Purpose 2

Provide a housing portfolio that will meet stakeholder needs now and through to 2025–26

• Criterion 1: Deliver a portfolio of properties, with a mix of types and locations, which meet the needs of Defence and the ADF member.
• Criterion 2: Create diversification within the portfolio through a combination of construction, upgrades, acquisition and leasing.
• Criterion 3: Continue to be recognised as an industry leader in innovation, diversity and sustainability.
• Criterion 4: Undertake targeted research and development to ensure our portfolio meets or exceeds community and ADF member expectations.

Overview

We will identify and implement organisational structures, practices, procedures and products that will sustain our business and meet government requirements through to 2025–26.

Detailed commentary

Our performance against stated measures and objectives in our Corporate Plan 2015–16 was as follows:

Criterion

Deliver a portfolio of properties, with a mix of types and locations, which meet the needs of Defence and the ADF member.

Result

Partially achieved

At 30 June 2016, we managed 18,767 properties worth $10.6 billion in all capital cities, major regional centres and some remote locations of Australia where the ADF has a presence. The majority of properties are integrated throughout the community, close to ADF bases and establishments, and close to a range of amenities and services, such as transport, shopping facilities and schools.

MWD housing

• Determining housing requirements
  
  Each year, Defence provides us with a forecast of how many MWD will require Defence-funded housing over the next five years, as distinct from those who will live in their own homes. Referred to as the DHF, it details accommodation requirements by location and rent band classification. Using the DHF, we prepare a capital program which sets out the proportion of housing we can supply, taking into account factors such as vacancy rates, expiring leases, land supply, the availability of capital, and the state of private rental markets. As explained in Purpose 1, ADF members directly source the balance through private rental markets and we manage the payment of their RA.
  
  
• MWD provisioning
  
  In 2015–16, the MWD provisioning KPI outlined in the Services Agreement with Defence was 99.0 per cent. At 30 June 2016, we achieved a closing balance of 17,121 properties or 98.7 per cent against both our Corporate Plan target of 17,330 properties and the Defence-approved schedule of 17,028 after capping (capped KPI result = 16,809 properties).
  
  Nationally, the DHF of 18,860 properties was 361 below the number of MWD actually housed (19,221). This increase in housing demand had the greatest impact in Brisbane (QLD), Sydney (NSW) and Canberra (ACT). Housing demand was below the DHF in Amberley/Ipswich (QLD), Townsville (QLD) and Darwin (NT). More information about portfolio movements is provided later in this Purpose 2.
  
  
• MWD portfolio
  
  MWD properties must comply with minimum Defence specifications in terms of location, size, amenity and market rent. In general, the minimum standard includes three bedrooms, separate lounge and dining areas, kitchen, laundry, bathroom and ensuite, single lock-up garage (carport in NT) and a 25–35 square metre backyard. In terms of location, they should not be more than the greater of 30 kilometres each way by road or 150 minutes from the Defence establishment where the ADF member works.
  
  The portfolio also includes a portion categorised as rent band choice housing (RBCH). These properties are generally inner city urban apartments and townhouses that do not meet the minimum standard. ADF members generally choose to live in a RBCH property because its location suits their lifestyle.
  
  As indicated in Figures 9 to 11, the majority of MWD properties are houses, that are 6–10 years old and have four bedrooms.

Figure 9: MWD property type, 30 June 2016

Figure 10: MWD property age (years), 30 June 2016

Figure 11: MWD property bedrooms, 30 June 2016

MCA portfolio

• Determining housing requirements
  
  Each year, Defence specifies a minimum MCA provisioning requirement in a number of nominated locations. Using this information, we prepare a capital program which sets out the proportion of housing we can supply, taking into account factors such as vacancy rates, expiring leases, land supply, the availability of capital, and the state of private rental markets.
  
  
• MCA provisioning
  
  In 2015–16, 95.2 per cent of the MCA program was achieved with a closing balance of 970 properties against the Corporate Plan target of 1,018 properties. The shortfall of 48 properties primarily reflects the reduced MCA acquisitions program agreed on by Defence for inclusion in our 2016–17 Corporate Plan.
  
  More detail about portfolio movements is provided later in this Purpose 2.
  
