Are there any disadvantages to DHA Investment Properties?

Question

In Australia, Defence Housing Australia (DHA) sells a selection of their properties to private investors under a leaseback arrangement in order to supplement housing supply for the Australian Defence Force.

DHA provides:

• Guaranteed rent - no vacancies between tenants (rent is backed by the Australian Government).

• Long-term lease - up to 12 years.

• Quality properties - brand new or newly renovated.

• DHA Property Care - take care of all maintenance issues and repair of any damage caused by tenants.

So based on all these advantages provided on DHA investment properties compared to your standard investment properties, are there any disadvantages to them or are they truly an investor's dream come true?

Answer 1

A quick online search for "disadvantages of defence housing australia investment properties" turns up a several articles that list a few possible disadvantages. I can't vouch for these personally because I'm not familiar with the Australian rental market, but they may all be things to keep in mind. I quote verbatim where indicated.

1. Defence housing tends to be priced 5% to 10% above the prevailing market price for suburbs in the same area. According to this article, the DHA admits that this is true, but states that it's a fair price to pay for the additional security of the covenant. You'll have to decide if the additional rent security is worth the higher price (assuming these articles are accurate).
2. Higher prices translate to lower rental yields, even before management fees.
3. Most of the housing is located near ADF bases, which are usually low-growth or declining areas. This limits potential capital gains on the sale of the property.
4. High management fees. DHA charges 16.5% of gross rental income for houses (or 13% for units and townhouses), which is double the private sector average. As with any fees, these greatly reduce the return.
5. "DHA restricts the sale of properties if a lease is still in place. The property must be sold with all lease conditions in place, which eliminates owner occupiers as buyers. Your only potential buyers are investors who think DHA properties are a good bet."
6. "DHA sets a non-negotiable sale price to the investor."
7. "DHA does review rents each year but is notoriously tough on paying increases. Owners end up with properties which are over-priced and under-rented in often ordinary locations - the essence of a bad property investment."
8. Finally, the DHA website itself states that " Rent may be subject to abatement in limited circumstances." A quick glance doesn't show me where to find any of these circumstances, but if you're interested in pursuing such a property, it's worth your while to look into what these circumstances might be (and if you see it on their site, let me know, because I'm curious).

Answer 2

I think the strongest reason against DHA purchases (I don't consider them investments) is points 3 and 5 mentioned above.

The resale market is only to other investors that are convinced its a good investment.

If you can't sell to owner occupiers, you've just removed the MAJORITY of your potential pool of people to resell to - this has a devastating effect on your ability to make any capital gain from your investment - if you're not chasing capital gain...be sure to understand why! (see article below)

The marketing people will have you believe that DHA is a great investment from a yield perspective...maybe so, I haven't crunched the numbers. But in my opinion, I would wonder - who cares?

Yield is important to ensure you can hold the property, but if there is no capital growth and you can't sell it for a profit or release some equity to buy the next investment, then you've just put a massive road block in your wealth building path.

I am at the asset accumulation phase of my investing journey, so my opinion is skewed towards capital growth investments. Unless you have a sizable equity base already, in my opinion $4-5 Million in debt free assets, then you should be looking for capital growth assets...not high yield.

This article from Your Investment Property magazine, although now dated, gives a good example to illustrate my point on why capital growth is the sensible strategy during the asset building phase of your wealth creation journey: Why capital growth is still king

Answer 3

Along with the above reasons, the fact that DHA are under investigation by the Federal Police, should be a red flag to any potential investor. The Federal Police aren't called in over parking fines.

The rules that are in place for effective and appropriate management appear to have been compromised.

I would like to see DHA's marketing people explain why the Department of Finance called in the Feds.

To clarify further, with any investment, the potential investor must satisfy beyond any doubt whether there's a problem with an individual or with the way the organisation is managed as a whole. Look at the Big Four banks.

To complete the research I suggest wait until DHA release an appropriate public statement (hopefully a sensible one that is honest- but don't hold your breath). I can see parallels with the recent scandal with HSU. When management is being led away in handcuffs it may be too late to change your mind.

Answer 4

Well, I am an investor/ Lessor under DHA properties.

Oflate, DHA lost it identity as a Govt agency and try to imitate a worst (not the best) real eastate agent. Every year rental valuation is a drama or waste of time and money to lessor. They pull down the rent by 10 to 22% and ask for a secondary valuation for no reasons. They don't even agree with market evidence and start bullying or black mailing tactics to force you to aceept a below market rent or the threat of third review , a very expensive review shared 50% by lessor and rest the poor tax payers! The thir review also badly influenced by DHA by submitting biased valuations and thereby destroying the independence of valuation. The API appointed valuer neither follow the DHA gudie nor the API guide and also ignore the market reality and take the average rent for the area.

You also losse 14 to 18% as management fees paid to DHA. Selling also a problem and its high time the CWG and the Minster in charge of the DHA must institute an independent investigation to expose the potential nexus between the valuers and the DHA and how the lessor (a self funded retiree, pensioners and others).

I already lodged a complaint with Ombudsman and waiting for a reply. There are 14 Lessors all in a Private street (Only DHA leased property in that street) near 213 Ray rd Epping 2121 that are leased to DHA for more than 10 years. Please note most of those Lessors almost lost $10000 per year because DHA under cut the rent to them when they paid me the market rent for many years. DHA by mistake send the rent paid to all. We have called for the details of rent paid to all the 14 lessors in that private street from 2008 todate under the Freedom of Information Act and waiting.