Planners of a $1 billion housing and lakes recreation development in fast-growing Hamilton say they now face a long and expensive battle with red tape, after the Government "perplexingly" rejected their bid to create a Special Housing Area with affordable homes.

Perry Group is proposing the 85 hectare development called Te Awa Lakes at Hamilton's northern gateway, on a former quarry site which is now zoned industrial.

The plan would deliver 1500 new homes beside the Waikato River. Under a special housing zone change, 10 per cent of them would have been priced at around $520,000 to $650,000 - classified as "affordable housing" under Government policy.

Perry Group chief executive Richard Coventry said the company had been following a private plan change process with the Hamilton City Council to get the land rezoned, but had been encouraged to pursue the Special Housing Area process instead to speed things up.

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"Now we have been sent back to the council's process."

Perry Group is left with three options, Coventry said.

It can create an industrial park along the 1.5 km of riverfront property, continue with a private plan change process, or put the whole idea on hold.

Coventry said that by the Government's own analysis, Hamilton is short of 2500 homes. The city council and the public had supported the development, he said.

In a letter to Hamilton Mayor Andrew King, Associate Housing Minister Jenny Salesa said she had to decline his recommendation for a Special Housing Area for Te Awa Lakes, "a complex application which has highlighted several issues".

First, the surrounding area was a strategic industrial node. New housing had the potential to constrain future industrial activities.

Second, she was concerned that the special housing area would result in a small residential community which was car-dependent, separated from community facilities and with no current provision for public transport. That would be contrary to Government policy for urban development, Salesa said.

A change in strategic land use would be best progressed through a plan change under the Resource Management Act, she said, so the views of potentially affected people could be better tested.

Perry Group chairman Simon Perry said the plan didn't require Government money and his company was ready to start development immediately, having earmarked funds for the project for the next five years.

"All we need is approval to spend our own money building infrastructure and housing that this city and region needs."

Te Awa Lakes had been master planned to be a vibrant, mixed use community hub which highlighted the Waikato River and its power to connect the region's communities.

Coventry said pursuing a private plan change would cost up to $2 million -- and that was before the possibility that the case would go to the Environment Court.

"And it could take years."

Perry Group was "bitterly disappointed" and perplexed, he said.

The Government's affordable housing policy required provision of more land for homes - exactly what the company was offering.

He said a private plan change would require "strong support" from the city council.

Mayor King said the council could not be seen to favour any project in this type of situation and it would have to go through "the proper process".

Coventry said Perry Group was confident it could exceed the 10 per cent of "affordable housing" requirement in its plans.

One thousand of the planned 1500 new homes would be within the Hamilton city northern boundary. The rest would be in Waikato District Council territory. That council was conducting a district plan review, which could see land zoned "country living" rezoned residential to provide for 450sq m lots which would be well-suited to Perry Group's plan, he said.