In the midst of the COVID 19 pandemic, Victoria’s last budget announcement came with a $5.3 billion investment in the ‘Big Housing Build’ – a commitment to create over 12,000 new dwellings in the social and affordable housing sector. That commitment comes on the back of the recent inclusionary zoning changes to the Planning and Environment Act 1987 to facilitate more affordable housing.

Are we now finally turning the corner, or will this be yet another false dawn for affordable housing? Only time will tell. However, we can say that we have certainly noticed a significant increase in advice to developer clients in the private sector on affordable housing over the last two years in particular.

In this part 1 of a 2 part series on affordable housing trends in the development sector, we share some of the current issues, insights and opportunities we have seen on projects where inclusionary zoning provisions and affordable housing agreements are now beginning to bite.

Typically these can arise in return for Council incentivising a developer, including through additional height or reduced car parking allowances. That sounds like a great outcome, but what do the terms of an affordable housing agreement look like and how will it impact the development and other purchasers at the project?

What is affordable housing?

Before turning to inclusionary zoning, it is important to stop and consider what affordable housing means, as that will be relevant in determining whether to incorporate any affordable housing in a project. For many, affordable housing is synonymous with social housing. However, social housing is only one type of affordable housing.

A useful reference point is the definition of affordable housing in the Planning and Environment Act 1987 (PEA), which is defined as ‘housing, including social housing, that is appropriate for the housing needs of very low, low or moderate income households’.

The PEA and the Victorian Government Gazette specifies the income range classification for each income household. For example, in 2020 the annual income for a single adult in the very low income range was $26,090 per annum. This is contrasted with the moderate income range being $41,751 to $62,610 per annum.

There are also many different types of affordable housing models. These can be broken up into the following categories:

• Social housing
  • Public housing (long-term rental housing owned and managed by the Victorian Government)
  • Community housing (long-term rental housing owned and managed by community housing organisations)
• Subsidised market housing
  • Subsidised private rental (for example, the National Rental Affordability Scheme)
  • Subsidised private ownership (HomesVic Shared Equity Initiative)
• Private market housing

Inclusionary zoning

Inclusionary zoning is a planning intervention already used in South Australia and NSW, and widely in the UK, to either mandate or incentivise the provision of affordable housing within developments.

What does inclusionary zoning look like in Victoria? The general principle is designated parcels of land, through policy control, which require or incentivise a percentage (typically between 5 and 20%) of end-product in a development is reserved as affordable housing.

As to the formal implementation of that policy in Victoria, in 2018 the PEA was amended to include an objective to facilitate the voluntary negotiation of affordable housing contributions. Note that this amendment was not a mandatory regime, but a voluntary regime.

Given the voluntary nature of the Victorian regime, not much really happened following the 2018 PEA amendment. However, as some Councils have explored amending planning schemes to mandate inclusionary zoning, and others increase incentives for voluntary affordable housing contributions, the development industry is now starting to see affordable housing agreements between Councils and developers. This is particularly the case for the delivery of affordable housing for moderate income households.

Affordable housing agreements

Currently, affordable housing agreements are predominantly delivered through section 173 agreements. These agreements ensure that any contribution to affordable housing is actually delivered, and any incentives offered by Council are clearly recorded.

To date, affordable housing agreements have been prevalent in medium and high density projects, and not land. Typically they are required in return for additional height in a project.

The affordable housing agreement flows from the relevant planning permit conditions. Some important considerations for proposed agreement terms include:

Issue	Consideration
Number of affordable housing dwelling	The agreement will set out the proportion of affordable housing dwellings required – either as a specific number of dwellings or a proportion of floorspace. If negotiating floorspace, be clear and understand what is included in, and excluded from, the definition of floorspace.
Tenure blind	Factor into your project feasibility that it is likely Council will require the unit to be designed and delivered tenure blind – to a design standard and location that is similar to all other units in the project.
Income	Will the units be for very low, low or moderate income households (as referred to in our income range classification above)? What is the applicable policy objective and what can the project realistically sustain?
Take out party	If the number of affordable housing units are of any scale, who will the takeout party be (i.e. a housing association)? It would be preferable to involve them in the process of negotiations and delivery. This may be particularly relevant for construction finance purposes to provide a financier with certainty.
Term	How long will the requirements to provide the affordable dwellings run for in the affordable housing agreement? We have seen terms of 20 years.
Discounted rent	What will the discounted rental requirement be? A discount of 20 to 30% to market rent for moderate income earners is not unusual.

Key takeaways

Whilst inclusionary zoning requirements are relatively new, and are only now starting to flow through to projects, it is important for developers of medium and high density product to be across the practical impact of affordable housing agreements. Additional height may sound ideal for a project, but managing risk and maximising opportunities for a project early is critical, including:

• Being clear on what the terms of an affordable housing agreement are likely to be
• Building relationships with any take out party early, and negotiating what that take out will look like
• Managing disclosure and messaging to purchasers of standard product within a project to minimise settlement risk

Of course, the delivery of affordable housing through affordable housing agreements as referred to above is only one method local and state government are pursuing to increase affordable housing stock. In part 2 of this series we will check in on the progress of the state government’s Homes Victoria Purchase Program which was announced at the end of 2020, the status of shared equity home ownership schemes and other trends in affordable housing we have seen that are relevant for the development sector.