Which is better: REIT or direct property? 

For most of my career, I have viewed listed property trusts and direct residential property as fundamentally different investments – not substitutes. But once interest rates fell below long-term averages after 2012, many advisers and investors began using REITs as a convenient income substitute: liquid, diversified, and yielding more than term deposits or bonds. 

That worked for a while, but the long-term numbers now tell a very different story. Over the long run, REITs have delivered comparatively weak returns and far more volatility than most investors appreciate. And now that high-quality bonds once again offer similar income, without the equity-like swings, the argument for using listed property as an “income” investment has lost most of its strength. 

You are familiar with direct property  

I probably don’t need to spend too much time outlining the pros and cons of investing in direct property, as I have covered this extensively before, especially in episode 311 last year, where I discussed 6 key disadvantages. 

The main advantages are well known. You have complete control over the asset – choosing which property to buy, who to rent it to, and whether to renovate or hold as-is. If you already have equity in another property, you can often borrow 100% of the purchase cost at relatively low rates. Negative gearing also allows you to offset rental losses against other taxable income, reducing your tax bill. And because investment-grade properties tend to deliver most of their returns through capital growth rather than income, they are particularly tax-efficient for people still working. 

What is a REIT and how do they work?  

A Real Estate Investment Trust (REIT) is a listed investment vehicle that derives its value mainly from owning income-producing real estate. In Australia, these are known as A-REITs. 

In the US, a company must earn at least 75% of its gross income from rent or mortgage interest to qualify as a REIT. In Australia, at least 80% of a REIT’s assets must be invested in real property, and it must distribute at least 90% of its net income to investors. In essence, a REIT is a pooled investment vehicle that owns property, distributes the income it earns, and investors are exposed to any changes in property values. 

REITs are often structured as unit trusts, meaning tax on the trust’s income is paid by the unit holders rather than the trust itself, unlike companies that pay tax before distributing dividends. Many are “stapled securities”, which combine a unit in the property-owning trust with a share in the management company. These two are stapled together and trade as a single security on the ASX. 

Some REITs hold a diversified mix of property types, including industrial, office, retail, theme parks, logistics, while others can specialise in one or two sectors. This structure allows investors to gain exposure to multiple properties and locations, creating built-in diversification. 

High-value commercial properties that these REITs invest in usually delivers strong rental income but more modest capital growth. It’s another reminder that, over the long run, you can’t expect an asset to produce both high income and high growth at the same time. 

Like private investors, REITs use gearing to enhance returns, though typically at lower levels at around 30% to 40%, whereas most private direct property investors gear at 100%.  

Their major advantage is liquidity. Because REITs are listed, investors can buy or sell their holdings easily on the ASX, something you cannot do with a direct property investment. 

Investors can also access REIT exposure through property ETFs, which hold baskets of local or global REITs. However, one drawback of the Australian market is concentration risk, as most A-REIT indices are dominated by a handful of large stocks, often just five to ten names. 

Common criticisms of REITs 

I think most investors are drawn to direct property because it gives them full control, tends to be less volatile than the share market, and, if they already have equity, they can often borrow the full purchase cost. 

With REITs, investors have no control beyond deciding whether to buy or sell. One criticism I have heard within the industry is that some large REITs employ acquisition managers who receive substantial bonuses for completing deals (buying or selling property). The concern is that these managers are incentivised to transact rather than to ensure those acquisitions perform well over time, and they may not even be around to face the long-term consequences. While that’s a sceptical view and most funds have strict acquisition criteria in place, it’s still a legitimate governance risk to consider. 

Another common criticism is volatility. Property is generally seen as a relatively defensive asset class because property prices have been less volatile than shares, with relatively stable rental income. Yet, the long-term data on REITs does not always support that assumption. In practice, listed property often behaves more like equities than bricks and mortar.  

For example, in the US, the FTSE NAREIT All REITs Total Return Index has shown annualised volatility of around 21% over the past 20 years, compared with about 15–16% for broad equities. In Australia, the pattern is similar: over the past two decades, the S&P/ASX 200 A-REIT Index has exhibited annualised volatility in the low-to-mid 20% range, compared to the mid-teens for the S&P/ASX 200 Index. 

