New affordable housing incentive scheme — the detail is out

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By Aaron Gadiel, Partner and Anthony Whealy, Partner

The NSW Government has enacted a series of amendments to planning laws, dealing with ‘affordable housing’, build-to-rent housing, seniors housing, residential apartment design and competitive design processes.

These changes are set out in the:

  • State Environmental Planning Policy Amendment (Housing) 2023 (published on 14 December 2023);
  • Environmental Planning and Assessment Amendment (Housing) Regulation 2023; and
  • State Environmental Planning Policy Amendment (Design Competition Guidelines) 2023 (published on the 15 December 2023).

Most of the changes relate to the State Environmental Planning Policy (Housing) 2021 (the Housing SEPP), with the aim to incentivise and fast track the delivery of more truly ‘affordable’ housing in areas well serviced by public transport.

This article summarises some of the key changes the Government has put in place.  However, it does not cover all the changes.  Individual developers/landowners should seek advice that is specific to their project.

A new ‘affordable housing’ incentive scheme

A new ‘affordable housing’ incentive scheme is now in place.  The scheme permits extra floor space ratio and extra height if certain criteria are met, in particular where a proportion of the development is set aside to be used exclusively as affordable housing for at least 15 years. In some cases, the scheme opens up a ’state significant development’ pathway, but the incentive scheme will equally apply to smaller scale development applications, via the usual local council development application process.

Before we get into the detail, there are two ‘big picture’ things that should be appreciated.

Firstly, ‘affordable housing’ does not carry its ordinary everyday meaning.  In planning law, ‘affordable housing’ has a special legal meaning.  It is housing for very low income households, low income households or moderate income households.  In most cases this means a household that:

  • has a gross income of no more than 120 per cent of the median household income; and
  • pays no more than 30 per cent of its gross income in rent.

The affordable housing component must be managed by a registered community housing provider — as ‘affordable housing’ — for a period of at least 15 years commencing on the day an occupation certificate is issued for the development.

New market-rate housing that is relatively affordable (such as apartments in a high-demand locality in which low-density housing predominates) will generally not qualify as ‘affordable housing’.

Secondly, extra floor space ratio and height provisions are often informally described as ‘bonuses’ in the development industry.  However, the word ‘bonus’ can be misleading.  This is because there is no automatic entitlement to the extra floor space or height.  While a consent authority will normally assess the acceptability of height and building massing in the context of the permitted floor space and height, there may be site specific factors which mean that the full extent of the permitted floor space and height cannot be realised in a particular case.

No extension to permissibility

The new ‘affordable housing’ scheme does not make residential development permissible in any new areas.  Development for the purposes of the relevant type of residential accommodation will already need to be separately permissible for the new scheme to apply.

Minimum percentage to be eligible

For the scheme to apply, at least 10 per cent of the development’s gross floor area must used for ‘affordable housing’ for a period of at least 15 years.

‘Affordable housing’ provided as part of development because of a requirement under:

  • another environmental planning instrument; or
  • a planning agreement,

does not count towards the ‘affordable housing’ component under the new scheme.

Type of development

The development must include one or more of the following types of the development:

  • attached dwellings;
  • dual occupancies;
  • dwelling houses;
  • manor houses;
  • multi dwelling housing;
  • multi dwelling housing (terraces);
  • residential flat buildings;
  • semi-detached dwellings; and/or
  • shop top housing.

Location of the development

To be covered by the new scheme, the development must be in a particular type of location.

The rule varies depending on whether the site is in the ‘Six Cities Region’.  From 1 January 2024, the ‘Six Cities Region’ is defined to include greater Sydney and:

  • in the north, the local government areas of Cessnock, Lake Macquarie, Maitland, Newcastle, Port Stephens and the Central Coast;
  • in the south, the local government areas of Wollondilly, Kiama, Shellharbour, the Shoalhaven and Wollongong; and
  • in the west, Blue Mountains and Hawkesbury.

