Tips and Traps of Developing Affordable Housing

By Justin Eslick

Different locations have different demand for affordable housing and this demand is often reflected in the concessions and incentives available for developers to encourage them to develop this product. The below list of ‘Tips and Traps’ is based on Brisbane, however, similar scenarios may apply all over Australia, especially in our capital cities.

The Essential Worker

Affordable housing really has multiple meanings. Most people define affordable housing as accommodation for boarders and Department of Housing residents, when it isn’t actually always the case. These days it may apply to accommodation housing ‘essential workers’. This is the branding for workers who may not earn as much income as they need to service the area that they are required to live and work in. The common examples are nurses or policemen. These are people who might be required to work in very expensive inner city locations yet do not earn the inner city dollars.

There are incentives that exist for developers who develop affordable housing for both of these types of residents. Rather than define this at any deeper level, for the purpose of this discussion we will treat the development for both these types as being ‘affordable housing’, however, the list tends to lean towards producing a ‘to be rented’ development, rather than a cheaper end product to sell.

Tips!

Here are some incentives and concessions that may currently be available or are being investigated:

Increased density. Affordable Housing developers are encouraged with increased density allowances. You can achieve up to 80% Gross Floor Area (GFA) compared with the normal 50% in some situations. To put this into perspective, on a 1000m2 site this may equate to 10 x 2 bedroom units instead of 6.
Increased Height. Not as widely available as increased density, but there is an argument for this. Any large increase in density will ultimately result in a need for an increase in height.
Less car parking. Townhouses and units often require 1.5 to 2 cars per unit. This can be heavily reduced for affordable housing. In fact there is one development in Brisbane where a warehouse has been converted to affordable housing and contains approximately 90 studio units... and 1 car space. Don’t always expect this sort of ratio though!
Reduced infrastructure charges (headworks). Currently being explored (and it needs to be), but under current rules in Brisbane there is very little incentive to build small units as the infrastructure charges levied against this is the same as for larger units. Ways to improve this are being investigated.
Reduced council fees. Development application fees and ongoing fees, possibly even reduced land tax and rates are all possible benefits/incentives currently available or being explored.
Reduced application time period. A typical unit development application will take 6 to 9 months for approval. Various councils are looking at reducing this considerably.
If your development is on behalf of, or to be transferred to a state department such as the Department of Housing, consider using them as the applicant. This will improve timeframes and costs.
Grants are often available to help your development comply, such as grants for fire safety installations (at 'On the Buses' the Reno Kings will take you past a boarding house they own and developed behind, where numerous grants were given to help with upgrades as the result of legislation changes - the end result was that the upgrades cost them next to nothing! For more information about 'On the Buses', click here).

Traps!

Beware though, developing affordable housing can come at a cost and there are traps:

To get a return on their generosity in allowing increased densities, etc. council will usually require the end product to be managed by a recognised organisation for a set period, often 10 years. This may be enforced by way of a caveat. This is a long time to be locked into the one strategy and will affect your ability to on-sell the development.
Rents will need to be at below market value. The theory is that an increase in development yield will result in an increase in overall return for the site, allowing a developer to drop the value of the rents. It depends upon the type of development, but one known discount is you have to have your rent at about 74% of true market rent.
Some lenders do not look favourably upon affordable housing and may be hesitant in lending for construction and lending on available equity at the completion of the project.
Likewise insurance companies tend to shy away from affordable housing and your premium may be higher.
When proposing affordable housing you may get ‘NIMBYs’: Not In My Back Yard. Some people don’t like the idea of living near or beside affordable housing and may contribute to the application process being a more stressful and drawn out affair than it has to be.

As you can see there are some clear advantages and disadvantages to developing affordable housing. Owning and developing the above types of developments can be very, very rewarding, however, you need to be aware of exactly what it is you are developing.

One last tip!

Before proposing affordable housing go and speak to the various ‘higher ups’ in council and the State Government. In some cases there is a great demand for this type of product and they may go to extraordinary lengths to encourage constructing it, well above what is discussed above.

Investigate Property is a Brisbane based buyer’s agent for investment property, with experience in boarding houses and student accommodation. For more information on Investigate Property click here.

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