By Aaron Gadiel, Partner

The NSW government is barrelling-on with its proposed Housing SEPP — even though its net effect is likely to reduce opportunities to develop housing.

The government placed a package of draft legal documents, including a proposed State Environmental Planning Policy (Housing) 2021 (Housing SEPP) on public exhibition on Friday (31 July 2021).  The documents are open for public comment until 29 August 2021.

The exhibition of this material follows the exhibition of a more general ‘Explanation of Intended Effect’ last year.  Mills Oakley published an article at the time.

The government is moving forward on its proposals in stages.  It finalised a new planning pathway for a stream of ‘built-to-rent’ housing in February this year.  Mills Oakley outlined those measures in a previous article.

Notably, despite the draft Housing SEPP’s broad objectives, it contains no measures to facilitate conventional:

• privately-developed infill apartment projects; and
• greenfield single dwelling housing development.

The public exhibition documents are largely focused on changes to the existing planning pathways for:

• ‘boarding houses’ — including ‘new generation’ boarding houses generally developed by private sector developers; and
• seniors housing.

Some proposed measures would lead to better outcomes for a selection of build-to-rent and seniors housing projects.  However, taken as a whole, the proposals will mostly have a negative effect on the supply of newly developed rental homes and seniors housing.

Mills Oakley has acted for developers of countless ‘new generation’ boarding houses over the past five years.  Almost all of the projects for which we helped secure development consent would not be capable of being approved under the provisions of the draft Housing SEPP.  For some sites, the opportunity to develop any form of more compact, multi-unit, rental accommodation will be wiped away altogether.  For other sites, the opportunity may still notionally exist, but with a reduced number of dwellings.

Reducing the dwelling yield may diminish the attraction of this development type, relative to other competing land uses.  This may damage the supply of cost-effective housing generally (possibly well beyond the ‘headline’ reductions in realisable gross floor area set out in the exhibition documents).

The intended changes to seniors housing are more mixed.  There are some improvements for the development of infill seniors housing.  However, there is also a proposal for the (almost) complete elimination of opportunities to develop seniors housing on rural zoned land.

For seniors development still able to proceed, there will be a dramatic increase in the number of legally-binding development standards that will have to be met (or varied under the onerous ‘clause 4.6’ variation process).

This article provides a broad outline of some aspects of the proposals.  It does not deal with every requirement or provision set out in the package.

What is a ‘SEPP’?

A state environmental planning policy (SEPP) is a legal document that has the capacity to override or replace local environmental plans (LEPs).

This means that SEPPs can:

• establish that certain types of development are permissible; and
• set development standards,

even when these measures are not supported by local councils.

The five SEPPs proposed for repeal

The government is proposing to repeal and replace the following:

• The State Environmental Planning Policy (Affordable Rental Housing) 2009 (Affordable Housing SEPP). This SEPP currently provides planning incentives for the development of certain (traditionally under-represented) forms of housing.  It also contains provisions intended to prevent such housing being penalised unfairly by local planning controls.  This SEPP sets aside some local development standards in certain circumstances (without any need for a ‘clause 4.6’ request).
• The State Environmental Planning Policy (Housing for Seniors and People with a Disability) 2004 (Seniors Housing SEPP). This SEPP contains important provisions that override local controls to allow expanded permissibility for seniors housing (including self-contained dwellings that are largely indistinguishable, in built form terms, from residential apartments).  This SEPP also sets aside some local development standards in certain circumstances (without any need for a ‘clause 4.6’ request).
• The State Environmental Planning Policy No 70 — Affordable Housing (Revised Schemes) (SEPP 70). This SEPP identifies the whole state as being in need of ‘affordable housing’.  This identification is relatively recent (it was made in February 2019) and is intended (by the NSW Government) to pave the way for ‘affordable housing’ levies to be imposed on new development.
• The State Environmental Planning Policy No 21—Caravan Parks and the State Environmental Planning Policy No 36—Manufactured Home Estates. The government is not proposing any substantive changes to the provisions of these planning instruments at this time.  It will seem that, initially, existing provisions will be rolled-in to the Housing SEPP.

