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Defence Housing Australia – road test

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Defence Housing Australia is a residential property developer that builds property for defence personnel and offers it to investors on leaseback. Here we road test the investment proposition.

What is it?

Defence Housing Australia (DHA) supplies housing for defence service personnel and their families and, as a by-product, also provides a residential investment opportunity.

The DHA has been tasked with providing defence housing since the mid 1990s and the investment proposition has really come into its own since the early 2000s, according to general manager, sales, marketing and portfolio management, Tony Winterbottom.

The DHA investment proposition offers a rental guarantee and a defined investment period for investors. DHA estimates are included in the federal budget and it now operates with revenues well beyond $1 billion. It has been tasked with being self-funded since 1998.

Winterbottom has been with the organization for almost seven and a half years. It was his first government appointment, having worked mainly in technology and military technology related companies before he joined. Initially he thought it would be a short-term position as he probably “wouldn’t last very long” in the public service.

The investment proposition

In a nutshell it involves DHA building and acquiring a property, selling it as soon as possible to a third party at a “fair market value”, then paying the purchaser an assessed market rent. The owner leases it back to DHA for a 12-year period, with the option to extend for another three.

“Its basis is fairly simple, it’s founded on what’s been very common in core property or commercial property, and that’s sale on leaseback,” Winterbottom says.

He acknowledges that the main objective of the organization is to provide defence housing, but they can also make that property work for them, and ensure the organization is self-funding, by turning that equity through sale on lease back.

The target investment market has changed since the organization began two decades ago.

“Probably 20 years ago when we started we wanted to sell our properties to institutions…but we discovered there was no institutional market for residential property,” Winterbottom says.

“We soon learnt that we had to sell to individuals to be successful, so we established an individual leaseback program.”

According to Winterbottom, investors stay with a property for, on average, between 15 and 20 years.

“We try and set a very fair sell price and that’s unlike a traditional developer that’s trying to maximise sales.”

Gross yield averages around 5% but with capital gain, Winterbottom says total returns are usually between 11% and 13% per annum over the life of the investment.

There is a management fee of between 13% and 16.5%, which represents approximately a net 0.85% cost on the returns.

Margaret Lomas, property advisor and director and founder of Destiny Solutions says that investors need to take into account the normal factors they would for purchasing property as an investment.

“The most important think you have to consider when you’re buying any property is the asset itself,” Lomas says.

“You have to have an asset that’s going to grow.”

This means looking for areas that have an abundance of growth drivers, which Lomas outlines as: a population that’s growing faster than the national average; infrastructure that’s supported by the national government; median household income that’s growing faster than inflation; and a diversity of industry.

Winterbottom stresses that the management arrangement covers everything, including a restoration at the end of the lease.

“We do all the regular maintenance, so if the hot water systems fails [we replace it],” he says.

“No tenancy fees, if the tenant damages the property we replace everything and also we give the people the confidence to invest out of their home city.”

Another concern that Lomas raises is the ability to on-sell the property during the lease.

This is possible, and the properties need to be sold with the lease attached.

“There is a ready on-sell market, several hundred properties trade every year on the on-sell market and we are happy to see that thrive,” Winterbottom says.

Location, location, location

Lomas says property investors always need to be very mindful of the prospects of the area they purchase and take into account all aspects of the investment proposition.

“You shouldn’t be driven by the rent guarantee to chose a property,” she says.

“I’m sure they can’t build all of it in hotspots.”

But DHA is increasingly building infield developments in metropolitan centres in prime locations, like Sydney’s Lindfield on the edges of the Ku-rung-gai Chase National Park, which satisfy many of the growth factors Lomas outlines above. Winterbottom believes they are now the second largest residential developer in the NSW capital city.

The Lindfield development, called Crimson Hill, will house 345 townhouses, apartments and houses on 13.8 hectares upon completion. Half will house defence personal through DHA and the other will be sold to the general public.

“Theoretically you could probably get 1000 dwellings [on that area] but the neighbours wouldn’t like that and we don’t want to upset the neighbours,”

The development also includes an all-weather football pitch for the local team and a community centre.

Social proposition

For the socially-minded investor DHA takes its responsibilities seriously. Properties are developed to the latest environmental criteria and Winterbottom believes the association has a role to play in the national housing problem.

“We’re building more and more townhouses and units, people want better environmental features. In Darwin we are producing tropical style homes and we are more and more doing that,” he says.

The portfolio comprises approximately 19,000 properties under management or ownership, valued at about $10 billion with another $1.5 billion in the development pipeline.

Winterbottom is not allowed to buy DHA properties due to his role in price setting but other DHA employers are allowed to outside of the area and region they live, and often do so.

“There’s lot of skin the game. And I would buy one of our properties in a heartbeat [if I could],” he says.


For the risk-adverse investor the DHA proposition offers a sound long-term investment that can help them sleep at night. The newer infield developments also look set to provide attractive yields. It would not suit the property investor looking to buy and sell properties in the short term and build their portfolio on such capital gains, but a 95% customer satisfaction rate, means it is offering current investors what they want.

Published on: Thursday, June 27, 2013

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