  
• MCA portfolio
  
  MCA properties offer MWOD and MWD(U) an attractive alternative to living on-base or renting privately, including a simple move-in move-out process with no bond or rent required in advance. Eligible members may also share properties with other eligible ADF members.
  
  As indicated in Figures 12 to 14, the majority of MCA properties are two bedroom apartments that are up to two years old. They are conveniently located close to Defence bases or the city, with easy access to amenities such as shopping facilities, cafes, entertainment, sporting grounds and public transport.

Figure 12: MCA property type, 30 June 2016

Figure 13: MCA property age (years), 30 June 2016

Figure 14: MCA property bedrooms, 30 June 2016

Commonwealth Heritage Listed (CHL) properties

We own 10 CHL properties in Fremantle (WA) and one site in Stockton (NSW). We also manage 61 CHL properties at ADF bases and establishments across Australia on behalf of Defence.

In 2015–16, we introduced guides for tenants living in heritage properties. The guides provide a short overview on the property's historical significance, details of how the property differs from other modern DHA-managed housing and tips for living comfortably while assisting our conservation and maintenance efforts.

We continued to manage a program of works to manage and/or restore properties. Of note, we completed restoration of Gunners' Cottages in Fremantle (WA). The 10 cottages were originally constructed in 1913–14 and were used for officers at the adjacent Artillery Barracks. We also constructed six new dwellings to complement the cottages.

In terms of the Defence-owned properties, the first year of our five-year maintenance forecast was carried out with great success. Notable works completed include:

• the upgrade of fireplaces at properties at the Royal Military College (ACT), Victoria Barracks (VIC) and Garden Island (WA)
• a review and/or installation of air-conditioning in properties at Garden Island (WA), HMAS Watson (NSW), HMAS Cerberus (VIC) and Victoria Barracks (VIC).

The common recreation area at our refurbished heritage-listed Gunners' Cottages development in Fremantle, WA.

Criterion

Create diversification within the portfolio through a combination of construction, upgrades, acquisition and leasing.

Result

Partially achieved

We are active in residential property markets to meet our provisioning obligations to Defence, maintain the standard of our portfolio and provide diversification. Each year, we undertake a large-scale residential development, construction, acquisition and leasing program that is agreed by Defence and summarised in our Corporate Plan. Throughout the year we negotiate with Defence to revise the schedule based on operational requirements.

MWD additions

Construction

We added 358 properties to the MWD portfolio in 2015–16 against a Corporate Plan target of 471. The target was reduced during the year in agreement with Defence to better align delivery with the peak posting cycle. The majority of constructions were delivered in Darwin (NT), Newcastle (NSW), Brisbane (QLD) and Townsville (QLD), and reflect the quality of properties being delivered from our major developments in the region.

Acquisition

A total of 264 properties were acquired for MWD in 2015–16, representing 100.0 per cent of the 2015–16 Corporate Plan target. Three properties were also transferred from Defence to DHA and recorded as acquisitions. Relative to the Corporate Plan, Alice Springs (NT), Canberra (ACT) and Rockingham (WA) exceeded their acquisition target. These changes reflect improved flexibility in our program to respond to changing housing demand relative to the DHF, as well as to variations in delivery timeframes.

In terms of land, we settled the purchase of 106 retail land allotments against the Corporate Plan target of 107 allotments. The reduction was a result of net changes within a number of DHFs to meet the planned 2016–17 construction program. The reforecast target was agreed on by our Board and Defence. We also settled the purchase of seven major land sites at a cost of $34.7 million. All will be used for future Defence housing.

Leasing

We directly leased 97 properties in 2015–16, falling short of the Corporate Plan target by 95 properties. This result reflects difficulty in leasing properties due to strong rental market conditions, such as low vacancy rates and lower agent fees. Main regions of shortfall were Canberra (ACT), Sydney (NSW), Adelaide (SA) and Amberley/Ipswich (QLD).

We also renewed or extended 585 leases by agreement with the lessor against the Corporate Plan target of 431 leases and extended options on 608 leases against the Corporate Plan target of 629 leases. This is an outstanding result, ensuring these quality properties remain in the MWD portfolio for the longer term.