Boarding houses

One of the most significant parts of the existing Affordable Housing SEPP (for private developers of housing) are the rules that are designed to facilitate ‘boarding houses’.

Despite the historical use of this expression, under the existing planning law, ‘boarding houses’ are able to accommodate any member of the community who chooses to live in one.  Access to a ‘boarding house’ under the planning law is not means-tested.

Boarding houses often (in substance) take the form of unit blocks that are exclusively comprised of small studio apartments.  Most conventional residential flat buildings would be unable to focus on this product type only — due to social mixing requirements.

Additionally, for a conventional residential flat building, the Apartment Design Guide would apply.  This typically necessitates that studio apartments have:

• a minimum internal area of 35 square metres (including bathroom and kitchenette);
• for apartments at ground level or on a podium — a private open space with a minimum area of 15 square metres and a minimum depth of three square metres; and
• for other apartments — primary balconies of four square metres (within a minimum depth of one metre).

These provisions do not generally apply to boarding houses.  Boarding houses can normally be developed without balconies or private open space for individual boarding rooms.  The normal minimum size for boarding rooms is 12 square metres (for a room used by a single person) or 16 square metres (for a room to be used by a couple).  The maximum size is 25 square metres.  These measurements exclude any area used for the purposes of private kitchen or bathroom facilities.

Boarding houses generally benefit from other planning provisions (that are not available for conventional residential flat development).  For example, development for a boarding house cannot be refused for any lack of solar access to its boarding rooms (so long as, when a communal living room is provided, at least one such room receives a minimum of three hours of direct sunlight between 9am and 3pm in mid-winter).  This contrasts with the Apartment Design Guide’s design criteria that says, in Sydney, living rooms and private open spaces of at least 70 per cent of dwellings within an apartment building should receive a minimum of two hours direct sunlight between 9am and 3pm at mid-winter.

As a result, there is a greater ability to develop boarding houses on sites where apartment development would be challenging.  Additionally, boarding houses may generally be developed with a greater number of dwellings (bearing in mind that each boarding room with its own kitchen and bathroom is a ‘dwelling’).

In a commercial sense, a key defining feature of a boarding house is that it cannot be subdivided and that it must be used as rental (rather than owner-occupied) accommodation.  There is no regulation of the rents.  That is, market rents apply.  However, given that the product is able to be developed at a lower cost than residential flat buildings, with more compact dwellings, the underlying expectation is that boarding houses are generally more affordable to rent than Apartment Design Guide compliant studio apartments.

In short, boarding houses represent the planning system’s longstanding pathway for build-to-rent as a specific housing type.  A key commercial consideration is the existing cap on the size of the boarding rooms to 25 square metres (plus any area used for the purposes of private kitchen or bathroom facilities).  If private developers want to pursue build-to-rent units that are larger than this, they presently need to pursue the development as a residential flat building, rather than a boarding house.

Fragmentation of the ‘boarding house’ development type

Boarding houses are presently defined very broadly.  In simple terms, a boarding house is a building that provides the lodgers with a principal place of residence for three months or more.  Boarding rooms may have their own kitchens and bathrooms.

There is presently a uniform suite of (largely beneficial) planning incentives and development standards for private sector boarding houses.

The government is now proposing to split this single development type into two different development types.

It appears that both of these new development types will be subject to a planning regime that is likely to be less attractive (in total, on average) to private sector developers than the status-quo.

The new ‘boarding house’ provisions

Under the proposed Housing SEPP, a development would only be regarded as a boarding house if:

• it meets ‘affordability’ rules (which include rent controls); and
• is managed by a not-for-profit community housing provider.

In simple terms, this means that the current planning regime for boarding houses — including its provisions for floor space ratio bonuses — will be denied to most commercial property developers.  (Some developers may choose to work with community housing providers, but this is very different, and a more challenging commercial proposition than the existing regime for boarding house development.  Among other things, community housing providers are subject to a layer of regulation as to their tenant mix, etc that do not apply to privately developed and managed boarding houses.)

If commercial property developers want to develop build-to-rent housing — other than as a conventional residential flat building or a product managed by a community housing provider —  they would generally need to pursue their development under the new specific ‘build-to-rent’ planning pathway or under the Housing SEPP’s proposed ‘co-living housing’ category.