Within the ‘Six Cities Region’, other than the Shoalhaven, the site must be within an ‘accessible area’.  This is defined to be:

  • 800 metres walking distance of:
    • a public entrance to a railway, metro or light rail station;
    • for a light rail station with no entrance — a platform of the light rail station; or
    • a public entrance to a wharf from which a Sydney Ferries service operates; and
  • 400 metres walking distance of a bus stop used by a regular bus service that has at least one bus per hour servicing the bus stop between:
    • 6am and 9pm each day from Monday to Friday, both days inclusive, and
    • 8am and 6pm on each Saturday and Sunday.

This expands the previous Housing SEPP definition of ‘accessible area’ to 800 metres walking distance from a light rail stop (it was previously 400 metres).

Outside of the Six Cities Region — and in the Shoalhaven — the site must be within 800 metres walking distance of land in one of the following zones (or an equivalent zone):

  • zone ‘E1 Local Centre’;
  • zone ‘MU1 Mixed Use’;
  • zone ‘B1 Neighbourhood Centre’;
  • zone ‘B2 Local Centre’; and/or
  • zone ‘B4 Mixed Use’.

The new provisions will not apply in certain parts of the City of Sydney (under the existing clause 1.9(2A) of the Sydney Local Environmental Plan 2012, which has not been amended).  The carve-out areas include:

  • some land at Green Square;
  • some land identified as ‘Ultimo-Pyrmont’;
  • The ‘southern employment land’;
  • land at the ‘Waterloo Metro Quarter’;
  • land in ‘Central Sydney’ (as mapped);
  • ‘Botany Road Precinct Opportunity Land’; and
  • parts of the Waterloo Estate.

Additional floor space ratio

The additional floor space ratio is calculated with reference to the maximum floor space ratio permitted on the land under an ‘environmental planning instrument’ (other than the Housing SEPP) or under a development control plan.  (A ‘local environmental plan’ is a type of environmental planning instrument.)

It is possible to secure up to 30 per cent extra floor space ratio.

However, the actual potential additional floor space ratio is calculated with reference to the ‘minimum affordable housing component’.

This minimum must be at least 10 per cent (of the gross floor area used for ‘affordable housing’).  However, it may be a larger proportion.

The additional floor space ratio (as a percentage) is twice the ‘affordable housing’ component (but is capped at 30 per cent).  For example:

  • a 10 per cent ‘affordable housing’ component is equal to a potential additional floor space ratio of 20 per cent;
  • an 11 per cent ‘affordable housing’ component is equal to a potential additional floor space ratio of 22 per cent;
  • a 12 per cent ‘affordable housing’ component is equal to a potential additional floor space ratio of 24 per cent;
  • a 13 per cent ‘affordable housing’ component is equal to a potential additional floor space ratio of 26 per cent;
  • a 14 per cent ‘affordable housing’ component is equal to a potential additional floor space ratio of 28 per cent; and
  • a 15 per cent ‘affordable housing’ component is equal to a potential additional floor space ratio of 30 per cent.

Interestingly, what this may mean in practice is that where a Council (or any consent authority) requires a reduction in total yield and floor space, for example to achieve compliance with other controls, the consequence will be a direct loss of affordable housing that the developer was otherwise required to provide.

In that sense, it seems to us that consent authorities will ultimately bear some shared responsibility for the delivery of affordable housing. Where they unreasonably insist in reductions in available floor space, they will be causing a reduction in the delivery of affordable housing by otherwise willing developers.

Additional height

If the development includes residential flat buildings or shop top housing, the potential building height (for a building used for residential flat buildings or shop top housing) is also increased.

The increase is calculated with reference to the maximum building height permitted on the land under an environmental planning instrument (other than the Housing SEPP) or a development control plan.

The additional building height is the same percentage increase that applies for gross floor area.  For example:

  • 20 per cent where there is a 10 per cent ‘affordable housing’ component; and
  • 30 per cent where there is a 15 per cent ‘affordable housing’ component.

