By Aaron Gadiel, Partner

The NSW Government has released surprising proposals that, at face value, dramatically wind-back planning provisions that support the private sector development of build-to-rent housing and seniors housing.

The changes are to be part of a proposed a new ‘Housing Diversity State Environmental Planning Policy’ (the Housing Diversity 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 actual legal text of the proposed new Housing Diversity SEPP is not available.  Instead, the NSW Government has released a ‘explanation of intended effect’.  It is open for public comment until 9 September 2020.

These changes will not necessarily be implemented.  It is possible that the government will change its position once it receives community and industry feedback.

What the government says it is trying to achieve

The government says two apparently contradictory things about the purpose of the new Housing Diversity SEPP.

On one hand, the government also says that the changes ‘will ensure that the residential development sector is well-placed to assist in the economic recovery of NSW following the COVID-19 pandemic’.  The government says that the proposed new SEPP ‘is an example of government-led action to address housing diversity and affordability’.  The government says that the changes will ‘accelerate projects that support employment and economic development.’

On the other hand, the government says that the proposed state environmental planning policy (SEPP) is intended to consolidate and update planning provisions ‘in response to community and council concerns about boarding house and seniors housing development (bold added)’.  This implies that it is intended to reduce opportunities to develop boarding houses and seniors housing.  (A shortfall in housing supply is rarely described by government regulators as a ‘community and council concern’.)

Our overall assessment is that, at face value (and taken in total), the proposed new Housing Diversity SEPP will significantly reduce the scope/extent of private build-to-rent and seniors housing development opportunities.

There are some changes that will ease planning rules for new housing.  However, these are largely confined to housing developed by the NSW Government’s own Land and Housing Corporation.

The three SEPPs proposed for repeal

The government is proposing to repeal and replace the following:

• The State Environmental Planning Policy (Affordable Rental Housing) 2009 (the 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.

Reduced ability to develop build-to-rent housing

The existing planning pathway for build-to-rent housing

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 choose 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 existing 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 uninform suite of (largely beneficial) planning incentives and development standards for private sector boarding houses.

The government is now proposing to fragment this single development type into four different development types.

It appears that each of the 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.

Boarding houses

Under the proposed Housing Diversity SEPP, a development would only be regarded as a boarding house if it meets ‘affordability’ rules (in terms of its rental) 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 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 one of the new development types proposed under the Housing Diversity SEPP.

Build-to-rent housing

A proposed development will only qualify as ‘build-to-rent housing’ under the proposals if:

• it contains at least 50 self-contained dwellings that are offered for long term (three years or more) private rent;
• is held within a single ownership;
• is operated by a single management entity; and
• includes on-site management.

The government is not proposing to mandate that ‘affordable’ requirements be imposed on rents, but it is proposing to allow local councils to impose such requirements.

Local councils have generally favoured using the planning system to control rents when they have been given the opportunity to do so.  The state government’s proposal to allow local councils to do this is likely to result in the roll-out of widespread rent controls for this development type.

Of course, an obvious risk in allowing rent control for new development is that some build-to-rent development may simply not be viable (as the regulated rents may not be sufficient for the development to pay for itself).

However, rent control may have wider consequences.  According to the Brookings Institution recent research has examined how rent control affects tenants and housing markets.  This research has apparently concluded that rent control does appear to help current tenants in the short run.  However, in the long-run the overall cost is said to be ‘very large’ — with decreases in affordability, accelerated gentrification and other negative consequences for surrounding neighbourhoods.

Some key features of the proposed ‘build-to-rent’ housing, in comparison with the existing ‘boarding house’ category are as follows:

