The proposed State Environmental Planning Policy (Housing Diversity) will consolidate and make some changes to, three existing SEPPs, being SEPP (Housing for Seniors or People with a Disability) 2004 (the Seniors SEPP), SEPP (Affordable Rental Housing) 2009 (the ARH SEPP), and SEPP 70.

An Explanation of Intended Effect (EIE) for the proposed SEPP was publicly exhibited between 29 July and 9 September 2020 and the government is currently reviewing submissions. This is the second in what may become a series of articles covering the proposed SEPP, with our first focusing on the implications for boarding houses. We will be keeping a close eye on any developments with the proposed SEPP, as it proposes several significant changes for the residential development industry.

What will the SEPP do?

No actual changes to SEPP 70 are proposed and its provisions will simply be carried across to the new SEPP.  The key effect of the remainder of the changes are:

1. Breaking down the current flexible boarding house land use to split it in three:
   1. Traditional boarding houses operated by community housing providers and providing “affordable housing” as defined by the ARH SEPP
   2. Privately operated new generation boarding houses, to be rebadged “co-living”, with planning incentives removed and larger room sizes plus private open space requirements applying
   3. Student housing
2. Introducing Build to Rent Housing (with no significant planning incentives)
3. Facilitating the development of social and affordable housing in partnership with the private sector, by extending planning incentives that apply to social housing providers to any private housing component of a mixed housing development, and facilitating the development of government owned land for these purposes

Breaking down Boarding Houses

Until now, the Boarding House provisions of the ARH SEPP have been used for traditional boarding houses, “new generation” boarding houses, and student housing.

At the moment, there is no requirement for boarding house accommodation to be “affordable” – that is, there is no control over the rent that can be charged for a “boarding room”. A “room” can essentially just be a very small apartment (max 25m² excluding bathroom and kitchen).

At the moment, boarding houses are actually quite a flexible form of development and they are the only true build to rent (BTR) type of development in NSW – by reason of the very nature of the format, they inherently cater for the more affordable end of the market- even the most upmarket ones are micro-apartments and because a boarding house cannot be strata subdivided, it must always operate as a rental property. There are a few catches for this type of micro-apartment:

• A communal living room is required for boarding houses with five + “rooms”
• No more than two adults can occupy a “room”
• An on-site dwelling for a boarding house manager is required for a boarding house with a capacity to accommodate 20 or more lodgers

As a BTR option, boarding houses come with planning incentives – in the form of FSR bonuses and being a mandatory permissible use in certain zones, but they also come with the significant limitation that the rooms can only be quite small and cannot cater for more than two residents, which rules them out as an option for families.

A key outcome of the new SEPP will be to divide these diverse boarding house uses into their own distinct land uses. As a result, boarding houses will be wound back to traditional boarding houses only, with affordability being a key requirement, and three types of new land uses will be introduced: BTR, co-living, and student housing.

The proposed definitions are:

Build to Rent Housing means a building or place that:

• Contains at least 50 self-contained dwellings that are offered for long term private rent
• Is held within a single ownership
• Is operated by a single management entity
• Includes on-site management

Student Housing means a building that:

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

Co-living Housing means a building held in single ownership that:

• 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

Build to Rent Housing

BTR is not something that yet exists in Australia and the new SEPP would be the first real step toward it. As an investment class, it is an alien proposition to Australian investors, and some planning incentives, in addition to tax exemptions/discounts, are required if developers are going to be motivated to produce, and investors motivated to finance, this new form of housing, for what is expected to be a much lower short-medium term return.

The key features of the BTR proposal are:

• BTR would be permitted in all R4 - High Density Residential, B3 – Commercial Core, B4 - Mixed Use and B8 – Metropolitan Centre zones. It will also be permitted in R3 – Medium Density Residential where residential flat buildings are permitted
• BTR developments with a capital investment value over AU$100 million (metropolitan excluding City of Sydney) and AU$50 million (regional areas) will be State Significant Development.
• BTR cannot be strata subdivided during the first 15 years, and if in a B3 zone, can never be strata subdivided
• Councils will be able to determine height and FSR controls for BTR development through their LEPs
• Minimum lease terms would apply, and short term rentals will not be permitted

The proposal to allow councils to determine height and FSR controls is somewhat concerning – if no planning incentives are offered it is hard to see how BTR will ever get off the ground. It is also entirely possible, given that the BTR use requires a minimum of 50 apartments, that it will be impossible to actually provide BTR housing within the existing LEP height and FSR controls without significant site consolidation.

It is proposed that BTR projects will be assessed against SEPP 65 and the ADG although it is possible that the application of these provisions may be modified, with the EIE stating that “The Department will develop specific advice about those parts of SEPP 65 that are particular to the build-to-rent typology”.

A minimum car parking rate of 0.5 spaces per dwelling will apply, which may be more favourable than local controls.

It therefore appears that the planning incentives proposed for BTR are limited to:

1. Allowing a BTR development in B3 and B8 zones which generally do not permit residential uses, and in B4 zones, where residential development is otherwise often restricted to shop top housing
2. A potentially lower car parking rate
3. The ability to be treated as State Significant Development for projects of sufficient value

The EIE states that feedback is sought on BTR in regional areas as it is expected that a smaller scale of development, such as multi-dwelling housing, or terraces, might be appropriate. While this sounds sensible, presumably the definition of BTR (which requires at least 50 self-contained dwellings) would need to be altered to make this possible.

Student Housing

The new SEPP will not make this use mandatory in any zones and will leave it up to local councils to determine where this use should be permissible, as well as the height and floor space controls which should apply. This would mean that student housing, as a distinct form of development, will not be able to occur unless and until local councils update their LEPs to include this as a permissible use.

The SEPP would set other development standards that will apply across the board, however, such as minimum room size, parking requirements (minimum bike and motorbike parking is proposed, with no minimum car parking requirement), and requirements relating to communal areas.

Co-living

It is proposed that co-living developments will replace the “new generation boarding house” and will be subject to similar controls – such as maximum occupancy of two adults, communal living areas and on site management. Co-living will be a mandatory permissible use wherever residential flat buildings are permitted.

Rooms in co-living developments will be slightly larger than boarding house rooms – at 30–35m², and the building cannot be strata subdivided. No FSR bonus will be available for co-living developments, and they will have to comply with LEP height and FSR controls as well as the ADG private open space requirement for a studio apartment (4m² per room).

The proposed changes will essentially mean that privately developed and operated boarding houses (rebadged as “co-living”) will:

• No longer have access to any floor space incentives
• Be required to provide larger rooms
• Be required to provide at least 4m² of private open space per room

Boarding Houses

The boarding house use will be wound back to its more traditional form:

• The SEPP will no longer override local controls to make boarding houses a permissible use in R2 zone
• Boarding houses must be “affordable” and must be managed by a community housing provider
• A maximum FSR bonus of 20% will be possible, regardless of underlying FSR controls

The government is seeking feedback in relation to whether the affordability requirement should be limited to a mandatory 10 year period.

Handing control back to councils?

In addition to the proposal to let local councils set the height and density controls for these new forms of residential uses, the EIE also states that the new SEPP will “clarify” that development standards in an LEP will prevail over the SEPP to the extent of inconsistency.

This is somewhat confusing as all of the SEPPs currently expressly provide that if there is an inconsistency between the SEPP and any other environmental planning instrument, whether made before or after the commencement of the SEPP, the SEPP prevails to the extent of the inconsistency.

It is not clear how reversing that position, so that LEPs prevail over the consolidated SEPP, can be described as a “clarification”.

It will also be interesting to see the drafting of this provision to see how it deals with the provisions of the SEPPs that currently have the express purpose of overriding certain LEP development standards, to ensure that a council cannot refuse a development to which the SEPP applies on certain grounds.

Facilitating social and affordable housing in partnership with private sector

The new SEPP will aim to facilitate the redevelopment of government owned land by the NSW Land and Housing Corporation (LAHC) for affordable and social housing, which may occur in partnership with private developers, and such projects may also include some degree of private housing.

This will occur by:

• Increasing the number of dwellings in a development that LAHC can self-assess from 20 to 60
• Extending density bonuses and car parking concessions, that currently apply under the ARH SEPP to all components, including the private housing components, of a residential development undertaken by or on behalf of LAHC
• Clarifying that LAHC can carry out any type of residential accommodation, including manor houses and terraces, that is permissible under an environmental planning instrument
• Extending the density bonus for in-fill affordable housing to include more land outside the Sydney region
• Allowing LAHC to self-assess applications for subdivision of government-owned land
• Making all projects over AU$100 million carried out by or on behalf of LAHC State Significant Development

These changes are positive as they will enable the private sector to better partner with LAHC to provide a mixture of private, affordable, and social housing, and may provide the incentive required in order to make it feasible for more private developers to become involved in the delivery of social and affordable housing.

Similar changes are proposed in relation to seniors housing development applications lodged by or jointly with a social housing provider, including:

• Reduced parking rates will also apply to the private dwelling component of a seniors housing development carried out by/on behalf of LAHC on government owned land
• The lift access exemption will apply to all seniors housing delivered on behalf of LAHC, including dwellings not proposed to be used for the purpose of social housing

Wide expansion of monetary contribution for loss of low-cost rental dwellings

The ARH SEPP currently allows a council to charge a monetary contribution when a development would result in the loss of low cost rental dwellings – which is deemed to occur when land is developed for a use that is not affordable housing where a building on that land was a low-rental residential building as at 28 January 2000. This applies to both boarding houses and buildings used as residential flat buildings containing a “low-rental dwelling”. A low-rental dwelling means a dwelling that (at any time in the 24 month period prior to the lodgement of the development application) was let at a rental not exceeding the median rental level for that time (as specified in the 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.

It is proposed to do away with this 28 January 2000 date and instead allow a monetary contribution to be levied if the building/s on the land provided low-rental dwellings at any time within the five years preceding the lodgement of the development application. The new SEPP will also place the onus on the applicant to prove that the building did not contain a low-rental dwelling at the relevant time, which will reverse the current position under the ARH SEPP, determined by the Land and Environment Court, which places the onus on a council to prove the low-rental use at the relevant time.

This change is potentially very significant as the provisions currently only apply to the redevelopment of buildings that have historically (more than 20 years previously) been used as low cost rental accommodation. Instead, they would now apply to the redevelopment of any building that had been used for low-cost rental housing at any time in the five years prior to lodgement of the development application. This will clearly capture a lot more developments, particularly because it is fairly common for buildings ripe for redevelopment to be rented relatively cheaply while a landowner/developer works on redevelopment plans.