When there is a maximum floor space ratio of 2:1 or less

It may be possible to access additional floor space ratio when the development is to be carried out by or on behalf of a registered community housing provider.  (A private developer who has an agreement in place with a registered community housing provider may be able to access this further additional floor space, depending on the nature of the legal arrangement.)

This additional special provision applies to land on which the maximum permissible floor space ratio is 2:1 or less.

If the ‘affordable housing’ component is at least 50 per cent, the potential additional floor space ratio is 0.5:1.

If the ‘affordable housing’ component is between 20 and 50 per cent, the potential additional floor space ratio is calculated on a sliding scale.  For example:

  • a 21 per cent ‘affordable housing’ component is equal to a potential additional floor space ratio of 0.21:1;
  • a 30 per cent ‘affordable housing’ component is equal to a potential additional floor space ratio of 0.3:1;
  • a 40 per cent ‘affordable housing’ component is equal to a potential additional floor space ratio of 0.4:1; and
  • a 45 per cent ‘affordable housing’ component is equal to a potential additional floor space ratio of 0.45:1.

To compare this with the more general ‘affordable housing’ incentive scheme it is necessary to think about what this extra floor space would mean if it was calculated as a percentage.  If the  ‘affordable housing’ component was 50 per cent and floor space ratio for the site was, say:

  • 0:8:1 — up to an extra 62.5 per cent of the maximum floor space ratio would be permitted;
  • 1:1 — up to an extra 50 per cent of the maximum floor space ratio would be permitted; and
  • 1.5:1 — up to an extra 33.3 per cent of the maximum floor space ratio would be permitted.

If the potential additional floor space under this special stream is less (or no better) than what is available under the more general ‘affordable housing’ scheme, a developer (acting on behalf of a registered community housing organisation) can simply rely on the more general incentive scheme.

If this special stream is used for a residential flat building or shop top housing (and the general scheme is not used), there is also potential for extra building height.  The additional building height (as percentage) is twice the percentage of the gross floor area used for ‘affordable housing’.  For example:

  • 20 per cent where there is a 10 per cent ‘affordable housing’ component; and
  • 30 per cent where there is a 15 per cent ‘affordable housing’ component.

Combining different floor space ratio ‘bonuses’

The new Housing SEPP provision expressly anticipates that a developer may access additional floor space ratio under more than one scheme under the SEPP.  In this regard, it nominates development for the purposes of

  • in-fill ‘affordable housing’;
  • boarding houses;
  • co-living housing; and
  • seniors housing.

However, if it is proposed to use the additional floor space ratio permitted under more than one these schemes, the overall maximum floor space ratio must not exceed 130 per cent of the maximum permissible floor space ratio for the land.  That is, the additional floor space ratio is limited to 30 per cent.

‘Non-discretionary’ development standards

The new ‘affordable housing’ provisions include a type of development standards that are typically welcomed by developers.

These are formally described (misleadingly) as ‘non-discretionary development standards’.

However, the purpose of such development standards is to set out standards for ‘affordable housing’ that — if complied with — prevent the consent authority from requiring more onerous standards for those matters.

Non-compliance with these particular development standards does not prevent development consent being granted.  In short, these development standards limit the discretion of the consent authority, but do not limit the freedom of the developer.

The standards can be briefly summarised as follows:

