Your country needs you

This article was originally published in the May 2024 edition of the Your Investment Property Magazine.

There are around 60,000 people currently serving full-time in the Australian military. Some live in barracks, military bases, or, at times, naval vessels but, according to the most recent census in 2021, about half were in rental properties. Around half of those were in the private rental market with the rest renting homes provided by the government, mostly through its military housing enterprise Defence Housing Australia (DHA). The self-funded organisation currently manages around 17,000 properties nationally, around 12,000 of those owned by private investors. DHA is regularly seeking to add to its pool of privately owned homes to accommodate military personnel and their families on long-term leases - up to 12 years. But more on that soon.

There is one major stipulation in leasing a residential property to DHA - it must be within 30 kilometres of a military base. That said, the organisation is currently looking to add properties in every capital city as well as many regional centres. DHA is also quite particular on what properties are suitable for its purposes. While it leases a variety of free-standing houses, townhouses, and apartments, all must meet the organisation's minimum requirements including bedrooms with built-in wardrobes, ensuites, secure car accommodation, security screens, and climate control. So, if your property ticks the boxes and falls within range, it may be worth considering whether DHA suits your long-term investment goals.

When you lease your property to DHA, you lease it to the organisation, not the tenants who live there. DHA is backed by the federal government but has been self-funded since 1988, currently generating revenue of more than $1 billion a year. As well as a tenant, DHA acts as a service provider for the military but is also a property developer and an active purchaser of homes on the private market. In 2022-23, it added a total of 2,545 properties to its national portfolio with around 90 of those from its own construction programs.

DHA generates most of its income each year through selling off portions of its property portfolio to private investors and then leasing the homes back on long-term leases. It also actively seeks to bring more private rental properties into its housing pool by offering deals not generally available through the private rental market. There are several significant differences in signing your rental property up with DHA and investors are advised to carefully consider whether organisation's the lease conditions suit their own property investment goals.

One plus in signing a lease with DHA is that rent is guaranteed even when the property is empty. As the tenant, DHA guarantees to pay rent for the term of the lease as long as the property is "habitable". Another sweetener is that unlike leasing through a standard property manager, you will also not be charged re-letting or advertising fees when occupancy changes. When the property is vacant, DHA will also continue to maintain lawns and gardens as part of its Property Care Contract (more on the contract later). But there is a proviso. If the property is deemed "unusable", the lease remains in place, but rent is halted while the landlord attends to usually major repairs or upgrades to the property.

Rents are determined by DHA-appointed licensed independent valuers and are based on current market rents in the area. Reviews are generally conducted annually and if landlords are unhappy with rental reviews, they can appeal them by engaging another independent valuer at their own cost. Rent is accrued daily and paid monthly in advance for the term of the lease.

Extra long-term leases

One of the biggest differences to leasing through the private rental market is that DHA likes long-term leases, which may be too long for some property investors. Generally, leases are for three, six, nine, or 12 years although there is some flexibility to negotiate a term that suits individual circumstances. A DHA lease agreement is also different to a standard lease in that the organisation gets to decide whether to extend the term of the lease by 12 months or up to 36 months. It can only do this once, however. These can be ideal for 'set and forget' investors but restrictive for those looking for flexibility and can be one of the biggest downsides of leasing through DHA.

If circumstances change for an investor during the term of a lease, the property can be sold via what's called a 'mid-lease sale' but only with the lease in place. Of course, this excludes the lion's share - around 70% - of the buyers' market, owner occupiers. Other investors might also shy away from taking on a property already signed up to a DHA lease. However, a DHA spokesperson told Your Investment Property Magazine that in some areas, prospective investors request to be on waiting lists to be informed of such properties that may become available.

"This allows investors to sell their DHA property to other interested parties looking to buy a DHA investment," the spokesperson said.

Of course, this can greatly depend on location and local interest, even in an undersupplied market.

Professional property investment advisors often cite the limited pool of mid-lease buyers as a major downside of investing in DHA housing. National managing director of Metropole Property Strategists Brett Warren told Your Investment Property Magazine the saleability of a property is a crucial factor in long-term investment.

"DHA properties, bound by lease agreements and specific tenant use (that is, defence personnel), can be less appealing to the broader market," Mr Warren said.

"When the time comes to divest, the pool of potential buyers is very limited, leading to longer selling periods and considerably reduced sale prices."