• Mandatory permissibility of ‘build-to-rent’ housing is to be limited to the following zones:
  • ‘R4 High Density Residential’ (R4);
  • ‘B3 Commercial Core’ (B3);
  • ‘B4 Mixed Use’ (B4);
  • ‘B8 Metropolitan Centre’ (B8); and
  • ‘R3 Medium Density Residential’ (R3) — but only when residential flat buildings are already permitted.
• This represents a likely significant reduction in the land that would be available for development (when compared with the existing boarding house category). This is because the current arrangements mandate that boarding houses are also permissible in the following zones:
  • ‘R1 General Residential’ (R1);
  • ‘R2 Low Density Residential’ (R2);
  • ‘B1 Neighbourhood Centre’ (B1); and
  • ‘B2 Local Centre’ (B2).
• The State Environmental Planning Policy No 65—Design Quality of Residential Apartment Development (SEPP 65) design quality principles will apply. However, it seems that the Apartment Design Guide will not necessarily apply as the government ‘will develop specific advice about those parts of SEPP 65 that are particular to the build-to-rent typology’. (At present, the Apartment Design Guide does not generally apply to boarding houses.)
• It seems that there will be no state-imposed floor space ratio bonus. Boarding houses presently generally benefit from a bonus of between 20 to 100 per cent on top of the floor space ratio permitted under a LEP.  There is no proposal to carry this through to ‘build-to-rent’ housing.
• Currently boarding house development applications cannot be refused on the grounds of density and scale if they comply with the maximum floor space ratio for any form of residential accommodation on the site (plus the bonus, if any). Similar provisions exist with regard to height. These provisions protect boarding house developments from being penalised relative to other forms of residential development.  No such protection is offered under the proposed Housing Diversity SEPP.
• ‘Clause 4.6’ requests are not normally required for variations to height and floor space ratio maximums for boarding houses. They can be approved on merit without such a formal request.  ‘Build-to-rent’ housing would apparently not benefit from this flexibility.
• Boarding houses benefit from a series of provisions (including ‘do not refuse’ development standards) that provide protection from harsher standards being imposed by local councils. These cover matters such as landscaped area, private open space, car parking, provision of communal rooms, etc. Only the car parking provision (0.5 spaces per dwelling) is proposed to be applied to the new category of ‘build-to-rent’ housing.
• ‘Build-to-rent’ housing — outside of the City of Sydney local government area — would be state significant development if there is a capital investment value (excluding land) of $100 million or more in non-regional areas ($50 million in regional areas). This means that the state government would be responsible for development assessment and determination for these developments, rather than local councils.  This is the first time, since 2011, that the state government has embraced the inclusion of a generic category of residential development in the list of ‘state significant’ development.  Of course, the great majority of existing private sector boarding house developments would be below $100 million in capital investment value.
• There would be no subdivision permitted for 15 years. In the B3 (commercial core) zone, subdivision would be prohibited in perpetuity.  Boarding houses are presently unable to be subdivided.

Room/unit size has been left open for now (to be resolved when ‘design guidance’ is developed later).  This means it is not yet clear whether dwellings will be able to be smaller or larger than the current 12-25 square metres (excluding areas used for the purposes of private kitchen or bathroom facilities) for boarding houses.   For example, it is not clear whether build-to-rent will only be able to be for small studios (as per the current boarding houses) or may also be one, two or three bedroom units.  There is a possibility, for example, that the minimum size of residential units could be set higher than 25 square metres (and prevent private developers form building large-scale build-to-rent housing with more modestly sized rooms).

Overall, as it stands, it seems that very little about the new proposed arrangements for ‘build-to-rent’ housing is actually likely to boost the supply of such housing, relative to the status-quo.

To try and take an upbeat note (from a developer’s perspective) there is the possibility that — in 15 years’ time — a developer might (subject to planning controls in force at the time) apply for the subdivision of the site (but not in a B3 zone).

There is also the possibility that the design guidance (yet to be developed) will be more flexible or less onerous than the Apartment Design Guide.  However, there is nothing in the government ‘explanation of intended effect’ that says that this is the agenda.

Co-living

A proposed development will only qualify as ‘co-living’ under the proposals if:

• it provides tenants with a principal place of residence for three months or more;
• includes on-site management;
• includes a communal living room (and may include other shared facilities, such as a communal bathroom, kitchen or laundry);
• has at least 10 private rooms, some or all of which may have private kitchen and/or bathroom facilities, with each private room accommodating not more than two adults.

So, in simple terms, ‘co-living’ developments may be smaller in scale than the ‘build-to-rent’ housing (which has a minimum number of 50 dwellings).  Tenancies would be able to be shorter (retaining the existing three-month minimum for boarding houses, rather than applying the three-year period).

Unlike ‘build-to-rent’ housing, for ‘co-living’ development, local councils would be precluded from imposing ‘affordability’ (rent control) requirements.

