We are just dipping our toes into the PI water at this stage and am interested to hear some views and ideas on investing in Defence Force homes. Solid, reliable returns? but with high management fees?? What about capital growth and hopefully positive cash flow? Is it possible with DF Housing??
Any input/past experiences appreciated.scott d
I have never used them but have some clients that have looked into them before deciding to find and purchase their own properties.
They "lease back" which means that you are garanteed a lease for a certain period of time often 5 to 10 years. Their rentals tend to be a little below the market due to the length they take them out for. They control the leases which means that you cannot get an independent pm to rise the rent to current market conditons. It is more of a set and forget investment but on the lower side in terms of return (due to the low risk).
Hi Scott d,
You may be interested in this article posted on Terry Ryder site hotspotting.com.au about DHA investment properties. We were looking at DHA homes as an investment, but after I researched, I commented to my wife that I felt you were paying premium purchase price, but below market rent returns and then I found this article which confirmed my suspicions.
We have 4 investment properties, none of which are DHA. We like the idea of being able to negotiate price, lower rental management fees, and freedom to control our investments.
Anyway ….. I hope you find the article helpful .
Martin
____________________________________________________________________________________________
DHA investments don't stack up
12 January 2007:
There seems a ready market for Defence Housing Australia products but I can’t think of a worse investment in the property market.
I believe defence housing investments fail most key criteria. They’re over-priced, provide low returns, have high management fees, the capital gains prospects are weak and there’s a narrow market if you need to sell.
Defence Housing Australia (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 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’re considered a safe, hassle-free form of property investment.
But 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. DHA properties fail that test on two counts: they’re invariably sold at above-market values and they’re usually in locations (close to military facilities) unlikely to deliver good growth.
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 DHA 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’re 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 DHA 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’re 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’s 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%.
DHA 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’re 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.”
Please note it is not only DHA that promote these "easy" investments, some developers offering new houses and "rent gaurantees" do the same thing. Over median market prices and low returns.
If you have no knowledge at all and no time, these may be OK, I personally like things with a little more sophistication.
I think a general blanket negative opinion on DHA properties is not right.
I own two townhouse properties with DHA in the QLD suburb of Mitchelton (one of qlds boom suburbs) yes it is close to the army barracks but also 7km from brisbane CBD.
The lease has a clause where rent is valued by an independent valuer at "market value" our recent valuation took the rent from $275/week to $320/ week and with the way rental prices are being driven up at the moment, I expect another significant rent rise this comming December.
Happy to give anyone further info on DHA properties if they wish.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
