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«Defence Housing Australia Service Fee Comparison Detached Houses DECEMBER 2014 © BIS Shrapnel Pty Limited December 2014 The ...»

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Defence Housing Australia

Service Fee Comparison

Detached Houses

DECEMBER 2014

www.bis.com.au

© BIS Shrapnel Pty Limited December 2014

The information contained in this report is the property of

BIS Shrapnel Pty Limited and is confidential.

All rights reserved.

This document has been prepared to address the interests and priorities of Defence Housing Australia

and not the interest or priorities of any third party. The document may not be relied upon by any person

and the use of this document by any other person without the express written consent of BIS Shrapnel to such use is at that person's own risk.

Note: Although great care has been taken to ensure accuracy and completeness in this project, BIS Shrapnel Pty Ltd has not independently verified, and does not accept responsibility for, the completeness and accuracy of the factual information on which its opinions and assumptions are based, which information has been derived from public authorities or government bodies.

R6129/AZ/JB/sf

BIS Shrapnel contact:

Angie Zigomanis BIS Shrapnel Pty Limited Level 1, Rialto North Tower 525 Collins Street Melbourne VIC 3000 Australia Tel. +61 (0)3 8679 7300 Fax +61 (0)3 9614 0033 Acknowledgement This report has been prepared by Jodi Birch with assistance from Angie Zigomanis.

Administrative support was provided by Sylvia Foo.

Service Fee Comparison Defence Housing Australia Contents EXECUTIVE SUMMARY

1  INTRODUCTION

2  COMPARISON WITH COSTS ASSOCIATED WITH A TRADITIONAL REAL ESTATE

AGENT MANAGEMENT AGREEMENT

Real Estate Agent’s Management Fee

Repairs and maintenance

Painting and floor covering replacement

Vacancy

Rental floor

Tenant protection insurance

Hassle

Costs outside both the DHA model and traditional real estate model

RESULTS OF COST COMPARISON

3  4  COMPARISON WITH MANAGED FUNDS

–  –  –

List of Tables Table I: Real Estate vs. DHA Service Fee costs – 9 year term

Indicative Real Estate Agent management fees (percentage of gross rent)

Table 2.1:

Table 2.2: Average vacancy rates by capital city, 2000 to 2014

Periods of rent fall over the 14 years to June 2014

Table 2.3:

Medium and most likely cost scenario (current dollars) – Year 9

Table 3.1:

Low cost scenario (current dollars) – Year 9

Table 3.2:

High cost scenario (current dollars) – Year 9

Table 3.3:

Table 4.1: Fees by managed fund segment, 2006 to 2013.

List of Charts Property type by rental management, Census 2011

Chart 2.1:

Chart 3.1: Share of standard tenancy costs $450 – Year 9 – medium scenario

Chart 4.1: Alternative investment fees as a % of assets

–  –  –

The cost of managing a comparable investment property (detached house) over a nine-year period (a common lease length with DHA properties) is typically lower under DHA’s fee than a traditional real estate agent’s fee. This is the case at three rent levels; $300, $450, and $600 per week and under each of the low, medium, and high cost scenarios. Even under the highest rent and lowest cost scenario, all costs associated with management totalled 18.1% of the gross rent (compared to 16.5% for a DHA lease agreement) representing a $494 saving per year.

The DHA fee also compares well with the costs associated with alternative investment vehicles, such as managed funds. Managed fund fees are expressed as a percentage of total assets under management, not as a percentage of gross revenue, which would be more comparable to the way management fees are expressed by a traditional real estate agent and DHA.

In conclusion, after taking into account all the comparable costs of managing an investment property to the same standard, the DHA fee of 16.5% provides savings over total costs borne by the landlord using a traditional real estate agent management agreement over a nine year holding period.

–  –  –

1 INTRODUCTION This report compares the cost of Defence Housing Australia’s (DHA’s) “all inclusive” property management fee (referred to in its lease as DHA Property Care) versus the total costs of a traditional real estate agent’s management agreement for detached houses. It also compares this cost with the cost of management of other managed investments.

DHA manages around 18,500 properties in Australia (of which just over 12,800 are leased) in order to house ADF members and their family. DHA’s leased properties are managed by DHA, for which it charges an all-inclusive fee of 16.5% (inc. GST) of the gross rent (applicable to detached houses). At first glance, the fee appears higher than the headline fees offered by traditional residential managing agents (typically 6.6%–11% inc. GST). However, they do not provide the same level of management.

DHA’s fee is “all inclusive”, covering a number of typical costs and expenses which are borne





by the landlord in a traditional real estate agent’s management agreement. These include:

–  –  –

 rental floor (advantage of no decreases in rent from the initial rent during the lease term for DHA sale and leaseback products only)  administration and re-letting fees  tenant protection insurance, or alternatively, the possibility of a delinquent tenant; and  hassle (quantifying the cost of the time required by a typical landlord to address repairs and maintenance and other issues).

As a result, the management fee charged by a real estate agent is not directly comparable to the “all inclusive” fee offered by DHA. Similarly, the fee charged for other managed investments (percentage of assets under management) and the DHA fee (percentage of gross rental income) are not directly comparable.

This analysis considers all the costs associated with traditionally managed residential investments to place them on par with the costs accounted for by the DHA fee in order to enable potential investors to make a better “like-for-like” comparison across alternative investments. The second component of this report converts the DHA fee to a fee as a percentage of the asset value to enable a better comparison with the management fees for an alternative investment such as managed funds.

As typical annual costs to a landlord can vary from year-to-year and from property-to-property, this report provides three cost scenarios for three indicative rental levels of an investment property (detached house). The medium scenario represents the middle, or indicative cost, while the high and low scenarios represent the upper and lower ranges.

