Concrete Analysis | Melbourne developers caught off guard by surprise new planning rules

Last week, surprise new planning rules came into force in Melbourne to limit the heights, overall areas and setbacks of new buildings in the central business district (CBD) and Southbank area. Introduced as an interim measure for the next 12 months, the government will now consult with the community and development industry to arrive at a suite of planning controls that are aimed at protecting Melbourne's character and liveability.

In 1990 almost no one lived in Melbourne's CBD. It was strictly for business and some retail. There were virtually no restaurants, cafes, icon fashion stores, or apartments. Twenty five years later Melbourne's CBD is hot property and home to some 125,000 people, and growing. Everyone wants to be in the city to eat, shop, play, work, study and live. This has seen the CBD, Docklands and Southbank explode with apartment developments, which in the case of "Australia 108" are up to 100 storeys tall.

The local state government has said the surge in apartment towers places Melbourne's CBD at risk of "darkened streets, wind tunnels and less open space" and has introduced height limits, mandatory setbacks and plot ratios - literally over night. However, these planning changes have three significant consequences for the current market.

The first and most obvious effect is the potential drop in value of development sites. Until now, Melbourne's planning laws have largely been discretionary and in the case of developments exceeding 25,000 square metres, were the responsibility of the Minister for Planning. Successive approvals by the previous Minister for Planning, Matthew Guy, have shifted the market's expectation of likely development yield on key sites. Now, with the surprise introduction of the new planning laws, many of these sites cannot be developed to the height or yield previously envisaged and are therefore worth considerably less.

Nick Baker, Associate Director at Planning and Property Partners said, "There are a number of sites in the CBD and Southbank that will now only allow half the number of apartments developers were previously anticipating. The blunt nature of the new controls will constrain site responsive design and result in the redevelopment of many sites being unviable."

The second impact is a longer-term reduction in future apartment supply in the CBD and Southbank, which will maintain upward pressure on capital and rental values. This will be exacerbated over the next 12 months due to the uncertainty about exactly what format the new planning laws will take. It is very difficult to evaluate the development capacity of a site, and therefore site value, if you do not know what the planning rules will allow. Uncertainty causes inaction in any market, so regardless of what the new planning rules will be, the lack of design and planning progress will delay future apartment supply.