Co-living housing

The extent of land available for co-living housing well be reduced, when compared with the existing ‘boarding house’ development type.  Under the Affordable Housing SEPP boarding houses are permitted in any of the following zones:

• ‘R1 General Residential’ (R1);
• ‘R2 Low Density Residential’ (R2);
• ‘R3 Medium Density Residential’ (R3);
• ‘R4 High Density Residential’ (R4);
• ‘B1 Neighbourhood Centre’ (B1);
• ‘B2 Local Centre’ (B2); and
• ‘B4 Mixed Use’ (B4).

In contrast, co-living housing will only be permissible where residential flat buildings or shop top housing are permitted.  This will generally rule out most B1 zones and some B2 zones.  In theory a specific LEP may include co-living housing in other zones, however, in practice, we rarely see local councils take up this type of flexibility.  Further, it seems that even an LEP will not be capable of making co-living housing permissible in an R2 zone.

A proposed development will only qualify as co-living housing under the proposals if it:

• has at least six private rooms (which may have private kitchen and bathroom facilities);
• provides occupants with a principal place of residence for at least three months;
• has shared facilities, such as a communal living room, bathroom, kitchen or laundry; and
• is maintained by a managing agent, who provides management services 24 hours a day.

Co-living housing may be smaller in scale than housing under the ‘build-to-rent’ planning pathway (which has a minimum number of 50 dwellings).

Some key features of the proposed co-living housing, that distinguishes it from the existing ‘boarding house’ category are as follows:

• The floor space ratio bonus is 10 per cent (a reduction on the bonus of between 20 to 100 per cent generally available for existing boarding house development). However, even this bonus will expire on 1 August 2024.  After that, there will be no bonus floor space ratio for co-living housing at all.
• Co-living housing will be subject to whatever height ratios are set for it under the LEP. The special rules preventing discriminatory standards (that exist for boarding houses) would not apply.
• ‘Clause 4.6’ variation requests would be required for variations to height and floor space ratio maximums (unlike the more flexible merit-based approach currently in place for boarding houses).
• Co-living housing dwellings (rooms) will be subject to a minimum size requirement of 12 square metres (for a room used by a single person) or 16 square metres (for a room to be used by a couple). This standard is only a ‘do not refuse’ standard for existing boarding houses.
• There is no maximum size gross floor area for dwellings. This compares with a maximum size of 25 square metres (excluding any area used for the purposes of private kitchen or bathroom facilities) in the existing boarding house category. (However, the Planning Department’s ‘Q&A’ asserts that there will be a maximum size for co-living housing.  Either the Q&A is incorrect, or the exhibited draft Housing SEPP does not reflect the government’s actual intention.)
• There will be a minimum lot size, generally aligned to the relevant minimum lot size for multi dwelling or residential flat buildings. There is no such requirement under the existing boarding house stream.
• Setbacks set out under a development control plan (which are required to be applied flexibly) will be imposed as more rigid development standards under the Housing SEPP itself. This will mean that such setbacks can only be varied through the rigorous ‘clause 4.6’ variation process.
• If the co-living housing exceeds three storeys, the building will have to comply with the minimum building separation distances specified as design criteria in the Apartment Design Guide. However, again, these will be imposed as less flexible development standards (design criteria in the Apartment Design Guide are only one means of achieving a qualitative performance objective).  This will mean that such building separation distances will only be able to be varied through the ‘clause 4.6’ process.

All-up the main benefit (for housing supply) of the introduction of co-living housing (as a distinct development type) would be the opportunity to develop larger studio apartments than are currently permitted for boarding houses (assuming that the draft Housing SEPP is accurate and that the Planning Department’s Q&A is wrong).  Of course, such larger dwellings are likely to come at a greater cost (likely reducing the affordability of the final rental product).

Otherwise, it seems that the introduction of co-living housing (as a distinct development type) would generally deny privately developed ‘new generation’ boarding houses from the benefit of the existing boarding house provisions.

Seniors housing — reduced scope

The most notable change to seniors housing is the almost blanket removal of rural land from the scheme.