It's also worth noting DHA does not pay a bond and it is up to the landlord to take out and maintain the usual insurances to cover the property. But while there is no bond, all DHA lease agreements run concurrently with a Property Care Contract which provides a range of services for a set fee. These services include most non-structural repairs, rent reviews, and organising inspections and contractors as required. The service fee is a flat 16.5% (including GST) for most free-standing houses and 13% (including GST) where there is a body corporate responsible for common areas, including external paintwork. Needless to say, these are considerably higher rates than for standard property management fees on the private market which run between 4-10%, depending on what services are provided.

DHA acknowledges its fees may seem expensive but says a Property Care Contract covers much more than traditional real estate agent fees. It includes letting expenses, non-structural repairs, grounds maintenance if the property is empty, end of lease repairs and cleaning, and annual rent reviews. DHA points out it may even repaint and recarpet the property at its own expense if it determines the property has been subject to unreasonable wear and tear. What's not covered under the DHA Property Care Contract is the usual major items that landlords are expected to provide. These include maintaining essential services such as water, electricity, and gas; repairing damage caused by subsidence, pests, and natural disasters; any repair work that's under an existing warranty; major landscaping, and other specific exclusions.

In the past, DHA has also offered the homes it's developed for sale at market value to private investors, largely for leasing back to the organisation. However, its so-called Property Investment Program for completed homes has been on pause since September 2022. DHA is still involved in community and residential development projects around the country but, amid the tight housing market, the organisation notes not all its current projects have received final approval while some may change or not proceed. DHA has also been known to sells off surplus land at times to the general public through its appointed sales agents. In the current market, however, private investment opportunities are relatively scarce. Details of DHA's current development projects nationally can be found on the organisation's website.

As an alternative to a purchasing a new investment home, DHA can also help private investors secure an existing property with a DHA lease in place. In some locations where these investments are popular, prospective investors may need to go through a ballot system to purchase them. The DHA website features a series of video testimonials featuring contented DHA investors, some with multiple properties, who tout the "hands-off", "hassle-free" nature of property investment with the organisation. On occasion, properties may also be made available outside of the ballot system for immediate purchase. Locations and circumstances are updated regularly on the DHA website. However, it pays for investors to be aware DHA-developed properties are always sold at market value for a fixed, non-negotiable price. This means potential investors can't offer a lower price when purchasing and may also not achieve maximum value when they sell.

A property strategist's view

Brett Warren of Metropole Property Investment Strategists says in his dealings with investors, DHA properties often come up as an intriguing choice, especially for those drawn to the allure of guaranteed rent.

"But for long-term investors seeking sustainable growth and flexibility, DHA properties should be avoided like the plague," he says.

Mr Warren says, historically, DHA properties have shown a tendency for slower capital appreciation than other real estate investments. This is partly because DHA properties are often located in areas with less market demand or in regions heavily dependent on defence employment.

"Their value doesn't escalate at the same pace as properties in high-demand urban or growth areas," he says.

Another drawback is that DHA properties often involve higher get-in costs due to their required specifications, according to Mr Warren. At the other end of the investment, he says they can also require refurbishment to "civilian standards" before selling on the private market, adding to exit expenses and eating into overall return on investment. Although some investors are drawn to rental security, he says DHA's long-term leases can be a double-edged sword.

"They can significantly reduce flexibility," Mr Warren says.

"If market conditions change or if personal circumstances require liquidation or repurposing of the asset, the investor is locked into a binding agreement, making it difficult to adapt to new situations," he says.

That said, leasing a home to DHA may suit some investors seeking a long-term, hands-off approach to property investment where rental income is guaranteed and everyday property maintenance can be comparatively low. For investors seeking shorter-term gains or chasing high capital growth, there are possibly better options on the market. As with all investments, it's wise to consult a financial or market expert to determine what best suits individual circumstances and personal investment goals.

Pros and cons of investing with Defence Housing Australia

PROS

• Guaranteed rent* (*while property is deemed "usable")
• Long-term leases (can also be a con)
• Set and forget-style investment
• More comprehensive property maintenance contracts

CONS

• Geographic limits
• Long-term leases (goes both ways)
• No bond
• Higher property management fees
• Non-negotiable property management contracts
• Re-sale restrictions

_{Image created by Emma Duffy via Midjourney}