  • a minimum site area of 450m2;
  • a minimum landscaped area that is the lesser of—
    • 35m2 per dwelling; or
    • 30 per cent of the site area;
  • for development that is not subject to the Apartment Design Guide — a deep soil zone on at least 15 per cent of the site area, where—
    • each deep soil zone has minimum dimensions of 3 metres, and
    • if practicable, at least 65 per cent of the deep soil zone is located at the rear of the site’
  • for development that is not subject to the Apartment Design Guide — living rooms and private open spaces in at least 70 per cent of the dwellings receive at least three hours of direct solar access between 9am and 3pm at mid-winter;
  • the following number of parking spaces for dwellings used for ‘affordable housing’:
    • for each dwelling containing one bedroom — at least 0.4 parking spaces; and
    • for each dwelling containing two bedrooms — at least 0.5 parking spaces; and
    • for each dwelling containing at least three bedrooms — at least one parking space;
  • the following number of parking spaces for dwellings not used for ‘affordable housing’:
    • for each dwelling containing one bedroom — at least 0.5 parking spaces;
    • for each dwelling containing two bedrooms — at least one parking space; and
    • for each dwelling containing at least three bedrooms — at least 1.5 parking spaces;
  • the minimum internal area, if any, specified in the Apartment Design Guide for the type of residential development;
  • for dual occupancies, manor houses or multi dwelling housing (terraces) — the minimum floor area specified in the Low Rise Housing Diversity Design Guide;
  • for development that is not subject to the Apartment Design Guide and is not dual occupancies, manor houses or multi dwelling housing (terraces) — the following minimum floor areas —
    • for each dwelling containing one bedroom — 65m2;
    • for each dwelling containing two bedrooms — 90m2; and
    • for each dwelling containing at least 3 bedrooms — 115m2 plus 12m2 for each bedroom in addition to three bedrooms.

Design considerations

Development consent cannot be granted for dual occupancies, manor houses or multi dwelling housing (terraces) without consideration of the Low Rise Housing Diversity Design Guide (to the extent to which the guide is not inconsistent with the Housing SEPP).

The Apartment Design Guide will need to be considered in relation to relevant residential flat buildings and shop top housing, as normal.

Expansion of ‘state significant development’

Some ‘affordable housing’ developments will now be ‘state significant development’.

‘State significant development’ applications:

  • require an environmental impact statement, rather than a statement of environmental effects (the environmental impact statement must be prepared with reference to environmental assessment requirements issued by the Secretary of the Department of Planning and Environment);
  • must be submitted to the Department, rather than the local council; and
  • will generally determined either by the Departmental officers or the Independent Planning Commission.

The development will be ‘state significant development’ if:

  • the new affordable housing scheme applies;
  • the development does not involve prohibited development; and
  • for development in greater Sydney (including the Blue Mountains, Hawkesbury and Wollondilly local government areas) and the Central Coast local government area — the part of the development that is residential development has a capital investment value of more than $75 million; and
  • for development on other land —the part of the development that is residential development has a capital investment value of more than $30 million.

The new ‘state significant development’ stream does not apply to ‘build-to-rent’ housing (which retains its separate potential pathway to ‘state significant development’ status).  It also does not apply to any development application lodged on the NSW Planning Portal, but not finally determined, before 14 December 2023.

Transitional arrangements

Any development application that had been formally ‘lodged’ on the NSW Planning Portal before 14 December 2023 will still be dealt with under the old Housing SEPP provisions. Such applications will not be subject to the new affordable housing incentive scheme.

Comment

The new ‘affordable housing’ scheme answers some of the developer criticisms levelled at the draft proposals.  Nonetheless, some aspects of the scheme may cause developers concern.

Firstly, while there is provision for extra height and floor space there may be other development standards (such as solar access standards or flight path controls) that may prevent the additional floor space from actually being achieved on some sites.  Additionally, local councils may argue that considerations raised by the Apartment Design Guide and development control plans mean that (some or all) of the extra floor space or height is not achievable on some sites.

The Department of Planning and Environment has attempted to mitigate this potential issue.  It has released a planning circular titled ‘In-fill affordable housing under State Environmental Planning Policy (Housing) 2021’.  This planning circular says ‘in cases where the uplift afforded under the Housing SEPP may compromise the ability to achieve strict compliance with local controls, consent authorities are encouraged to consider the flexible application of the controls in light of the public benefit relating to the delivery of affordable housing’.