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

• Mandatory permissibility of ‘co-living’ housing to be restricted to wherever residential flat buildings are permitted. This is a likely significant reduction in the land that would be available for development (when compared with the existing boarding house category).  Boarding houses are presently permitted (under the Affordable Housing SEPP) in a wide range of zones which do not often (or ever) permit residential flat buildings.  This includes the R2, B1, B2 and B3 zone.
• Again, there will be no state-imposed floor space ratio bonus. (A loss when compared with the existing boarding house category.)
• ‘Co-living’ development will be subject to whatever height and floor space 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’ 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’ dwellings (rooms) will need to be larger than boarding rooms in existing dwellings. 30-35 square metres are nominated (the proposal does not explain whether the measurement includes or excludes areas used for the purposes of private kitchen or bathroom facilities).  Boarding rooms currently are in the size of 12-25 square metres (excluding kitchen/bathroom areas).  Apartment Design Guide design criteria sets a 35 square metre minimum for studio apartments (including kitchen/bathroom areas).  It seems that co-living developments will not include one, two or three bedroom apartments (only studios).
• ‘Co-living’ rooms will each require their own private open space — four square metres per room. This likely means that rooms will generally need to have balconies — raising acoustic and private issues that existing boarding houses are able to avoid.   This may limit the sites in which co-living development can take place (when compared with boarding houses).
• There will be a communal open space requirement of 25 per cent. No such requirement presently exists for boarding houses.  (There is a requirement for a communal living room once there are five or more boarding rooms, but the Affordable Housing SEPP does not impose minimum dimensions).
• ‘Co-living’ development will not generally benefit from the existing special provisions to assist boarding houses. Only the car parking provision (0.5 spaces per dwelling) is proposed to be applied to the new category of ‘build-to-rent’ housing.
• The building envelope controls for residential flat buildings would apply. This contrasts with boarding houses which generally only need to comply with the setbacks that are commonly applicable or exist within the relevant zone or locality.  In a lower density zone, those setbacks will often be far less onerous that those that would apply for residential flat buildings.
• There would be no subdivision permitted (as per boarding houses).

The possibility of design guidelines for co-living developments is flagged.  This may also result in further restrictions or hurdles that do not currently exist for boarding house development.

All-up the main benefit of the introducing of ‘co-living’ as a development type, in terms of housing supply, would be the opportunity to develop larger studio apartments than are currently permitted for boarding houses.  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’ as a distinct type of development would generally have the effect of denying privately developed boarding houses from the benefit of the boarding house provisions.

Student housing

As discussed earlier, student housing is generally currently developed as a form of boarding house.

However, the proposed new ‘student housing’ development type is quite limited.  It would only apply to a building that:

• provides accommodation and communal facilities principally for students enrolled to study at an education establishment during teaching periods; and
• may incorporate some fully self-contained dwellings.

It is notable that any housing developed as ‘student housing’ is principally to be occupied during teaching periods, rather than all year round.

Other key features of the proposed ‘student housing’, that distinguish them from the existing ‘boarding house’ category are as follows:

• It would not be mandatory for student housing to be permissible on any Local councils would determine permissibility under their LEPs.
• Again, there will be no state-imposed floor space ratio bonus.
• There will be no minimum provision for car parking (boarding houses can be developed with no car parking, although there is usually a need to justify why parking cannot be provided at either 0.5 spaces per boarding room or at an applicable development control plan rate).
• ‘Student housing’ development would be subject to whatever height and floor space ratios are set for it under the LEP. The special rules preventing discriminatory standards (that exist for boarding houses) will not apply.
• ‘Student housing’ rooms would have a minim size of just 10 square metres (with the possibility of allowing smaller areas when justified).
• There will be an indoor communal space requirement of 15 square metres per student. In areas that are not within 400 metres of ‘the relevant university’, the Housing Diversity SEPP will ‘recommend’ 2.5 square metres of outdoor space per student.
• It seems that the planning provisions generally in place to benefit boarding houses will also not be available for ‘student housing’.

The possibility of design guidelines for student housing development is flagged.  This may also result in further restrictions or hurdles that do not currently exist for boarding house development.

It is hard to say whether there are any net benefits or costs in this new category of development.  However, given that:

• it is intended principally only for use in teaching periods; and
• it will only be permissible when a local council consciously decides to make it so,

it is likely that this form of development will be niche and rarely an option.

