Kingshill Development started Land and Environment Court conciliation with Port Stephens Council on Thursday after the Hunter Central Coast Regional Planning Panel rejected its concept plans for subdividing the first half of the huge 3500-lot Kings Hill housing estate in February.

The billion-dollar subdivision, which has been planned for 20 years, would create a new town almost the size of Raymond Terrace on the Pacific Highway opposite Grahamstown Dam.

The council had recommended last year that the planning panel approve a concept plan for the first 1900 lots in the subdivision.

But the planning panel deemed the proposal was likely to "significantly affect a threatened species, population or ecological community or its habitat" after the office of Environment and Heritage refused to grant its "concurrence" to the project.

The office's refusal said the proposal "involves the removal of 152 ha of koala habitat" in an area which housed at least 50 koalas.

Kingshill Development had proposed setting aside 1225 hectares of koala habitat, but Environment and Heritage found some of this area was in future development land in the broader Kings Hill urban release area and 85 per cent of it was outside the developer's control.

The Hunter chair of Urban Development Institute of Australia NSW, Geoff Rock, said on Thursday that biodiversity laws introduced in 2016 had quarantined more than half the land in Hunter urban release areas identified by the government.

The 2018 Kings Hill application was not assessed under the 2016 Act because Port Stephens was one of several areas granted 18 months of grace before the law came into effect.

But Kings Hill project manager Adam Smith said any new application would be assessed under the new legislation if the court case did not yield a favourable outcome for the developer.

"The multimillion-dollar question is where did it all go wrong," he said.

"Why haven't we got an outcome at this point?

"There just seems to be a lack of willingness by the local Environment and Heritage office to engage on the matters."

Much of the Kings Hill urban release area was rezoned for housing in 2010, three years after the state identified it as one of four priority housing areas in its Lower Hunter Regional Strategy.

Kingshill bought 64 per cent of the site in 2012 and three years ago lodged concept plans for 1900 houses, conservation areas, a school, town centre and parks.

Mr Rock said biodiversity laws were acting "contrary" to the government's housing strategies and NSW needed to find a better balance between environmental considerations and the need to house a growing population.

"The Act is ... causing a significant constraint on our land supply and therefore driving prices up," he said.

"Over 60 per cent of the identified greenfield residential land in the regional strategy is held up in the planning system due to the application of biodiversity constraint.

"If you've got the Kings Hill site or the Minmi site owned by Winten identified as an urban release area and zoned for residential purposes, obviously the intent is to deliver residential outcomes.

"How can you avoid any impact? You can't. It's impossible. The legislation should be to avoid where you can, and where you can't you should minimise and then get to the offsetting part."

The NSW budget allocated $106 million over three years to increase the supply of credits under its Biodiversity Offset Scheme for landholders, but Mr Rock said the scheme was not working because "no one understands the number of credits we need to deliver our housing".

He said the scheme was adding $30,000 to a block of land for those developers who had navigated the system, but he recognised the government was working on improving the scheme.

He said the 2016 Act was starting to have a significant impact on Hunter land releases.

"We've had the benefit, and I use that term loosely, for the last five years of all those developments that lodged in that deferment period, but we've largely soaked up all that supply."

The UDIA was making "strong recommendations" to a government review of the legislation.

The sole director of Kingshill Development No.1 and Kingshill Development No.2, Quan Fang, signed a deal with the state in 2020 under which the proponent would dedicate land for a school and help pay for a road interchange and water channel worth a total of $80 million.

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