South African property outperformed the JSE top 40 index over 21 years when accounting for rental income and capital growth.
To see whether it is better to buy a house and rent it out or invest in the JSE, Daily Investor used data from the FNB house price index.
It is a residential property index that tracks the price return of residential properties in South Africa.
The index is built upon the “repeat sales method” and shows how house prices have changed over time. The repeat sales method tracks individual house prices when bought and sold.
The index matches the selling prices of houses across all residential properties financed by FNB.
FNB applies filters and cut-off procedures to eliminate outliers before the data is compiled into an index.
The index only accounts for the price appreciation of properties and does not consider returns on rental income.
To measure the price performance of properties in South Africa, we compared a R100 investment in the JSE Top 40 index to the same investment in the FNB house price index.
As an investment property’s main revenue stream is rental income, the returns for the FNB house price index had to be adjusted.
We used the Global Property Guide to get an average rental yield on South African properties to simulate a property receiving rental income.
The rental yields were collected from different property types in KwaZulu Natal, Gauteng, and the Western Cape.
The average rental yield was then calculated based on all the available data to get an average rental yield of 8.82%.
As rent does not remain fixed, the rental income was adjusted toward the property investment’s value at the beginning of each year based on the rental yield.
To account for rates and taxes and maintenance costs, 50% of the rental income was discarded to cover these expenses.
We measured the returns over 21 years – from 2001 to 2022 – for a R100 initial investment.
The JSE Top 40 investment grew to R877, translating into a 10.9% compounded annual return.
The investment in the FNB house price index, adjusted for rental income and costs, grew to R910 at a compounded annual return of 11.1%.
The analysis revealed that buying and renting a house competes favourably with an investment in the stock market.