, the trailing 12-month (TTM) dividend yield was 5.7%, nearly one percentage point higher than the 4.8% offered by the REITs. Given that banks provide superior dividend yields, trade at more attractive valuations AND have better long-term growth prospects, there is no question that a long-term investor should favour banks over REITs.
How about REITs in Singapore?
REITs play a significant role in Singapore’s stock market, with the country hosting Asia’s largest REIT market outside Japan. In the benchmark Straits Times Index, eight of the 30 constituent stocks are S-REITs, accounting for roughly 10% of the index’s weight. By contrast, there are no REITs in the FBM KLCI. Given their prominence in Singapore, one might expect S-REITs to outperform their Malaysian counterparts. The data is somewhat ambiguous, perhaps not surprising given their differences. M-REITs are mostly domestic and retail-focused while S-REITs are far more diversified in terms of assets and regional-global exposure.
DPS growth for the five largest M-REITs and S-REITs — CapitaLand Integrated Commercial Trust, CapitaLand Ascendas REIT, Mapletree Pan Asia Commercial Trust, Mapletree Logistics Trust and Mapletree Industrial Trust — were more or less in line before 2020 but the recovery for S-REITs have been much slower after the pandemic. As a result, S-REIT DPS has inched up by just 6%, compared to the 23% increase achieved by the five biggest M-REITs (see Chart 6). However, S-REITs delivered stronger growth in NAV per share of 21% versus M-REITs’ 13% (see Chart 7) over the same period — though both M-REITs and S-REITs pale in comparison to the 51% growth delivered by Malaysian banks.
If one were to look at the total returns over the past decade, then M-REITs have clearly outperformed. Chart 8 shows the cumulative share price performance (adjusted for dividends) for the five largest MREITs having done better than the five largest S-REITs since January 2015, largely because the latter have been trading sideways since 2020. Notably, though, S-REITs were outperforming prior to the pandemic. M-REITs, on the other hand, have done very well over the past one year — but this also means their valuations are now higher. The average price-to-book ratio for the five M-REITs is 1.4 times compared to 1.1 times for the S-REITs. It is also important to bear in mind that the share prices in Chart 8 are in local currencies. Total returns in US dollar terms for the M-REITs, at 97%, is almost at par with the total returns for S-REITs of 96%, due to the ringgit’s 17% depreciation against the USD since January 2015, while the Singapore dollar has appreciated 3.4%.
Conclusion
The statistics suggest that the asset quality of the top five M-REITs is comparable to that of the largest S-REITs — and their slower growth relative to banks stems from the same structural limitations of the REIT business model. For yield-focused investors, banks present a more compelling alternative, offering stronger growth potential alongside attractive dividends. This is why, when selecting high-yield stocks for our Malaysian Portfolio, we consistently favour banks over REITs.
Of course, not all banks are equal. Much like REITs, there are stark performance differences between the large banks and their smaller counterparts. The five smallest banks — AMMB Holdings Bhd, Alliance Bank Malaysia Bhd, Affin Bank Bhd, MBSB Bank Bhd and Bank Islam Malaysia Bhd — have lagged behind the top five banks in nearly every metric. Between FY2015 and FY2024, their EPS grew by just 13%, compared to 68% for the largest banks. DPS growth was similarly weaker at 42%, versus 82% for the top five. NAV per share rose by only 24%, roughly half of the 51% achieved by the largest banks. Reflecting these weaker fundamentals, their share prices have increased by a mere 17% over the past decade, compared to 88% for the top five banks (see Chart 9).
Large banks enjoy several structural advantages, including their extensive branch and service networks that make them the preferred choice for customers who value convenience when accessing banking services or depositing funds. Government agencies also tend to place their deposits with larger institutions. This deposit advantage enables big banks to offer lower interest rates on savings, reducing their funding costs. With cheaper funding, they can extend loans at more competitive rates, attracting lower-risk borrowers. In contrast, smaller banks face higher funding costs and must lend at higher rates, often to customers with a higher risk profile — increasing their exposure to credit risk. This heightened risk profile makes them less attractive to depositors, forcing them to offer consistently higher deposit rates to compete. Additionally, large banks benefit from better operating leverage through economies of scale, further enhancing their profitability. In summary, if you are looking to buy high dividend yield stocks, the large banks are a better choice than REITs.
The Malaysian Portfolio was up 0.5% for the week ended Sept 17 with gains led by Maybank (+2.8%), United Plantations (+1.6%) and Hong Leong Industries (+0.9%). The only losing stock was Kim Loong Resources (-0.7%). Total portfolio returns now stand at 186.0% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 11.9% over the same period, by a long, long way.
More positively, both the global portfolios fared comparatively better. The Absolute Returns Portfolio gained 2.5% for the week, lifting total portfolio returns to 41.6% since inception. The top three gainers were Alibaba (+13.4%), Trip.com (+6.7%) and Crowdstrike (+4.9%) while the two losing stocks were Ping An Insurance (-2.0%) and ChinaAMC Biotech ETF (-2.0%).
The AI Portfolio traded 2.9% higher last week. The gains boosted total portfolio returns to 7.8% since inception. The biggest gainers were Alibaba (+13.4%), RoboSense Technology (+5.5%) and Workday (+3.7%). Meanwhile, Datadog (-3.5%) and Twilio (-0.7%) ended in the red. We are looking to make some changes to the portfolio in the coming days.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports
