Transport Oriented Development Program – One Month Later

Introduction

It has been a month since the commencement of Tier 2 of the Transport Oriented Development Program (TOD) and stakeholders have had months prior to consider the TOD’s relevant planning policy, the TOD Tier 1 and the Low to Mid Rise Housing Initiative (LMR) (collectively the Programs).

This article summarises the updated development of the Programs and our view on the current housing crisis in 4 parts as follows:

1. Part 1 – Program recap
2. Part 2 – Mid-June 2024: views and commentaries of key stakeholders on the Programs
3. Part 3 – In the background: summary of other issues affecting housing supply in NSW
4. Part 4 – Conclusion: our view

Part 1 – Program recap

TOD: Tier 2

The State Environmental Planning Policy (Housing) 2021 was amended with effect from 13 May 2024 by the inclusion of a new Chapter 5 Transport Oriented Development (Chapter 5) and the amendment of other provisions all set out in the State Environmental Planning Policy (Housing) Amendment (Transport Oriented Development) 2024 (TOD SEPP).

The TOD SEPP is the first to take effect of a three staged overall housing initiative and that is not mentioning the previous initiatives for build to rent, affordable housing and other efforts to increase housing.

Key Elements of Tier 2

1. Covers an area within a radius of 400m of 37 heavy rail and metro stations.
2. 18 stations initially and balance over 3 to 18 months.
3. Master planning for increased density and affordable housing within walking distance to rail transport in residential zonings R1 to R4, E1 and B2 (Canterbury), E1, E2, B2 (Canterbury) and B3 (Gosford).
4. Development standards greater than those in Chapter 5 cannot be enforced by Councils.
5. Chapter 5 won’t apply to development applications lodged but not determined by 13 May 2024 or to modifications of prior development applications sought after 13 May 2024.
6. Maximum building heights of 22m (or 24m shop top housing) – approx. 6 storeys.
7. FSR of 2.5:1.
8. Minimum front building line widths of 21m and active street frontages in E1, B2(Canterbury) and equivalent zones.
9. Parking allowances lower.
10. Chapter 5 prevails over other planning instruments and other parts of the Housing SEPP.
11. Residential flat buildings or shop top housing developments with a GFA of at least 2,000m2 must allocate 2% GFA to affordable housing.
12. TOD SEPP will apply in heritage conservation areas but will not override items of heritage.

TOD: Tier 1

The second initiative is Tier 1 of the overall TOD program which have not commenced and are not expected to commence until 4^th quarter 2024 and then a staggered commencement. They are not part of the TOD SEPP or Chapter 5.

Key Elements of Tier 1

1. Covers sites within a radius of 1200m (not a hard boundary – might be less) of 8 priority transport hubs – Kellyville, Bella Vista, Hornsby, Macquarie Park, Crows Nest, The Bays, Homebush and Bankstown. Precincts may increase in future.
2. Delivery of mid and high rise housing with affordable housing to be achieved through a State led rezoning and master planning program.
3. Councils may elect to undertake their own master planning but they will be given deadlines to do so before the State takes over and in any case must be consistent with Tier 1 principles.
4. SSD (State Significant Development) Pathway for residential development with a Capital Investment Value of at least $60m.
5. SSD assessment pathway targeted timing of 90 days in government hands.
6. SSD pathway only to operate until November 2027.
7. SSD approvals limited to 2 years to promote faster construction.
8. SSD applications may run in parallel to State led rezoning if the precinct master planning is advanced.
9. Affordable housing to comprise up to 15% (depending on feasibility) of homes in the 8 Accelerated Precincts in perpetuity to be managed by community housing providers.
10. Low-rise housing close to jobs, transport (other than stations) and amenities
11. High-rise development closer to stations.
12. Commitment – $520m by NSW Government in necessary infrastructure

Low to Mid Rise Housing Initiative

The third initiative is the Low to Mid Rise Housing Initiative which is anticipated to have a mid 2024 rollout. It is seen as a longer term solution to a continuing housing deficit.

Key Elements of the LMR

1. Covers sites within a radius of 800m of rail, Metro or light rail stations, land zoned E2 Commercial Centre or SP5 Metropolitan Centre and E1 Local Centre or MU1 Mixed Use (but only if the centre provides frequently needed goods and services) within the Six Cities Region (Eastern Harbour City, Western Parkland City, Central River City, Central Coast City, Illawarra-Shoalhaven City and Greater Newcastle City).
2. Permit residential flat buildings in medium density R3 zones.
3. Permit multi-dwelling housing and manor houses and dual-occupancies in R2 low density zones.
4. To encourage more housing closer to the stations and town centres transitioning to less dense housing further out.
5. The Low-Rise Housing Diversity Code (Code) will apply and will enable a fast track planning pathway for low rise housing.
6. Low rise developments within the Code may proceed under a complying development certificate.
7. Non-refusal standards will be introduced for 3 to 6 storey residential flat buildings and shop top housing wherever they are permitted (except in low density residential zones).
8. Otherwise merit based assessments.