The ability to develop seniors housing on rural land (that adjoins land zoned primarily for urban purposes) is one of the central features of the long-standing seniors housing scheme.

The proposed new seniors housing scheme will only apply to a single rural zone, being the ‘Zone RU5 Village’ (RU5) zone.

The other zones that the scheme will apply to are:

• ‘R1 General Residential’;
• ‘R2 Low Density Residential’;
• ‘R3 Medium Density Residential’;
• ‘R4 High Density Residential’;
• ‘B1 Neighbourhood Centre’;
• ‘B2 Local Centre’;
• ‘B3 Commercial Core’;
• ‘B4 Mixed Use’;
• ‘B5 Business Development’;
• ‘B6 Enterprise Corridor’;
• ‘B7 Business Park’
• ‘B8 Metropolitan Centre’
• ‘SP1 Special Purposes’
• ‘Zone SP2 Infrastructure—Hospital’
• ‘RE2 Private Recreation’.

(Some land will be excluded from the scheme even if they are in these zones, but it is beyond the scope of the article to deal with those exclusions.)

Seniors housing —  no more site compatibility certificates

Site compatibility certificates are to be abolished.  These certificates are currently a burdensome extra step in the process. At present, a certificate must be obtained from a district or regional panel before a development application can be lodged.  There is normally no right of merit appeal when a certificate is refused.

At present, the most common circumstances where site compatibility certificates are needed are for:

• development on rural land; and
• development on land that is used for the purposes of an existing registered club (often zoned ‘RE2 Private Recreation’).

The development of club land and RU5 land will be assisted by the abolition of site compatibility certificates.  The change otherwise merely reflects the removal of rural land from the seniors housing scheme.

Seniors housing — vertical villages

The Seniors Housing SEPP contains provisions that relate to vertical villages (potentially medium-rise or high-rise) seniors housing developments.

The current scheme allows for a bonus of floor space ratio of 0.5:1.  This is, for example, a bonus of 25 per cent if the floor space ratio is 2:1 and a bonus of close to 17 per cent if it is 3:1.  This has generally not been sufficient to attract significant developer interest.

One constraint has been the difficulty in achieving the additional floor space ratio within the available height control.

The Housing SEPP includes a different floor space ratio bonus for ‘vertical villages’ as follows:

• for development involving independent living units — an additional 15 per cent of the maximum permissible floor space ratio;
• for development involving a residential care facility — an additional 20 per cent; and
• for development involving independent living units and residential care facilities — an additional 25 per cent.

For developments of independent living units (ie private apartments) the bonus floor space ratio will generally be reduced.

However, in a positive move (in terms of housing supply), there would also be provision for a bonus height (ie an increase to maximum building height) by up to 3.8 metres.  This may cause some developers to look carefully at this proposed scheme.

Seniors housing — more development standards

The proposed seniors housing regime is subject to many more legally binding development standards than the existing scheme.  Some are very prescriptive.  This is likely to increase the need for ‘clause 4.6’ variation requests (with the accompanying risk that such requests always carry).

Residential care facilities — state significant development

The proposed Housing SEPP would make residential care facilities ‘state significant development’ when

• the development has a capital investment value of $30 million (in the Greater Sydney region) or $20 million (elsewhere); and
• the residential care facility component of the proposed development has a value of at least 60 per cent of the capital investment value of the proposed development.

This means that the NSW government would be responsible for development assessment and determination for these developments, rather than local councils.

The legal effect of the changes

The proposals on public exhibition will not necessarily be implemented.  It is possible that the government will change its position once it receives community and industry feedback.

Nonetheless, effective immediately, any consent authority is required to take the draft Housing SEPP into consideration (when deciding upon a development application).

This does not mean that the draft Housing SEPP imposes binding obligations on the consent authority.  It is definitely not binding.  A consent authority may need to consider:

• whether any weight should be given to a proposed requirement at all;
• why it may be appropriate to not apply a requirement set out in the draft Housing SEPP; or
• whether, in the particular application under consideration, non-compliance with a proposed requirement might be ameliorated by the imposition of conditions.

Going forward it would be prudent for any new ‘statements of environmental effects’ for developments types impacted by the proposed changes to also address the Housing SEPP.