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Which Is Better: REITs or Direct Real Estate?
REITs are better for investors with limited capital who want periodic income and liquidity without management, while direct real estate is better for investors with substantial capital who want full control and are willing to manage the property. Neither is better for everyone; one simply suits your circumstances better.
A REIT is a closed-ended investment fund listed on the stock exchange that owns developed, income-producing properties such as shopping centers, offices and warehouses. Capital Market Authority rules require it to distribute at least 90% of its net profits to unitholders every year, and it is not allowed to invest in undeveloped (white) land.
Comparing REITs with Direct Real Estate
| Factor | REIT | Direct real estate |
|---|---|---|
| Capital required | The price of one unit | Hundreds of thousands of riyals or more |
| Liquidity | Sell on any trading day | Selling can take months |
| Diversification | Several properties, tenants and cities | Usually a single property |
| Management | Licensed fund manager | You or a property management company |
| Income | Distributions of at least 90% of net profits annually | Rent after expenses and vacancy |
| Financing | Fund borrowing capped at 50% of total assets | Personal mortgage that magnifies both return and risk |
| Entry cost | 0.155% trading commission | 5% real estate transaction tax + brokerage |
| Ongoing costs | Management fees deducted from the fund | Maintenance, insurance and management |
| Control | You don’t choose the properties or tenants | Full control |
| Value volatility | Unit price changes daily | Value only shows up at valuation or sale |
Returns: Which Earns More?
There is no fixed winner, because the source of return differs. A REIT’s return = cash distributions + change in the unit’s market price, while direct real estate’s return = net rent + increase in the property’s value when you sell.
Direct real estate can deliver a higher return in two cases: if you buy below market thanks to your knowledge of the neighborhood and your negotiating, or if you use financing and the value rises, since the loan magnifies the gain on your own money. But the same loan magnifies the loss if prices fall or the property sits empty.
A REIT offers more regular income thanks to diversification and the distribution requirement, but its unit price can trade below the book value of its properties for long periods. And because the fund distributes most of its profits, higher borrowing costs as interest rates rise feed directly into lower distributions.
The Real Costs: An Example with SAR 1 Million
The biggest tangible difference between the two options is the cost of getting in and out. Suppose you are investing SAR 1 million:
| Cost | REITs | Direct property |
|---|---|---|
| Trading commission or brokerage on purchase | About SAR 1,783 (0.155% + VAT) | Up to SAR 25,000 in brokerage |
| Real estate transaction tax | Not applied to buying units | SAR 50,000 (5%) |
| Cost when selling | About SAR 1,783 | Brokerage and sale expenses |
Direct property therefore starts about 7% behind before it earns any return, which is a key reason it is a long-term investment by nature. A REIT, on the other hand, deducts an annual management fee from its assets, an ongoing cost that doesn’t appear in the table but affects distributions every year.
The Risks of Each Option
REIT risks:
- Unit price volatility with market sentiment, even when the properties themselves haven’t changed.
- Lower distributions if a major tenant leaves or borrowing costs rise.
- Dependence on the fund manager’s decisions on buying, selling and financing.
Direct real estate risks:
- Concentrating your money in one asset and one location.
- Vacancy and tenants defaulting on rent.
- Low liquidity when you need money unexpectedly.
- Regulatory changes, such as the five-year freeze on rent increases in Riyadh since September 2025.
When to Choose Each One
Choose REITs if:
- Your capital is less than the price of a well-located property.
- You want periodic income without dealing with tenants or maintenance.
- You may need the money within a few years.
Choose direct real estate if:
- You have enough capital plus a reserve for expenses.
- You know the local market well and can buy at a good price.
- You are investing for more than 7 to 10 years and want full control.
Many investors combine the two: one direct property in a market they know well, plus a REIT portfolio that adds diversification in sectors they can’t enter alone, such as warehouses and large office buildings.
A Practical Example: Derayah REIT
To illustrate the difference with a real example, Derayah REIT is a closed-ended, Shariah-compliant traded real estate fund managed by Derayah Financial. The Capital Market Authority approved its offering in December 2017; at launch it was worth about SAR 1.17 billion and held 15 properties with around 60 tenants across 6 regions.
This is exactly what an individual investor can’t do with direct property: for the price of one unit, they own a small share of a property portfolio spread across several cities and dozens of tenants, instead of tying their income to a single property. But the same example shows the opposite risk: the unit’s market price has fallen in recent years below its nominal value of SAR 10, which is common in the Saudi REIT market as interest rates rose. So review the latest fact sheet of any REIT before buying to see its current assets, distributions and borrowing level.
Frequently Asked Questions About REITs and Direct Real Estate
Is a REIT better than buying an apartment to rent out?
For someone without the time or experience to manage a property, usually yes. An apartment needs more money and ties your income to one tenant, while the fund spreads the risk across dozens of tenants. But someone who finds an apartment at a good price in a high-demand neighborhood may earn a higher return over the long term.
Are REIT distributions guaranteed?
No. The fund must distribute at least 90% of its net profits, but the profits themselves can fall if rents drop or costs rise.
Is zakat due on REITs?
Yes, and it is calculated differently from zakat on a directly owned rental property. It is best to refer to the fund’s disclosures and its Shariah board.
Can non-Saudis invest in REITs?
Yes. REITs are listed on the stock market and can be bought by residents and non-residents. They are the simplest way for a foreigner to get exposure to Saudi real estate without going through direct ownership procedures.
Conclusion
REITs give you income, diversification and liquidity with a small amount and low entry cost, while direct property gives you control and the chance of a higher return in exchange for more capital, more effort and more risk. The deciding question isn’t “which is better?” but “which suits my amount, my time and my investment horizon?”
This content is for awareness purposes and is not investment advice.