Part 2 – Mid-June 2024

The industry bodies, developer groups, Councils, political groups and affected residents have all had a month since the commencement of the Tier 2 TOD SEPP and months prior to consider the TOD SEPP and the TOD Tier 1 Program and the LMR.

It should be remembered that the three initiatives are an attempt to deal with the very serious housing deficit which is being faced by NSW and will continue without effective methods to grow housing. There is not one magic solution.

Some commentary on the initiatives has been at a practical level and some aimed at a more fundamental political level:

1. Recent newspaper articles report on a Bill introduced by the Liberal Party which would allow for the abolition of transport oriented development zones in circumstances where six storey apartment blocks would be enabled under the Tier 2 TOD SEPP, although sufficient support for the Bill is unlikely. Leaving aside the merit and political party based issues, it would set a dangerous precedent in allowing parliament an oversight of planning instruments.
2. Some critics are concerned that notwithstanding the Tier 2 SSD pathway fast tracking, construction will still take many years and most apartments will be priced out of reach of many home buyers in the specified locations.
3. There are calls for a greater than 2% affordable housing mix up to 15% in Tier 1, yet developments must be feasible from a development perspective and imposing too high a percentage may mean that no development proceeds.
4. Another issue raised by developers is that 2% of a 2,000m2 GFA would be too small (perhaps 1 or maybe 2 small apartments) for any community housing provider to manage, so the numbers are impractical.
5. Developers are also concerned:

• that the 2 year limitation on Tier 2 development consents is too short considering the current processing timeframe in the local Councils;
• that local Councils won’t cooperate with the NSW Government and will find ways to derail the planning initiatives and timeframes;
• that the community will need to support the initiatives for them to work;
• that there should be greater understanding of whether the proposed initiatives will be feasible in the specified precincts – that is some types of development may only be feasible in specified markets and precincts – government support by way of underwriting feasibilities should perhaps be considered.

Overall, the property industry groups appear to support the initiatives and will continue to work with government to make the TOD Programs more effective.

Part 3 – In the background

In the background there are a number of other factors affecting the ongoing development of housing in NSW or lack of it:

1. High and unstable interest rates.
2. Building prices having increased and continuing to increase dramatically.
3. Builder instability with many going under.
4. Affordability for low to middle income earners with housing prices that seem not to stop with a lack of supply and, perhaps justifiably, a fear of missing out mentality.
5. Salaries not keeping pace with inflation and deposits for housing becoming even more difficult to save.
6. Financial institutions taking a more conservative view of loans.

That is to name only some of the more obvious issues.

There is some good news:

1. In a report dated 15 May 2024 by Stamford Capital (Stamford Report), it is reported that there is greater liquidity in Australia’s debt capital markets, with non-banks likely to lead the way in construction lending and lenders overall increasing their loan book growth.
2. The Stamford Report noted as its key trends that:

• the appetite to lend has returned – see comment above;
• lenders are more robust with their due diligence with iCirt ratings becoming a more used tool as providing a more transparent visibility of a borrower’s capabilities, integrity and reputation. iCirt is an independent review and rating system which reviews building professionals from data which is assessed, scored and weighted across six eligibility criteria – capability, conduct, character, capacity, capital and counterparties;
• a little more relaxed about presales in off the plan projects; and
• ICR (Interest Coverage Ratio) and margin expectations are relatively realistic. Most institutions interviewed for the Stamford Report believed interest rates would start to fall by December 2024.

As noted above, construction costs have been holding developers back and the loan institutions interviewed for the Stamford Report believed that position would not improve in the short term. That said, in dealing with construction costs there are ways by which the developer and the builder can reach a position to deal with rising construction costs.

Part 4 – Conclusion

All of the above factors lead developers and the industries working with developers into an uncertain era for new projects in which:

1. a planning environment in which government is developing programs to increase housing density and to assist with the development of higher density projects particularly around rail hubs and town centres, like the TOD Program and the LMR Program, battling political opposition and which, according to industry groups, still require some refinement to be effective;
2. a borrowing environment where lenders have greater liquidity and want to lend into development projects potentially with less presale requirements and rate coverage concerns but subject to a more extensive due diligence and in many cases subject to independent input like iCirt;
3. continuing instability in interest rates but with the hope of a fall by December 2024; and
4. ongoing increasing construction costs remaining a major factor in decision making.

It is hoped that developers will be able to work with government to give effect to the planning changes utilising the increased liquidity position of financial institutions.

If you would like to discuss this article with us, please contact Mike Ellis, partner on (02) 9261 5900 or mike.ellis@vincentyoung.com.au.