Overall, these results represent 1,290 MWD leased properties added to the portfolio in 2015–16 against the Corporate Plan target of 1,252 properties. Success can be attributed to the development of location-specific strategies.

A total of 840 MWD leased properties exited the portfolio in 2015–16 against the Corporate Plan target of 849 net exits. Of note, lease retention efforts resulted in 90 fewer lease handbacks compared to the Corporate Plan in under provisioned areas, including Canberra (ACT) and Sydney (NSW). Darwin (NT) handed back 49 more leases compared to the Corporate Plan as actual housing demand was below the advised DHF.

MCA additions

Property acquisition

We added a total of 209 MCA properties through acquisition in 2015–16, representing a shortfall of 51 properties against the Corporate Plan target. This result is consistent with the reduced MCA program agreed on by Defence for inclusion in our 2016–17 Corporate Plan.

Leasing

We directly leased 57 properties against the Corporate Plan target of 60 properties. The shortfall was balanced by achieving 17 additional lease renewals, extensions and options against the Corporate Plan target of 12. This resulted in an overall achievement of 74 MCA properties leased against the Corporate Plan target of 72 properties.

Defence upgrade program

In 2015–16, we continued work on upgrading Defence-owned properties in preparation for enforcement of Defence's housing classification policy on 1 July 2017. Modernising the properties not only provides a better standard of living for ADF members and their families that tenant the properties, but extends the life span of the properties by 10–15 years.

We achieved 108 upgrades against the Corporate Plan target of 136 upgrades. The achievement is impressive noting the program's dependency on properties becoming vacant during the planned period. More information about our upgrade projects is on our website.

In the reporting period, a decision was reached regarding the future of Seaward Village (Perth, WA). On 26 April 2016, the Hon Michael McCormack MP, then Assistant Minister for Defence, announced that DHA would undertake a major upgrade of all 153 properties in the village. The upgrade project replaces a previous plan to redevelop the site.

Subsequently, we began consultation with all major stakeholders, including Defence, ADF tenants and surrounding residents, on the preferred upgrade option. We are working closely with Defence to establish funding arrangements and seek the necessary approvals. Construction work is anticipated to commence in 2016–17.

Our award-winning Breezes Muirhead development in Darwin (NT) is an example of excellence in environmental sustainability.

Criterion

Continue to be recognised as an industry leader in innovation, diversity and sustainability.

Result

Achieved

We are committed to creating healthy and sustainable communities for ADF members, their families and the broader community.

Design and construction

In designing and constructing properties and communities, we focus on five key sustainability areas:

1. low energy consumption
2. low water consumption
3. effective waste management
4. human wellbeing
5. biodiversity of local flora and fauna.

Since 1 July 2010, all of our new housing has been built to a minimum six-star EER.³ Where possible, housing in our new developments also:

• complies with the Australian Government's Livable Housing design guidelines—silver level
• seeks to meet the requirements of the UDIA's EnviroDevelopment certification—six leaf level.

Through the construction process, where possible, we:

• work with local providers to source building materials and landscaping supplies to reduce the environmental impact of long-haul transport and help build links with the local community
• use materials that are in line with the local building code, climate and lifestyle.

Properties are designed for the climate in which they are located. For example, large eaves which provide protection from the sun and light-coloured external walls and roofing are typical in tropical locations such as Darwin (NT) and Townsville (QLD). Properties in these regions are also designed to make use of natural airflows and solar orientation to decrease the need for artificial heating and cooling.

We consistently install energy and water saving fixtures and fittings, and ensure outdoor areas within our developments are landscaped to complement local flora and fauna. We are researching new sustainable technologies and 'off the grid' housing, and incorporating them in our construction and development activities where possible.

More information about our approach to corporate social responsibility is provided in the environmental performance subsection in Section 3 of this report.