The circular also says ‘development outcomes should be balanced against the Government’s policy intent to realise more affordable housing …. For example, when considering solar access controls contained within the applicable Local Environmental Plan (LEP), the objective of preserving solar access should be considered whilst facilitating the delivery of affordable housing, which is an objective under clause 15A of the Housing SEPP’.

Secondly, ‘affordable housing’ must be managed by a registered community housing organisation for 15 years.  Registered community housing organisations are subject to a layer of regulation outside of the planning system.  This regulation affects their ability to tenant properties (and means that they may need to choose a tenant mix that does not maximise revenue).  Ultimately this may limit what registered community housing organisations are able to pay for the right to manage ‘affordable housing’ dwellings for 15 years.  This may undermine the commercial viability of some developments with an ‘affordable housing’ component.

Thirdly, as new areas are master-planned, it seems likely that planning authorities will factor-in a likely take-up rate for the affordable housing incentives.  This may mean that some new floor space ratios and heights are reduced to allow for ‘headroom’ for the new incentive schemes to be accommodated (without unacceptable impact on neighbouring properties and the public domain).  Over time, the net effect may be a general reduction in the ability for developers to develop market-rate housing.

Build-to-rent housing

Changes have been made to the ‘build-to-rent’ housing stream to address a problem with the controls that were introduced in February 2021.

Those controls prevented — in commercial core zones — stratum or strata subdivision of a building to which a ‘build-to-rent’ development relates (until then, stratum subdivision of mixed-use buildings had been a routine and generally uncontroversial practice).  The new controls will permit stratum subdivision of a building in a commercial core zone (as is already the case in other zones).

However, the tenanted component of a building will not be able to be subdivided into separate lots (consistent with other zones).

Bizarrely, the existing requirement that build-to-rent in commercial core zones be maintained as such in perpetuity has been extended to the ‘SP5 Metropolitan Centre’ zone (found in the Sydney CBD and surrounds).

This is odd, because the justification for the ‘in perpetuity’ requirement in the commercial core zones was that most commercial core zones prohibit residential development (in the absence of special build-to-rent provisions).  However (until now) the zones that would permit residential development have only been subject to a 15-year requirement maintain the housing.  The ‘SP5 Metropolitan Centre’ zone is not like most commercial core zones, because it permits residential development (including residential flat buildings and shop top housing).

These changes do not apply to any development application that had been formally ‘lodged’ on the NSW Planning Portal before 14 December 2023.

Seniors housing

Design considerations

It is now mandatory for a consent authority to consider the new Seniors Housing Design Guide, published by the Department of Planning and Environment this month.

This replaces the Seniors Living Policy: Urban Design Guideline for Infill Development, March 2004.

Revised non-discretionary development standard

The non-discretionary development standard for landscape area (for non-social housing developments) has been made more flexible.

Previously, to qualify for the ‘do not refuse’ standard, at least 30 per cent of the site area had to be landscaped.  This has now been broadened to be either the lesser of —

  • 35m2 per dwelling; or
  • 30 per cent of the site area.

Development standards

The accessibility and usability development standards for hostels and independent living units have been re-written.

Transitional arrangements

These changes do not apply to any development application that had been formally ‘lodged’ on the NSW Planning Portal before 14 December 2023.

Repeal of SEPP 65

State Environmental Planning Policy No 65 — Design Quality of Residential Apartment Development (SEPP 65) has been repealed.

However, this does not signal the end of the Apartment Design Guide.

Instead, a new Chapter 4 has been inserted into the Housing SEPP, titled ‘Design of residential apartment development’.  This new chapter contains the substance of SEPP 65, with some changes.

Two of the changes that have been made, in translating SEPP 65 into Chapter 4 of the Housing SEPP, are set out below.

Boarding houses and co-living housing

Under the planning law, a modern boarding house with three or more boarding rooms (where each room has its own bathroom and kitchenette) is, in fact, also comprised of residential flats: SHMH Properties Australia Pty Ltd v City of Sydney Council [2018] NSWLEC 66 at [63].

