Property rezoning: A beginner's guide

Every local council establishes a Local Environment Plan (LEP) where they put different types of zones for residential, commercial, employment, open space and special use. Each of the zones is subject to different development policies, which are determined based on the development pace and pattern deemed ideal by the council. As such, zonings determine the overall composition and appeal of neighbourhoods in a certain suburb.

Zonings usually fall into four common categories: residential, commercial, industrial and agricultural. These are further subdivided to low-, medium- or high-density residential zones, growth zones, mixed-use zones, township zones, rural living zones, farming zones, green wedge zones, single and multiple dwelling zones, community living zones and other specific zoning sub-categories.

Aside from varying development rules, there are also different financial regulations that govern each zone. Lenders assign particular policies to each type of property depending on the zone it belongs to.

For instance, you cannot apply for a residential loan when the property is zoned for commercial use. Commercial loans can put a deeper dent in your budget since they typically have higher interest rates as well as a loan-to-value ratio capacity of around 65 to 70 per cent. If you are not prepared for a big expense, this could be a roadblock on your wealth-creation journey.

By understanding zoning, you gain the ability to determine the property which can perfectly match your needs, financial capabilities and limitations as well as your overall long-term investment strategy.

How does rezoning occur?

Zonings are determined in council zoning meetings organised by local governments. The zoning decisions are finalised and established through the LEP and other written documents.

However, there are instances when local zoning can be formally amended to suit the changing needs of the community. In fact, it is not uncommon for government officials to rezone whole sections of land during council zoning meetings due to growing population and environmental considerations.

Councils in NSW made changes in zoning after the state government requested that all zonings within the state be aligned to a comprehensive LEP. Meanwhile, the Blacktown Council responded to the demands of the residents by limiting the construction of townhouses in medium-density zones only.

Essentially, local councils use land rezonings as a more strategic way of addressing the changing demand for housing based on population, infrastructure and employment growth.

Individual property rezoning may occur if the existing zoning status of the property is no longer fitting for the location.

Investors and homeowners may also apply for rezoning if their development plans are in conflict with the existing town planning controls. Developers may also request for zoning changes to increase the return on their investment.

Keep in mind that rezoning applications will have to go through a formal amendment process. Since you’re proposing an amendment to the local government-mandated LEP, you can expect the process to be meticulous and considerably lengthy.

Applications for rezoning are generally considered viable if the land cannot be reasonably developed or used under its existing zoning or if the development of the land under the existing zoning will be to the detriment of the public good.

Rezoning will change the range of permissible uses of the land, the development controls to be implemented and the type of loan that an investor can get for the property. It may also affect the value of land and influence the rates applicable to it. Valuers often factor in zoning, availability of services and location constraints such as flooding when determining land value.

The rezoning process

The first step in the process of rezoning is filing the formal application, also known as the planning proposal, to the local council.

Planning proposals include the statement of objectives or intended outcomes, an explanation of the provisions included in the proposal, the justification of objectives, outcomes and provisions and the process to be undertaken for implementation, a map detailing the proposed zones and environmental constraints and the details of community consultation.

The planning proposal must be in compliance with Section 55 of the Environmental Planning & Assessment Act 1979 and all applicable guidelines from the Department of Planning.

Engage the local council’s Strategic Planning division to make sure that you provide a good application. In most cases, rezoning applications require an application fee.

The following steps are outlined by the Wollondilly Shire Council in New South Wales. Other local councils may have different procedures to follow:

Before moving forward, the council must resolve to support the planning proposal at an Ordinary Meeting of Council. Once they air their support, the proposal will then move to the Department of Planning for consideration.

The Department of Planning will determine whether the proposal is justified on planning grounds. Depending on the proposed amendments, variations, resubmissions, community consultations, consultation with state or Commonwealth Public Authorities or even a public hearing may be required. They will also finalise a time frame for the creation of the draft amendment as well as the delegation of the function of making the LEP.

If the Department of Planning approves the proposal at the Gateway Determination stage or the checkpoint before significant resources are committed to the plan, the applicant will be liable for the full cost of the preparation of the draft LEP, other local environmental studies deemed necessary by authorities as well as project management fees.

Once the planning proposal passes the Gateway Determination, it will be exhibited to the public, together with the new plan making process and other supporting studies, in order to gather the views of the community.

Finally, the Parliamentary Counsel will prepare the written draft LEP before it is made by the Minister of Planning or a delegate. The amended LEP will take effect after it is published on the NSW legislation website.

Capitalising on rezoning

Your understanding of zoning can spell the difference between buying a good real estate asset versus being stuck with a bad property.

According to Right Property Group’s Steve Waters, due to varying regulations, some properties turn out to have better wealth-creation potential than others. As such, investors can turn the zoning rules into their advantage by doing due diligence and seeking guidance.

He said: “Some investors try to base their strategy around the possibility of zoning changes or town planning flexibilities. Metro areas, in particular, offer great potential for properties with rezoning potential because population growth and urban sprawl will prompt local councils to look at ways for extracting maximum housing yield out of limited options.”

“One council approach is to increase density rules under certain residential zonings, which can be a way for investors to profit because a zoning change can propel your property into a ‘higher use,’” the property professional added.

However, buyers must be cautious about paying for rezoning potential because no zoning amendments are ever final until they actually take effect.

Many budding investors have paid premium for properties with rezoning potential, only to lose money due to high holding costs and low returns. If the zoning changes don’t happen, you will ultimately be stuck with a property lemon or forced to sell at a bad time.

In order to avoid falling victim to “false rezoning alarms”, contact the local council and discuss all things related to town planning as preparation for your property purchase. The local councils will have the resources you need to determine the strengths and limitations of a particular zoning.

Mr Waters also recommended engaging with private town planning advisors to help you interpret the documents from the local council and determine ways to maximise the potential of your property within the boundaries of the set guidelines.

According to him: “If you’re looking to invest with future potential in mind, employing a professional property investment advisor is worth every penny. There are delicate intricacies around zoning that are best understood by a keen eye and experienced hand. It’s a great way for you, the owner, to profit while not being bamboozled by planning-speak.

Remember zoning can be your friend, but you must be careful. It’s not the be-all and end-all of smart investing, but it is a pretty good place to start,” he concluded.

This information has been sourced from the Sutherland Shire Council, Wollondilly Shire Council, Empower Wealth and the Smart Property Investment website.