New expanded levy regime on residential flat and boarding house development, starts 1 February 2021

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By Aaron Gadiel, Partner

In a pre-Christmas strike, the NSW Government has significantly expanded the reach of state rules intended to support the ‘retention of existing affordable rental housing’.

The changes are set out in the State Environmental Planning Policy Amendment (Social Housing) 2020, published on Friday 18 December 2020.

The changes will penalise two kinds of property owners.

Firstly, the changes will penalise the owners of some residential flat buildings that have not been strata subdivided.  Landowners will be impacted if they have rented out dwellings at or below the local government area’s median rental level — at any point in the five years before a development application is lodged to re-develop the site.

Secondly, the changes will hit the owners of boarding houses generally.

The current regime

The changes alter ‘Part 3’ of the State Environmental Planning Policy (Affordable Rental Housing) 2009 (the Affordable Housing SEPP).   Historically, the controls in Part 3 were known as ‘SEPP 10’.  They were re-badged as part of the Affordable Housing SEPP in 2009.

The existing ‘SEPP 10’ controls only have a limited application, as they are ‘grandfathered’.  They only apply to buildings that were either boarding houses — or low rental residential flat buildings — as at 28 January 2000.

The rules were limited in this way to ensure that there was still every incentive for developers to build — and landowners to operate — new boarding houses and low-rent residential flat buildings.

The ‘grandfathering’ also meant that that as residential flat buildings naturally aged (after 28 January 2000) a landowner was still incentivised to make dwellings available for rental accommodation — even at below median rental levels.  There was no need for a landowner to upgrade units, leave units vacant, or carry out early demolition to escape the application of ‘SEPP 10’ controls.

The change

The old ‘SEPP 10’ controls will, from 1 February 2021, be expanded.

The new rules will apply to new and any pending development applications at that time.  (There is no ‘savings’ or ‘transitional’ provision.)

Firstly, the ‘grandfathering’ date of 28 January 2000 is to be scrapped.

This means that it does not matter when a building became, say, a boarding house.  It will apply to any boarding house in the Greater Sydney region and the local government areas of Newcastle and Wollongong.  This will include the wide range of ‘new generation’ boarding houses that have been built since the Affordable Housing SEPP was put in place since 2009.

It also means that residential flat buildings that evolve into more affordable housing (as a result of aging or lack of competitiveness with new housing stock) is liable to be subject to the new rules. (Residential flat buildings that have been strata subdivided will be unaffected.)

Residential flat buildings will be captured when dwellings within them are rented-out at the median rental level or below for the relevant local government area (in the five-year period before a development application to re-develop the site).

Some examples of the latest median rental figures (weekly rent) for two-bedroom flats are as follows:

  • Canada Bay — $550
  • Canterbury-Bankstown — $390
  • Cumberland — $400
  • Georges River — $450
  • Hornsby — $400
  • Inner West — $490
  • Mosman — $595
  • Northern Beaches — $630
  • Randwick — $560
  • Ryde — $480
  • City of Sydney — $650

Going forward, owners of residential flat buildings (that are located in Greater Sydney/Newcastle/Wollongong that have not been strata subdivided) will probably need to keep an eye on the rentals in their dwellings.  Owners will need to compare them with the median rental set out in the official Rent and Sales Report, in relation to a dwelling of the same type, having the same number of bedrooms and located in the same local government area.  The Rent and Sales Report is available here.

If there is a risk that dwellings in such a residential flat building will need to be rented out below the median rental level for the first time, owners will want to consider whether they want to take pre-emptive action to avoid the later application of ‘SEPP 10’ controls.  This may include:

  • upgrading the dwellings to command higher rentals (rather than risk renting them out below median levels);
  • leaving dwellings vacant; or
  • carrying out early demolition.

Boarding houses (that are located in Greater Sydney/Newcastle/Wollongong) will be subject to the ‘SEPP 10’ controls, irrespective of their rentals price.

What do the ‘SEPP 10’ controls do?

The ‘SEPP 10’ controls will not, in themselves, change.  They will simply have a broader application.

Some key features of the ‘SEPP 10’ controls for newly captured buildings are as follows:

Firstly, works that might previously have been exempt development will no longer be exempt.  For instance, upgrade works to alter (or add to) the structure or fabric of the building (inside or outside) would require development consent.   This has the effect of making it more difficult to improve a building in a way that might command higher rent.

Secondly, additional special considerations will apply to any development application for:

  • the demolition of the building;
  • alterations or additions to the structure or fabric of the building (inside or outside);
  • changing the use of the building to another use (including, in particular, a change of use to backpackers accommodation); or
  • if the building is a residential flat building, the strata subdivision of the building.