To deal with this — and to avoid SEPP 65 being applied to boarding houses — clause 4(4) of SEPP 65 expressly excluded boarding houses from its operation.  This general exclusion has now been watered down.  In the new Chapter 4 of the Housing SEPP there is now only an express exclusion for mixed use development that includes a boarding house.  Arguably, there is still an implicit exclusion of boarding houses (under a new section 13A of the Housing SEPP).  However, we still expect some local councils to claim that the Apartment Design Guide will now apply to modern boarding houses with three or more boarding rooms.

Similarly, SEPP 65’s general exclusion for co-living housing has not been translated across to the new Chapter of the Housing SEPP.  While a ‘residential flat building’ is defined to exclude ‘co-living housing’, there is no such exclusion for ‘shop top housing’.  This has the consequence that local councils may now argue that Chapter 4 of the Housing SEPP (and the Apartment Design Guide) will now still apply when co-living housing:

  • is equipped with private rooms where each room has its own bathroom and kitchenette; and
  • is located above the ground floor of a building, where at least the ground floor is used for commercial premises or health services facilities.

Extra clarity on the status of design criteria

The Land and Environment Court has generally acknowledged that residential apartment development can be approved despite not meeting the design criteria set out in the Apartment Design Guide.  This was illustrated in the recent decision of the Court in Construction Development Management Services Pty Ltd v City of Sydney [2023] NSWLEC 1620.

However, the new Chapter 4 of the Housing SEPP now includes an additional provision that expressly deals with this point.  It says that the requirement for a consent authority to consider the Apartment Design Guide does not require a consent authority to require compliance with design criteria specified in that guide (section 147(3)).

Transitional arrangements

The new Chapter 4 (‘Design of residential apartment development’) of the Housing SEPP does not apply to development application that had been formally ‘lodged’ on the NSW Planning Portal before 14 December 2023.

There are currently no express savings or transitional provisions preserving the operation of SEPP 65 (for existing development applications) beyond its repeal on 14 December 2023.  (This may be an oversight by the Government.  Watch out for an amendment to fix this once the apparent error is realised.)

Competitive design processes

On 15 December 2023, the NSW Government published the State Environmental Planning Policy Amendment (Design Competition Guidelines) 2023, with immediate effect.

This document amended:

  • 14 local environmental plans; and
  • three state environmental planning policies,

to adopt new Design Competition Guidelines, purportedly published in ‘September 2023’.

However, at the time that this article was written (on 18 December 2023) the new guidelines were not available on the website of the Department of Planning and Environment (nor was any media release announcing the guidelines).

Furthermore, there are no savings and transitional provisions.  Developers with affected developments that have been the subject of an architectural design competition (or a competitive design process) should urgently look to obtain a copy of the guidelines, and consider, what, if any, implications they have for their development.

Further, multiple provisions in local environmental plans allowing the Department of Planning and Environment to waive requirements for an architectural design competition have been deleted.  Instead, for some local environmental plans, a new regime is implemented where (in certain circumstances):

  • the consent authority may certify in writing that a competitive design process is not required;
  • a design review panel reviews the development; and
  • the consent authority takes into account the advice of the design review panel.

Local environmental plans subject to this change are:

  • Bayside Local Environmental Plan 2021;
  • Newcastle Local Environmental Plan 2012;
  • Parramatta Local Environmental Plan 2023;
  • Penrith Local Environmental Plan 2010;
  • Randwick Local Environmental Plan 2012;
  • Ryde Local Environmental Plan 2014;
  • The Hills Local Environmental Plan 2019;
  • Strathfield Local Environmental Plan 2012;
  • Tweed City Centre Local Environmental Plan 2012; and
  • Willoughby Local Environmental Plan 2012.

Bottom line

It is clear that the new state government has strong views about changing the way that planning works in NSW.  The changes outlined above are only one thread in an increasingly large reform program.

The challenge for developers will be successfully navigating the changing landscape, without being caught short.

For further information, please do not hesitate to contact us.

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