Leasing operations

Overview

Sales and leasing activities play a vital role in sustaining a healthy long-term financial structure for DHA. Revenue generated from the sale and leaseback of property continues to be DHA’s primary source of capital. Direct leasing from private owners and negotiation with DHA lessors to renew or extend leases and undertake upgrades also helps to ensure quality, well-located property is available to Defence members.

At the end of the reporting period, approximately 66% of DHA’s property portfolio was managed on behalf of investors. Lessor satisfaction with almost all aspects of DHA leasing and customer service remained consistently high (83% to 100%). This, combined with positive capital and rental growth, contributed to an increase in repeat purchases (16.8% of settlements in 2012–13 compared to 11.5% of settlements in 2011–12) and referrals year-on-year.

Following an exceptional overall performance in 2011–12, during 2012–13, DHA focused efforts on delivering against KPIs while establishing alternate sales and leasing channels and products, continuing to foster relationships and partnerships, and increasing awareness of the DHA brand. These activities helped confirm DHA’s reputation in the industry as a credible investment option.

Sale and Leaseback program

Each year DHA sells properties to investors under a leaseback arrangement. The properties have been built or acquired by DHA in locations where housing is needed for Defence members. They meet Department of Defence requirements in terms of rent, size, amenity and inclusions.

In 2012–13, SLB activity was largely focused on retail investors. High numbers of sales orders were achieved owing to the attractiveness of the SLB offering. Favourable market conditions, such as historically low interest rates, contributed to investor confidence. To manage prospective investor demand, a ballot system was introduced.

DHA continued to increase awareness and understanding of its SLB product through consistent messaging and multi-channel marketing campaigns. Of note, DHA signed a two-year marketing agreement with the Canberra Raiders to increase its brand awareness and, more specifically, promote the retail SLB product to a mass media audience. The agreement contributed to a record number of new registrations of interest in the retail SLB product and to a small number of settlements.

DHA representatives also met over 50 financial institutions and brokers, increasing awareness of the retail SLB product within the industry. This contributed to a number of settlements through referrals, tailored financial products and enhanced customer service. DHA is looking to expand these activities in 2013–14, with a view to formalising these partnerships and developing tailored solutions for its prospective investors and lessors.

DHA settled sales on 753 properties in 2012–13, generating $353.4 million in revenue against the Corporate Plan figure of $348.8 million, resulting in a $15.7 million profit. Repeat purchase and referral from existing lessors rose to 16.8% of settlements in 2012–13 compared with 11.5% of settlements in 2011–12.

DHA’s competitive advantage

Others have attempted to emulate DHA’s turnkey lease product. However, few can match DHA’s credibility as a GBE, the security of Defence members as tenants, the standard of property delivered in accordance with Defence guidelines and the diversification of supply offered Australia-wide.

Distinguishing features of the DHA Lease Agreement are:

• a long-term lease (typically between nine and 12 years; greater when lease extensions are exercised)
• guaranteed rental income during the lease term, with rent payable from settlement and no loss of income when Defence tenants change³, and
• DHA Property Care services⁴ provided during the lease term, comprising:
  • property and tenancy management, including periodic inspections, itemised  statements and a complimentary bill paying service
  • organising and covering the cost of most non-structural maintenance, including the repair and replacement of fixed appliances as required
  • annual rent review to market valuation by an independent licensed valuer
  • emergency repair to preserve the property and protect human health, safety and security as required, and
  • restoration at lease-end to ensure the property is returned in good order, including professional cleaning, repainting and recarpeting⁵.

DHA Investment Management Limited

DHA has been seeking to diversify its funding sources beyond the retail SLB program. In July 2012, DHA’s Board approved a business case to establish unlisted property trusts holding DHA properties and to sell units in those trusts to private investors. Approval for the fund was obtained from DHA’s Shareholder Ministers. A review of this trust will be conducted before any further trusts are considered.

During the reporting period, DHA Investment Management Limited (DHA IML), a wholly-owned subsidiary of DHA, was formed to operate as the Responsible Entity for the property trust and to hold an Australian Financial Services Licence issued by ASIC under the Managed Investments Act 1988 (Cth).

Following significant interest in the prospective fund, administrative arrangements were initiated. These included appointing a Board of Directors and Compliance Committee, drafting a Constitution and a Compliance Plan, appointing a Custodian and preparing and lodging a Product Disclosure Statement.

DHA is confident it will raise $50.0 million through the initial offering. While this initiative will broaden the base of investment in DHA properties, DHA will be careful to ensure that its retail SLB program is not prejudiced by this or any other property trust.

Leasing programs

DHA undertakes leasing activities to augment housing supply from its construction and acquisition program. As with SLB, all properties must meet Defence standards in terms of rent, size, amenity and inclusions; this may include items not considered standard in some locations.