–  –  –

2 COMPARISON WITH COSTS ASSOCIATED WITH A TRADITIONAL

REAL ESTATE AGENT MANAGEMENT AGREEMENT

This section examines the additional costs borne by a landlord that are incorporated into a DHA lease agreement (i.e. but not covered by a real estate management agreement).

Real estate agent’s management fee Traditional real estate management fees can potentially vary from location to location, as can the cost and inclusion of various administrative fees. Real estate institutes, who are the professional association for real estate agents, rarely provide advice to agents regarding their residential management fees, and therefore there is no standard recommended fee. Rather, real estate institutes provide ethical guidelines and advice as to the current legislation influencing the industry.

In order to ascertain an indicative real estate agent management fee cost structure and any other associated costs, BIS Shrapnel contacted a sample of 18 local real estate agents spread across the locations in which DHA has concentrations of leased properties. The fees were indicated as a percentage of the gross rent received and were in a range from 6.6% to 11% (rounded). The management fees (as a percentage of gross rent) for the locations covered are indicated in Table 2.1. Prices are quoted either inclusive or exclusive of GST and we have adjusted all fees to include GST.

Additional fees included letting fees, which is largely expressed as between 1 to 2 weeks gross rent plus GST, and administration fees, which were found to range from $2.50 to $8.80 per month. This administration fee is for the preparation and provision of a monthly statement. In addition, a number of other fees are often charged over and above these fees and include advertising, database fees, preparation of lease fees, tenancy tribunal fees (if required) and others.

–  –  –

While there is the alternative for a landlord to self-manage the property, the majority of landlords use a real estate agent. Analysis of the 2011 Census indicates that 64% of privately rented properties were managed by a real estate agent, varying from 58% of separate houses, to 67% for semi-detached, row and terrace houses, and up to 74% of all flats units and apartments (indicated in Chart 2.1). As a result, the analysis in this report is based on a comparison only with the costs of those who manage their property using a real estate agent.

–  –  –

This report takes a bottom-up approach, whereby we break down the value that the DHA model provides to highlight the costs that a typical landlord would pay over and above a traditional agent’s management fee, and which are absorbed by DHA.

–  –  –

The gross rent achieved by a typical rental property can vary significantly due to the quality of fixtures and fittings, number of bedrooms/bathrooms, overall size and location. An analysis of all the detached houses that have been sold and leased back by DHA between July 2013 and September 2014 (just over 900 properties) revealed that the properties largely clustered within

three distinct rent bands:

–  –  –

Repairs and maintenance Under a traditional real estate management agreement landlords are responsible for any repairs to their detached houses while tenanted and are likely to undertake further repairs and maintenance during or in-between tenancies, in order to keep their property competitive in the marketplace. DHA incorporates these costs into its management fee.

DHA has comprehensive data of actual expenditure on repairs and maintenance for their properties and at different rental price points. We have analysed this data to determine average costs and the magnitude of any potential variations. The data is based on expenditure for the 2013–14 financial year.

© BIS Shrapnel Pty Ltd 2014 Service Fee Comparison Defence Housing Australia While DHA‘s property repair and maintenance costs apply to its properties only, there is no reason why these would differ substantially from a traditional residential rental, assuming that the landlord would keep his/her property well maintained. Given the extensive number of properties under management, DHA’s sample should provide a strong indicative cost of maintaining and repairing properties within Australia.

For the purposes of allocating DHA properties, the Department of Defence classifies them into five “rent bands”. The defence member rank then determines their rent band entitlement. The repairs and maintenance costs show little difference between properties in the first and second rent bands, which best corresponds with our $300 per week and $450 per week rental scenarios. The higher rent bands have different repair and maintenance costs due to the quality of fixtures and fittings, number of bedrooms/bathrooms, and overall size of the dwellings being managed. We have taken the costs of repairs and maintenance of these higher spec properties as indicative of those at the higher $600 a week rent level.

Given the variation in the repairs and maintenance cost per property due to location as well as due to rental cost, we have therefore provided three cost scenarios for repairs and maintenance costs based on the standard deviation from the average across all 16 major regions that DHA

leases properties. These are as follows (costs inclusive of GST):

–  –  –

Painting and floor covering replacement DHA’s fee makes a provision for internal re-painting upon lease expiry for a lease longer than six years. For a lease longer than nine years, it also provides for re-carpeting, replacing vinyl floor coverings or re–polishing timber floors and both internal and external painting (unless a body corporate or similar entity has the responsibility).

DHA data indicates that these end of lease costs in 2013–14 averaged $6,244 (including GST) per property for leases that run for at least six years ($1,041 per annum), and cost $9,821 (including GST) per property with leases for at lease nine years ($1,091 per annum) for a detached house. For a higher spec property renting at $600 a week, these end-of-lease costs have been escalated in a similar fashion to the higher repairs and maintenance costs associated with such a property. With a smaller variation in painting and floor covering replacement, the high and low cost scenarios fall 15% above and 15% below these average costs respectively.

If the above works are required during the life of the lease due to fair wear and tear, and to maintain the property to a high quality standard, DHA will undertake and pay for the works.

DHA is still required under its lease agreement to complete end-of-lease works. If, however, it is not deemed necessary (i.e. the property is in good condition), DHA may offer a payout in lieu of undertaking the work.

–  –  –

Vacancy While a DHA managed property may be vacant in-between tenants, DHA continues to pay rent during this period, subject to the terms and conditions of the lease agreement. In contrast, rent is foregone under a real estate agent management agreement.



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