Seniors housing

Changes to land that can benefit from the Seniors Housing SEPP

Under long-standing provisions, the Seniors Housing SEPP already does not apply to certain land that is defined as ‘environmentally sensitive land’.  As part of the Housing Diversity SEPP the government is proposing to make unspecified changes to these provisions to ensure that the exclusion is ‘better aligned with current legislation and planning conditions’.  This may (or may not) lead to the Seniors Housing SEPP being disapplied to additional lands.

A taste of the government’s approach to the Seniors Housing SEPP might be signalled by its most recent amendment to that SEPP.  On 29 July 2020 the government published the State Environmental Planning Policy (Housing for Seniors or People with a Disability) Amendment (Metropolitan Rural Areas Exemption) 2020.  This legal document effectively turned-off the beneficial provisions of the Seniors Housing SEPP for large areas of land mapped as ‘metropolitan rural areas’ (subject to transitional provisions).

LEP provisions to trump the Seniors Housing SEPP

Currently, the Seniors Housing SEPP allows development for the purpose of seniors housing to be carried out ‘despite the provisions of any other environmental planning instrument’. The government is now proposing to reverse this so that ‘development standards in an LEP prevail to the extent of any inconsistency’.

This would fundamentally change the relationship between the state-level seniors housing controls and local controls.  The implications would be wide-ranging.  For example, it would have the effect of setting aside important ‘do not refuse’ standards in Part 7 of the Seniors Housing SEPP.  For self-contained dwellings, these provisions currently protect seniors housing development from onerous local standards in relation to building height, density and scale, landscape area, deep soil, solar access, private open space and parking.

‘Clause 4.6’ requests to be required and flexibility to be limited

‘Clause 4.6’ requests would now be required if it is proposed to contravene LEP height or floor space ratio controls. (When the Seniors Housing SEPP applies, at present, such requests are not generally required for breaches of LEP height and floor space ratio controls as per judicial decisions taken in 2009 and 2019.)

However, in a ground-breaking change, the extent of any variation of development standards that would be allowed under the Seniors Housing SEPP (under ‘clause 4.6’) would be limited to a ‘maximum of 20%’.  Generally speaking, law-makers have previously resisted the imposition of strict numerical limits on variation in development standards under clause 4.6.

This is because variations under that provision can only be approved if they are unreasonable or unnecessary in the circumstances of the case.  If a development standard is actually unreasonable or unnecessary, it is immaterial that the variation to the standard is 20 per cent or 50 per cent.  Variations greater than 20 per cent are regularly approved by local councils and the Court where the circumstances justify it.  This change inevitably means that development standards would still be applied, to some extent, in circumstances where the objective evidence shows that it should not be applied at all.

Longer life for site compatibility certificates

In a positive move, the period for which a site compatibility certificate will be in force is proposed to be extended to five years (from two years), so long as a development application is lodged within 12 months of the certificate’s issue.

Special treatment for the Land and Housing Corporation

The proposed SEPP will further entrench approval arrangements that treat proposed built form differently, depending on who owns it (rather than what it looks like or how it works).

The NSW Government’s social housing agency (the ‘Land and Housing Corporation’) will be given an extended ability to self-approve its own dense housing developments and subdivisions.  The agency will also benefit from density bonuses for private (market) housing that it develops — while those same bonuses will not be available to private developers.

Effectively, the NSW Government seems to be further abandoning the principle of ‘competitive neutrality’ in private housing development.  The NSW Land and Housing Corporation will further benefit from inherent regulatory advantages that appear to be divorced from the incidence of adverse planning impacts.

It’s a surprise

It is possible to see some projects benefiting from some of these changes.

However — based on the types of private sector projects we regularly work on — it seems to us that the overall tenor of these changes will have a negative impact on housing supply.  Overall, the changes are likely to:

• increase the cost and risk of obtaining development consent;
• reduce the number of sites available for privately-developed build-to-rent and seniors housing; and
• reduce the housing yield and financial feasibility of some privately-developed build-to-rent/seniors housing projects.

It is surprising that — at a time of great economic uncertainty — the NSW Government has released a suite of proposals that are likely to reduce the overall ability of the private sector to develop build-to-rent and seniors housing.

Submissions can be made to the NSW Government here by 9 September 2020.