Industry leadership and collaboration

Breezes Muirhead (Darwin, NT)

Our Breezes Muirhead development is a leader in environmental excellence. It won the UDIA NT Excellence Award in 2015 for both environmental excellence and masterplanned development, and has been named as a finalist in these categories again in 2016. Examples of best practice are as follows:

• Breezeway model
  
  The model challenges standard practice urban design in tropical climates. Allotments are orientated to capture the prevailing cool sea breezes within a staggered lot template that delivers a wide range of sizes. Breezeways separate dwellings and channel prevailing breezes through the site, creating a side yard well-suited to outdoor entertaining. Design guidelines also encourage the construction of climatically responsive houses that minimise environmental impact and balance comfort and affordability with sustainability.
  
  
• Largest installation of solar panels
  
  Breezes Muirhead is home to Darwin's largest installation of solar panels in a single suburb thanks to a partnership between DHA and Country Solar NT. More than 75 DHA-managed properties have a special type of solar panel installed, creating a 337kW solar suburb. The technology provides the most advanced micro-inverter technology for solar power systems, combining innovations in power electronics, networking and web-based software, to make solar power systems smarter and more efficient.
  
  
• First 'off the grid' house
  
  In June 2016, we commenced construction of suburban Darwin's first 'off the grid' house, which may also be the first house in the NT to receive an 8.5 star NatHERS rating for energy efficiency. Built by local builders, Skandy's Group, the home will be part of the new display village to open in late 2016. A stand-alone solar power system will reliably provide an average of 24.6kW to the home every day of the year, sufficient to meet the power needs of the occupants. Passive design principles that encourage cross ventilation and light-coloured building materials with a low thermal mass complement the solar power system.
  
  
• Aboriginal Landcare Education Program (ALEP)
  
  Greening Australia (GA) is a not-for-profit organisation dedicated to conserving and restoring landscapes through collaborative science-based and innovative conservation programs. In collaboration with GA, we are helping to provide skills, training and work experience to at-risk indigenous adults to assist with their long-term employment opportunities. Over six months, participants are provided with practical experience in nursery operation and land management. This includes onsite training, which contributes to their Certificate I in Conservation and Land Management. In July 2015, six locals joined the growing list of graduates in the NT, after completing the most recent round of GA's program.
  
  
• Planet Ark National Schools Tree Day
  
  In November 2015, 40 primary school students and teachers from Leanyer Primary School joined forces with GA NT to revegetate land adjacent to William Forster Park (one of the parks within Breezes Muirhead) with plants cultivated from seeds collected from the site. Indigenous trainees participating in Breezes' ALEP contributed to the success of the day, preparing the planting area and working with small groups of students to assist with the planting. Many of the students participated in our 2014 event, at which students planted more than 300 native seedlings. The plants had grown considerably over the 12 months and the students were in awe of the changed landscape their activities had achieved.

The Prince's Terraces Adelaide

We have entered into a ground-breaking collaboration with the Prince's Foundation for Building Community, Prince's Charities Australia and Renewal SA (the SA government's urban renewal authority) to design and build a mix of eight terrace houses and four flats (built as mews behind the terraces) in the revitalised urban precinct of Bowden (Adelaide, SA).

The development was the first residential project in Australia to receive the Green Building Council of Australia's 6 Star Green Star design rating for encapsulating innovation and world leadership in sustainable design. The properties are predicted to use 50 per cent less energy and 50 per cent less potable water than a typical urban townhouse, with their carbon footprint reduced by more than 40 per cent compared to that of a standard house.

The project will demonstrate the benefit of well-located and sustainable living, with a vision to not only influence our future projects, but to become a benchmark for residential development in Australia.

UDIA EnviroDevelopment

We continue to foster close ties with the UDIA and their EnviroDevelopment program. EnviroDevelopment is a scientifically-based assessment scheme that independently reviews development projects and awards certification to those that achieve outstanding performance across four or more of the provided elements: ecosystems, waste, energy, materials, water and community. EnviroDevelopment makes it easier for purchasers to recognise and, consequently, select more environmentally sustainable developments and lifestyles.

In 2015–16, our Wirraway developments (Hunter Valley, NSW) and The Landing development (Brisbane, QLD) achieved six leaf certification. This brings DHA's EnviroDevelopment achievement to eight projects throughout Australia. Our other certified projects are: AE2 and Crimson Hill (Sydney, NSW), Breezes (Darwin, NT), Bluewattle (Townsville, QLD), Warner Lakes The Reserve (Brisbane, QLD) and Bayriver (Adelaide, SA).