On a pure volatility basis, REITs have actually been riskier than shares. 

Head-to-head: Comparing performance  

REITs 

The Vanguard Australian Property Securities ETF (VAP) has delivered a total return of 10.23% p.a. over the 15 years since inception from October 2010 to September 2025. This consists of 5.34% p.a. in income and 4.89% p.a. in capital growth.  

However, it’s important to recognise how concentrated this index is: Goodman Group alone makes up more than 35% of the index, and the top 10 holdings account for around 85% of it. Looking back further, the index’s total return since inception in 2002 is a more modest 6.91% p.a. 

Vanguard’s International Property Securities Index Fund, which launched in September 2005, has returned 5.25% p.a. over the same period, comprising just 0.33% p.a. in growth and 4.92% p.a. in income. Before Covid, the fund had delivered a 6.62% p.a. return since inception, made up of 5.13% income and 1.49% capital growth (September 2005 to December 2019). These results are hardly compelling. And given SPIVA data shows that 82–90% of active managers fail to beat the index over 10–20 years, if you want exposure to REITs, an index fund is still the most sensible path. 

The international fund is far more diversified than its Australian counterpart, with over 300 holdings and the top 10 representing 39% of the index. It also provides geographic diversification, though more than 70% of the exposure remains in the US. 

In my view, the strong performance of the Australian index has been heavily driven by Goodman Group, which has been a standout performer on the ASX. Its share price has risen roughly 15-fold since 2009.  

I think a more realistic long-term expected return from investing in REITs is between 6% and 8% p.a. Most of the outperformance in Australian REIT indices comes from a single stock (Goodman), not the broader asset class. 

Residential property  

In a previous blog, I examined how median house prices have changed across Australia’s five largest capital cities over the past few decades. Of course, the median represents the midpoint, meaning many properties have likely outperformed this benchmark. 

Over the past 20 to 30 years, average capital growth has typically ranged between 5.5% and 6.5% per annum. Investment-grade properties generally deliver a gross rental yield of around 2.5% to 3% per annum. After allowing for expenses of roughly 35% of gross income, the net rental yield is likely to be about 1.6% to 2% p.a. 

Combining capital growth and net income, the total historical return from residential property has been in the range of 7.1% to 8.5% per annum. However, by applying sound, evidence-based asset selection principles, investors can hopefully achieve capital growth above the median. On that basis, a reasonable estimate for the total long-term return from quality residential property is around 8% per annum which is broadly in line with what you might expect from listed property trusts (REITs). 

In summary, based on historical returns, REITs and direct residential property have delivered broadly similar long-term performance. 

In summary: REIT vs direct property  

• Control: none versus full 

• Liquidity: cash in a few days versus roughly six months 

• Gearing: typically, 30–40% (doesn’t impact personal borrowing capacity)  versus 100% 

• Volatility: more than 20% versus around 10% 

• Net income: roughly 5% versus under 2% after expenses  

• Management time: Hassle-free versus can be time consuming 

• Long-term returns: about 6–8% versus roughly 8% 

Different assets, different jobs: The real role of REITs vs property 

REITs are typically quite volatile from year to year, but their long-term income returns are reasonably predictable. Broadly, you can expect income of around 5% p.a. from an index REIT, plus a few per cent in capital growth over time. If you are comfortable with that volatility and you are primarily investing for income, REITs may work well. But it’s worth noting that high-quality bond funds can deliver similar income with far less volatility, albeit with little to no capital growth. Therefore, REITs generally look more compelling when interest rates are materially lower than they are today. 

Direct residential property, by contrast, is fundamentally a growth asset. When investors borrow 100% of the purchase price, the gearing amplifies returns, making it highly likely to outperform REITs over the long run. In this blog, I concluded that investors could reasonably expect low double-digit internal rates of return. Direct residential property is also far more tax-effective for investors who are still working. 

In short, while REITs invest in property, they are fundamentally different to direct residential property and serve two very different roles in a portfolio.