The additional special considerations are as follows:

  • whether there is likely to be a reduction in ‘affordable housing’ on the land to which the application relates (‘affordable housing’ in this context does not necessarily mean rent-controlled housing run by a non-profit organisation, it simply means housing for low or moderate income households);
  • whether there is available sufficient comparable accommodation to satisfy the demand for such accommodation;
  • whether the development is likely to cause adverse social and economic effects on the general community;
  • whether adequate arrangements have been made to assist the residents (if any) of the building likely to be displaced to find alternative comparable accommodation;
  • the extent to which the development contributes to any cumulative loss of affordable housing in the local government area;
  • the structural soundness of the building, the extent to which the building complies with any relevant fire safety requirements and the estimated cost of carrying out work necessary to ensure the structural soundness of the building and the compliance of the building with the fire safety requirements;
  • whether the imposition of a condition requiring an ‘affordable housing’ monetary contribution would adequately mitigate the reduction of affordable housing resulting from the development; and
  • in the case of a boarding house, the financial viability of the continued use of the boarding house.

Aside from the extra procedural hurdles, in our experience, the most consequential outcome of the application of ‘SEPP 10’ controls to a building tends to be the imposition of an ‘affordable housing’ levy that would not otherwise apply.

The levy is calculated by:

  • taking the total number of bedrooms in a low-rental dwelling (and/or boarding rooms) that will be lost by the proposed development; and
  • multiplying that number by five per cent of the ‘replacement cost’.

The ‘replacement cost’ is calculated by looking at the sale prices of the least expensive categories of dwellings, as documented in the official Rent and Sales Report.

For example, in the City of Sydney, this ‘replacement cost’ is presently $722,500.  Five per cent of this amount is $36,125.  If a residential block of four two-bedroom dwellings is to be demolished, the levy would be twelve times this amount, that is $433,500.

We recently secured the approval (in contested Land and Environment Court proceedings) for a 19-storey 96-room boarding house.  The levy, if applied to a development of this scale in the City of Sydney would be $3,468,000.

There is a formula for reducing the levy for a boarding house assessed as not being financially viable.  This reduction mechanism is not available for a residential flat building.

Any ‘affordable housing’ levy imposed under ‘SEPP 10’ will come on top of the standard local infrastructure contributions (often call ‘section 7.11’ levies) and planning agreement obligations.

However, a consent authority that proposes to impose a levy, must take into consideration any land or money that the applicant has provided for affordable housing within the area (otherwise than as a condition of a consent).  Additionally, the levy does not apply in an area subject to a state government ‘special infrastructure contribution’ if that levy is already intended to collect funds for affordable housing.

Partial implementation of the ‘Housing Diversity SEPP’?

The above change appears to be an implementation of one aspect of the proposed ‘Housing Diversity SEPP’ (exhibited from July to September).  Mills Oakley published an article about these proposed changes in August 2020.

The proposed ‘housing diversity’ package included many other changes, but they seem generally not to have been progressed (at least for now).

The ‘housing diversity’ package included two proposals to make ‘build-to-rent’ housing ‘state significant’ when a project had a capital investment value of $100 million or more.   The new $100 million threshold for state significant status was to apply to:

  • private sector projects outside of the City of Sydney; and
  • projects carried out by the NSW Government’s Land and Housing Corporation.

The latest changes have introduced the ‘state significant’ status for the NSW Government’s Land and Housing Corporation, but not for the private sector.

The NSW Government has not published an update on the proposed ‘Housing Diversity SEPP’ on its website, nor has a planning circular been publicly released.  At this stage it is a mystery as to why a small skerrick of the broader ‘housing diversity’ package has been implemented as discrete measures, isolated from the other proposed changes.

It is, for example, not clear if the government will be proceeding with the other changes. (For what it’s worth, there is a history of the government exhibiting comprehensive changes to state environmental planning policies, only to never proceed with them — and never even announce that they are not proceeding.)

The upshot

It seems that a new expanded levy regime will apply to a wider range of lower cost housing.  There is a risk that this regime will discourage people from investing in — or allowing their properties — to become low-cost housing.  In the past this risk was managed by ‘grandfathering’ the arrangement.  That past policy approach has now been abandoned.

Furthermore, the new arrangement will hit development proposals that are already well-advanced in the system (if the relevant development consents are not granted prior to 1 February 2021).  This will further contribute to the market’s perception that the NSW regulatory system is inherently unstable.

The selective implementation of a $100 million state significant threshold for government housing projects — without an equivalent threshold for the private sector — may also entrench perceptions that private sector development faces a tougher battle in securing approval than any equivalent public sector project.

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

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