Industry recognition

As a progressive developer, we aim to balance innovation and sustainability with the needs of ADF families and the broader community. This philosophy has earned us considerable recognition from key industry stakeholders, and a reputation as a leader in the residential development industry. Details of our achievement in 2015–16 are listed over the page.

Criterion

Undertake targeted research and development to ensure our portfolio meets or exceeds community and ADF member expectations.

Result

Achieved

As outlined in Purpose 1, we undertake regular lessor and ADF member surveys. The feedback we receive from these is integral in shaping the type of products that we then build, buy, lease or sell. For example, the MCA survey provided essential insight into what ADF members wanted in their apartments, not only in terms of fixtures and fittings but also amenity and location. Similarly, lessor feedback has been used to review our management fee and related incentives to ensure ongoing satisfaction with our investment offering.

In addition to surveys, where appropriate, we also undertake more qualitative analysis. In 2015–16, we held focus groups in Perth (WA), Darwin (NT), Townsville (QLD) and Canberra (ACT) to find out what ADF members consider to be essential and desirable characteristics of apartments they would like to occupy if they selected an MCA property. The information gathered from these sessions has influenced provisioning decisions and communication to members on a national basis. The MCA program has continued to grow in popularity with over 60,000 page views on our website and over 10,000 members checking their eligibility to access this category of housing during 2015–16. We also continued to use focus group testing in developing our Look Forward SLB advertising campaign to ensure prospective investors and professionals in the real estate and finance industries both correctly interpreted product benefits and knew how to find additional information.

As part of our commitment to building principles that benefit the long-term user, we regularly engage social planners and community officers to provide specialist advice and help us engage with local communities and councils through all stages of development. In the early planning phase, we seek feedback on a range of items including different housing types, traffic management and planting of appropriate flora. Throughout the construction program, we ensure community members are kept informed of progress through newsletters, letter box drops, information sessions and other events. This helps to proactively manage issues and also helps to develop communities. This strategy has enabled us to build dwellings that people will still choose to live in many years from now.

Our Breezes Muirhead development in Darwin (NT) is an award-winning example of how researching community preferences and key climatic and environmental conditions can result in the delivery of a highly popular and successful development. In conjunction with Charles Darwin University, the NT Power and Water Corporation and Investa Land, we have commissioned and sponsored an independent research project to prove the benefits of the Breezes Muirhead planning and construction model. The research will be submitted in 2018 as part of a Doctorate of Philosophy (PhD).

Our finance team administers a research and development tax incentive program on behalf of the organisation. The team compiles applications for the Australian Taxation Office to gain a tax offset for eligible projects with a significant investment in new innovation. The full benefit of 10 per cent can potentially be returned to an information technology program or development project's budget. Since 2011, more than $6.0 million has been returned to our projects through the incentive program. Recent examples of our work include:

• developing cool residential housing in tropical climates through the use of natural ventilation and airflow while using significantly smaller lot sizes
• developing an environmentally friendly treatment method for stormwater drainage in dry tropical climates that uses natural channels and wetlands
• protecting flora and fauna while addressing unique site management challenges, such as drainage issues from site gradient and orientation.

More information about this tax incentive program is included in note 21 of the financial statements in Section 4.

Analysis of performance against Purpose 2

Despite difficult property market conditions, we were successful in provisioning for ADF members and continuing to diversify our portfolio. A large part of our success was continuing to foster relationships with state and territory governments and their responsible agencies, local councils and developers to acquire well-located and affordable land and property for future Defence housing.

We continued to demonstrate our commitment to environmental sustainability and to be recognised as a leader in this field. We also continue to engage our clients, customers, stakeholders and the general public to deliver communities that not only meet Defence and community expectation, but that people will want to live in many years from now due to the quality of construction and consideration of lifestyle attributes and amenities. This is an ongoing challenge, as it is for any property developer, and one that we take seriously.

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3 EER must be certified by an independent accredited assessor, using AccuRate (NatHERS replacement), other equivalent methods (e.g. state systems such as BERS Pro and BASIX) or, where permitted, BCA deemed-to-satisfy provisions.