Victoria's commercial land use zoning

Productivity reform case study

The case study was handed to the Council on Federal Financial Relations on 28 July 2020 and publicly released on 14 September 2020.

The case study explores the implementation and impacts of changes to Victoria’s commercial zones over the past decade. Victoria’s experience suggests it is possible to introduce greater flexibility into zoning arrangements with positive outcomes.

Download the case study

Land use zoning can be an effective tool for pursuing urban planning objectives, such as separating industrial activities from residential areas or reserving open or green space.
But overly prescriptive zoning imposes costs and reduces land use flexibility and adaptability.
While important, zoning is just one of many factors shaping land use in a jurisdiction like Victoria, including population growth and a shift from manufacturing to knowledge‑ and service‑based industries.
Victoria has sought to simplify and standardise its commercial zones over the past 20 years.
- Business zones were standardised in the late 1990s to provide greater consistency across newly merged local government areas.
- The broad Commercial 1 and 2 zones were introduced in 2013 following the merging of the previous five business zones. (This change was accompanied by amendments to the industrial zones to provide more flexibility for office and some retail uses.)
- The Commercial 3 Zone is a mixed use employment zone introduced in October 2018.
The effect of these reforms over time has been to broaden the extent of allowable and as‑of‑right uses (that is, uses allowed without a permit) on commercially zoned land across the state.
The move to broader commercial zones aimed to increase business investment and encourage more productive land use by making the zoning rules simpler and less prescriptive, but generated concerns about unintended adverse consequences.
Business investments and qualitative feedback suggest that these measures are having their intended effects.
- The changes have increased the availability of suitable sites and reduced set-up costs for small‑scale supermarkets and large format retailers. Consumers now have greater access to these type of retailers.
The significant negative impacts predicted to result from the 2013 reforms do not appear to have come about, although some maintain that the more market‑driven approach has detracted from urban amenity or unfairly affected some businesses. Some of these arguments are questionable on empirical and/or conceptual grounds.
The new Commercial 3 Zone aims to facilitate the establishment and growth of creative industries, small‑scale manufacturers and start‑up businesses.
- The Commercial 3 Zone has the potential to increase the productivity of land use by allowing limited retail and residential uses, while maintaining the option value of preserving land for employment‑related activity (rather than full‑scale residential development).
- Its merits as a form of industry assistance are more questionable.
This case study highlights that:
- although it is widely accepted that enhancing the amenity and productivity of land use requires a combination of regulation and markets, there is inevitable debate about the right balance
- a key benefit of flexible zoning arrangements is that they allow land use to adapt to changing economic circumstances (such as unanticipated shifts in the nature of office work)
- Victoria’s experience suggests it is possible to introduce greater flexibility into zoning arrangements with positive outcomes.

Victoria's commercial land use zoning

Productivity reform case study

The Productivity Commission found that Victoria’s commercial zoning arrangements illustrate the benefits of a more flexible approach to land use, with benefits for the broader community.

This is a finding from the Commission’s first case study on productivity reforms across the Australian Federation.

“Victoria’s system uses a smaller number of zones, which allow a broad range of permitted uses. This has increased the availability of sites and reduced set‑up costs for small-scale supermarkets and large format retailers to the benefit of consumers,” Commission Chair Michael Brennan said.

The Victorian experience shows that is it possible to bring more flexibility and simplicity to commercial land use without significant negative consequences.

More flexible zoning helps realise the productive potential of urban land, making it easier for new firms to enter local markets and for existing firms to expand with reduced administrative and compliance costs.

The report emphasises that land use regulation is important. Australia needs a certain amount of regulation to separate incompatible uses from one another (such as industrial uses from residential areas).

“There is a risk in being too prescriptive. Part of having a dynamic economy is being open to new types of business and new forms of economic activity, our commercial zoning arrangements should help facilitate that,” Mr Brennan said.

“Flexibility will be particularly valuable given the current uncertainties surrounding future patterns of commercial land use (such as those created by the COVID-19 pandemic),” Mr Brennan observed.

The case study notes that while Victoria’s new Commercial 3 Zone could provide a path to more productive use of some former industrial sites across Melbourne, its merits as an opaque form of industry assistance to selected firms or sectors are more questionable.

This is the first of a number of potential case studies aimed at highlighting possible reform directions for jurisdictions across the Australian Federation. The case studies aim to identify existing State and Territory initiatives which could help inform policy in other jurisdictions.

The productivity reform case study into Victoria's Commercial Land Use Zoning can be found at: www.pc.gov.au/vic-commercial-zoning

Victoria's commercial land use zoning

Productivity reform case study

Download the case study

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