In 2012–13, DHA continued to focus on renewing the leases of properties where that is a cost-effective way of sustaining the portfolio. It involves negotiations with lessors of new lease agreements or a long term extension before current leases expires. A total of 342 properties were retained in the portfolio in this way. While this was below the Corporate Plan figure, the net leasing outcome for 2012–13 (the difference between properties removed at end-of-lease and properties added through the leasing program) was less than budget by only 115 properties or about 7% of the leasing program. This is considered acceptable, especially with changes in demand in some locations (e.g. Adelaide). The net outcome also reflects the difficulty DHA faces with its direct leasing program, where DHA is in the market for houses that meet Defence minimum standards and satisfy rent band requirements. This has been a particular problem in Sydney where DHA was unable to meet the target for direct leasing of Rent Band 1 houses.

To ensure DHA has the flexibility to meet its Defence housing obligations and minimise disruption to Defence tenants, the DHA Lease Agreement gives DHA the right to vary the lease by extending or reducing the term. The current DHA Lease Agreement allows DHA to extend the term by up to 36 months and reduce or extend the term by up to 12 months (each option can be exercised once). During the reporting period, DHA extended the term of 978 leases against the Corporate Plan figure of 1,012.

In 2012–13, to assist with promoting direct leasing as a way for investors to do business with DHA, a revised web-based application system was implemented. This helped generate 3,059 applications, resulting in 167 standard direct leases against the Corporate Plan figure of 197, and 20 direct leases of apartments for the singles program.

In 2011–12, DHA established DHA Refresh, whereby DHA and lessors work in partnership to upgrade properties in highly desirable locations, ensuring these properties remain in DHA’s portfolio for the long-term. In 2012–13, over $502,000 was spent completing works on 17 properties in Sydney, Melbourne and Brisbane. A further 23 business cases for properties in Sydney, Melbourne and Brisbane were approved, for completion in 2013–14.

To assist in building relationships with DHA lessors and provide consistent service delivery, Leasing4U was launched in 2012–13. It aims to provide clear and unambiguous communication of leasing policies, procedures and guidelines relating to all aspects of DHA’s leasing business.

Lessor satisfaction

DHA undertakes surveys to measure lessor satisfaction. The largest of these is the annual lessor survey which measures satisfaction with customer service, one of DHA’s KPIs, as well as aspects of property management. The results of this survey aid in improving lessor relations and product development.

The KPI for satisfaction with DHA’s customer service (90%) was met nationally in 2012–13, with  1,471 (96%) of the 1,536 lessors who responded to this question reporting satisfaction. Phrasing of this question was changed from previous years, so there are no trend data available.

Nationally, 63% of respondents (954) indicated they had contacted DHA within the preceding 12 months regarding their property. Satisfaction with aspects of communication (accessibility, knowledge, timeliness of response and courtesy and helpfulness of DHA staff) remained high in 2012–13, with results ranging from 87% to 94%.

There was a positive relationship between satisfaction with DHA’s overall customer service and satisfaction with DHA staff’s accessibility, knowledge, timeliness in responding to communication and courtesy and helpfulness. Specifically, lessors who were satisfied with these aspects of customer service were statistically significantly more likely to be satisfied with the overall customer service.

Satisfaction with the value for money of the property management service fee (88% of 1,530) and feedback from the periodic inspections (83% of 1,512) and the maintenance service (91% of 1,501) continued to be above the target of 80% nationally. There were no statistically significant differences when comparing 2011–12 and 2012–13 results.

Satisfaction with all aspects of rental payments (timeliness, accuracy and format and detail of monthly statements) was exceptionally high in 2012–13, with results in the range of 99% to 100% of 1,538 to 1,540 respondents. With similar results achieved last year, no significant differences were found when comparing the levels of satisfaction in 2011–12 and 2012–13.

Respondents were asked to rate their satisfaction with the process, outcome and information related to their most recent annual rent review. Satisfaction with the process (91% of 1,540) and outcome (83% of 1,536) of the annual rent review increased significantly between 2011–12 and 2012–13. Lessors were more likely to be satisfied with the process of the review if they were satisfied with the outcome of the review. Statistical analysis revealed a strong relationship between the results of the revaluation and satisfaction/dissatisfaction with the process of conducting and advising updated rental incomes.

Of the 1,541 respondents, 295 (19%) reported logging into DHA Online Services. Of note, 93% of these respondents reported it was easy to find via the DHA website, 87% of respondents were easily able to find their financial statements and, where relevant, 66% of respondents easily found details of upcoming maintenance. The majority (93%) of respondents reported that they would be likely to use DHA Online Services again in the future.

In 2012–13, the majority of respondents (93% of 1,536) indicated they would recommend investing in DHA property to others and consider negotiating a new lease on expiry of their existing lease (87% of 1,530). The number of lessors willing to lease another property to DHA (75% of 1,526) was significantly higher than the previous year’s result. This is an excellent outcome and continues to be evident in DHA’s sales and leasing outcomes.

Footnotes

3 Rent subject to abatement in limited circumstances.↑

4 DHA Property Care services are provided during the term in return for a fixed service fee.↑

5 Subject to the length of the lease and the obligations of a Body Corporate or similar entity.↑