Defence housing sounds good but is it best for you?

When analysed, Defence Housing Authority investments fail most key criteria.

• They are over-priced,


• Provide low returns,


• Have high management fees,


• Capital gains prospects are weak, and


• There is a very narrow market when you need to sell.

DHA is a branch of the Federal Government’s Defence Housing Authority, which builds homes for Australian Defence Force personnel.

The DHA sells the homes to investors on leaseback. This means they must be rented to Defence Force tenants for a specified term; anywhere from three to 12 years. There are at least 17,000 of these houses, apartments and townhouses around Australia.

Marketers extol the long leases to government tenants and the property management service offered by DHA (some properties are re-painted and re-carpeted at the end of the lease). They are considered a safe, hassle-free form of property investment. But here is the problem....

Property investors want to make money out of the deal. Capital gain is a primary motivation which means investors need to buy at the right price and get a property that will grow in value.

However, Defence Housing properties fail that test on two counts: they are invariably sold at above-market values and they are usually in locations (close to military facilities) unlikely to deliver good growth.

Terry says " I've been writing about DHA investments for years and every valuer I've spoken to tells the same story: DHA houses are priced well above what you would pay for an equivalent house in the same area. The Defence Housing Authority admits this is true but claims that the security of the long-term lease covenant warrants the higher price."

Adelaide buyers advocate Chris Waterman says DHA properties are sold at very full prices;. He believes they compare poorly with other property in the market.

Paul Nugent, general manager of Wakelin Property Advisory in Melbourne, says: If you're getting a guaranteed return you are paying for it in the purchase price. It concerns me that often DHA homes are artificially priced and don't present good value. Brisbane buyers agent Scott McGeever of Property Searchers says he found DFA properties were priced above normal market levels when he worked previously as a valuer. None of them ever stacked up on the asking price, he says, They were always 5% to 10% above market value.

Capital gain prospects are another concern. Perth analyst Gavin Hegney of Hegney Property Group says Defence Housing homes tend to be in low-growth areas and so a high portion of the value is in the improvements rather than the land. I wouldn't invest where most of these properties are located, he says. They are just in the wrong areas.

Nugent agrees: The bulk of what people are paying for is the improvements on the land and the lease benefits, rather than the land value itself. With a good investment property, 60-70% of the purchase price is directly attributable to the land value and I believe it is the reverse with most DHA property because of the location.

The lack of growth prospects compounds the problem of paying above-market prices in the initial purchase.

The high prices also translate into low returns. Most DHA houses have gross yields below 4%, some below 3%. Recent offerings in Sydney, Newcastle, Adelaide and Brisbane had yields from 3% to 3.5%.

Defence Housing Australia charges a management fee of 16.5% of the gross rental income. This compares with mainstream property managers who charge 7.5% or 8%. DHA says its fees are justified because they cover the cost of managing the property and most day-to-day maintenance.

Even the long-term government lease is perceived as a negative by some. Nugent says: You are losing one of the key benefits of owning property - having personal control over the asset. Another thing that's good about property is that it's negotiable but with DHA you have very much reduced capacity to negotiate. DHA conditions include restrictions on how the property can be marketed, to protect the privacy of Defence tenants. This means inspections by buyers need to be co-ordinated with the DHA. The issue for investors is selling during the lease period. The property must be sold with the balance of the lease term and conditions intact. This limits the selling options for the owner by eliminating owner-occupiers (who comprise the bulk of the market).

Hegney says investors are only 25-30% of the buying market. That security of tenure can be great for an investor but when it comes to selling it limits your market for buyers – so what you gain with one hand you more than lose with the other. It's just too limiting.

quoted from a report by Terry Ryder, a highly respected independent Australian property researcher