Defence housing provides steady income, but buyers should heed the tradeoffs.

Investors are taking the opportunity to buy houses and units that Australia’s 60,000 uniformed Australian Defence Force members and their families call home.

These properties are in centres as far afield as Darwin, Townsville, Perth and Melbourne. If you buy one, you can have confidence a property that might be thousands of kilometres away from your own home will generate regular income with few management hassles.

Why? Because the rent will roll in like clockwork, thanks to a system that guarantees payments, finds tenants and looks after maintenance.

There’s a catch, of course. Defence Housing Australia (DHA) charges a higher administrative fee than commercial property management firms.

For some investors, this is an acceptable tradeoff for guaranteed rents and a higher-than-usual level of property management.

Another potential concern with Defence housing is return on investment. Some real estate investment advisers, particularly those who recommend inner-city bricks and mortar, argue DHA properties are ”artificially priced”. However, this claim is contested by DHA officials.

Historically, a main cause of people leaving the military has been the poor quality of Defence housing, especially for Defence Force members with families.

The former Defence Housing Authority morphed into the Government Business Enterprise, now called Defence Housing Australia, in 1988. DHA’s charter is to provide and improve housing for serving ADF members and their families.

The general manager of DHA, Tony Winterbottom, says housing standards and staff retention have improved since the 1980s.

DHA leases accommodation from private investors and also has a stockpile of DHA and Defence-owned properties. A condition of ADF service is a rental subsidy, which is based on rank.

DHA has 19,000 properties under management worth $10 billion. About 60 per cent of these are owned by 12,500 private investors who have entered into long-term lease management agreements.

Paul Nugent, a director of Wakelin Property Advisory, isn’t a fan of Defence investments. ”They are artificially priced properties and pitched to a certain market,” he says. ”The rental yield is very much tied in with what works for the Australian Defence Force and their personnel and, essentially, you are buying an asset that is not sold for a market price.

”It is also not rented on the open market and, down the track, you can only sell to another investor.”

Analyst and adviser Terry Ryder says DHA properties are almost always sold at above-market values and are usually in locations close to military facilities that are unlikely to deliver good capital growth. He says DHA management fees are too high.

Mr Winterbottom disputes this and says some advisers have their own agenda. ”They are not advisers to our product, so we are not paying them,” he says.

”They are not willing to tell the whole story. If you go to your local real estate agent, he might offer you an 8 per cent management fee, but that 8 per cent doesn’t do much apart from a basic property-management service. It does not pay for the advertising to let properties or to fix a stove. ”Our fee is very competitive when the total costs of property management are evaluated.”

Mr Winterbottom says Defence properties are independently valued before being offered to investors. ”People have to go to the bank and get finance, so it’s a market-price-based system,” he says. ”We need to make sure the relationship between the rent and the price investors are paying is competitive.

”I’ve got 12,500 very happy investors. Thirty per cent of our investor sales are to existing owners of Defence properties.”

Posted by Chris Tolhurst – Domain (The Age) on 24th November, 2012