14 Sep 2009

Directions in affordable housing

by Gary Best, Kirsten Matthews

Affordable housing is a critical issue for Australia especially in key metropolitan areas. There are a number of approaches that have been taken at varying levels of government to encourage investment in this sector.

Affordable housing is a critical economic and social issue for Australia, more so in the current economic climate. There have been a number of Commonwealth and State Government initiatives aimed at stimulating investment by individuals in affordable housing, particularly in the context of first home buyers.

However, direct investment by the private sector must also be encouraged if affordable housing
is to be delivered on the scale required to meet increasing demand. Below is an outline of some of the approaches being used to encourage this type of investment.

Voluntary planning agreements

Voluntary planning agreements made under section 93F of the Environmental Planning and Assessment Act 1979 (NSW) have been utilised to deliver affordable housing in the context of large-scale developments such as at the Carlton United Breweries Site at Broadway, Sydney. Carlton and United Breweries as land owner offered to enter into a voluntary planning agreement with the Redfern-Waterloo Authority under which CUB would make monetary contributions to the Authority for the purpose of provision of affordable housing in the Authority’s operational area.

Contributions plans

Within the Redfern-Waterloo area, affordable housing has been delivered by the implementation of the Redfern-Waterloo Authority Affordable Housing Contributions Plan 2006.

The Contributions Plan, prepared within the framework of section 30 of the Redfern-Waterloo Authority Act 2004 (NSW), enables the Minister for Planning, when granting consent for a development, to impose a condition requiring payment of an affordable housing contribution.

Flexible planning approaches

Incentives for developers to develop affordable housing include adopting a more flexible approach to development-related issues including planning, design and construction at the development approval stage of a project, in return for the provision of affordable housing.

For example, Blacktown City Council made it a condition of granting development approval for the Forest Glade, Parklea project that affordable housing be provided – in this case, 13 of the 64 new homes to be built. The concessions offered by Council included a reduction in minimum lots sizes, reduced setbacks and the relocation of private open space from front and side setbacks to backyards.

Certain controls have ensured that the moderately priced housing remains available for its intended purposes. Such controls include restrictive covenants limiting increases in re-sale prices over a seven year period, and limiting subsequent sales to buyers who also meet the moderate income criteria.

Entitlement to a percentage of sale proceeds

Incentives for developers to deliver affordable housing also include provision for the developer to retain a percentage of sale proceeds where affordable housing is delivered as part of a larger residential development. This approach is used increasingly where public bodies are lacking the expertise to successfully deliver large-scale projects.

By way of example, the Rouse Hill Regional Centre is a $1.5 billion development establishing a new urban community at Rouse Hill, NSW. The Minister for Planning entered into a project delivery agreement with Lend Lease GPT (Rouse Hill) Pty Limited to procure, among other things, the development and sale of residential lots.

The developer has agreed to ensure 3 percent of all residential lots developed are made available for affordable housing purposes.

Public Private Partnerships

Public private partnerships (PPPs) are a business venture funded and operated through a partnership between the government or public sector and one or more private sector institutions.

A PPP model has been implemented under the Bonnyrigg Living Communities Program, a $733 million redevelopment of the estate and related public housing services, to enable the redevelopment and privatisation of the Bonnyrigg estate in suburban western Sydney. The long-term management of social housing and associated community renewal programs is contracted to the private sector, which will be remunerated through a monthly performance-based service fee paid by the NSW Land and Housing Corporation.

Some of the key aspects of this PPP include:

  • private sector financing of the redevelopment as a mix of private and public housing, with 30 percent of the estate remaining as dispersed public housing by the end of the development period;
  • the private sector will be entitled to sell the new and refurbished dwellings that are to be privately owned, with the NSW Land and Housing Corporation being entitled to an agreed proportion of the income from the sales.

The PPP model allows for direct leveraging of large-scale private sector resources. While PPPs are still rare in the affordable housing sector, Bonnyrigg highlights the potential for the private sector not only to finance and develop the dwelling or physical asset but also to manage it in order to meet defined public housing objectives over the long term.

Shared equity model

A shared equity structure model typically requires an equity injection from both the home owner and a government body or financial institution, with the balance of the purchase price funded by a
loan. Under this model the government body or the financial institution shares in both capital gains and losses realised on the sale of the property.

It has been suggested that to ensure greater market penetration of private shared equity products, the Commonwealth Government could also assess the means by which it could increase the return on equity for private partners – be it through tax concessions, subsidies or other mechanisms.

Government grants and subsidies

The Housing Affordability Fund is a $512 million fund set up by the Commonwealth Government to be spent over five years with a view to lowering the cost of new homes by targeting two supply-side barriers to housing development. Firstly, the Fund will be used to speed up development assessment processes and reduce holding costs for developers. Secondly, it aims to reduce the burden of infrastructure costs associated with development.

Although the Fund is aimed primarily at Local, State and Territory governments, the Commonwealth Government has indicated a willingness to consider contracts with the private sector where the prospective outcome is clearly better and guaranteed by that company. The Guidelines also propose that private companies participate in the Fund by entering into partnership arrangements with the government applicants.

The National Rental Affordability Scheme seeks to stimulate the supply of up to 50,000 new affordable rental dwellings across Australia by 2012.

The key features of the Scheme include annual incentives to provide affordable rental dwellings for a period of 10 years consisting of:

  • a Commonwealth Government incentive of $6,000 per dwelling per year tax offset or payment; and
  • a State or Territory Government incentive of $2,000 per complying dwelling per year in direct or in kind financial support.

The availability of the incentive is conditional on the dwelling being rented throughout that period to eligible low and moderate income households for 20 percent less than the commercial market rental rate.

A total of 3,899 incentives were offered for affordable rental homes as a result of the Round One allocations under the Scheme. The Commonwealth Government has received applications for more than 27,000 dwellings in Round Two.

As reported in The Australian Financial Review on 31 March 2009, the majority of the incentives to date have been allocated to community housing associations, which have been able to use the Scheme to build up their portfolio of managed affordable housing. Developers have benefited by supplying the affordable housing stock to those associations, including by way of pre-sales of larger projects.

In recent media releases, the Commonwealth Government has stated that it is encouraged by the ongoing strong interest from the corporate sector in the Scheme. There is an opportunity for private developers to participate in the Scheme by retaining ownership of dwellings developed by them or, alternatively, on-selling dwellings to approved purchasers providing certain requirements are met.

As these initiatives are relatively recent it will be some time before we are able to assess what impact they will have on the supply of affordable housing in Australia. The Property Council of Australia, in its publication “Housing Affordability”, was of the view that “the proposed $8,000 subsidy per year for 10 years is unlikely to attract private investors to take the development, capital growth, vacancy and other risks involved. The options the Government could explore include: increasing the subsidy; contributing government land at a lower land cost; capital guarantees; and yield guarantees.”

State Environmental Planning Policy (Affordable Rental Housing) 2009 (Affordable Rental Housing SEPP)

Premier Nathan Rees recently announced a further initiative aimed at stimulating the delivery of affordable housing in New South Wales, the Affordable Rental Housing SEPP. Amongst other things the Affordable Rental Housing SEPP includes streamlined approvals for low rise developments such as townhouses and villas in certain residential zones with more than 50 percent of dwellings offered at 20 percent below market rate for a 10 year period.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.