Understanding Highest and Best Use in Property Valuation

In real estate valuation, one of the most important—yet often overlooked—concepts is Highest and Best Use (HBU). Before a valuer can accurately estimate a property's worth, they must first determine its most profitable, legally permissible, physically possible, and financially feasible use. This is what “highest and best use” refers to.

Whether you're a landowner, developer, investor, or agent, understanding this concept is key to maximizing property value and making informed real estate decisions.

What Is Highest and Best Use?

Highest and Best Use refers to the most likely use of a property that results in the highest value, considering what is:

Legally permissible

Physically possible

Financially feasible

Maximally productive

The principle is especially relevant for undeveloped land, underused properties, or those being considered for redevelopment. For instance, a vacant plot in a commercial hub may be more valuable as a shopping complex than as farmland.

The Four Criteria of Highest and Best Use

To determine HBU, a valuer must analyze the property against four essential criteria:

1. Legally Permissible

The use must comply with:

Zoning regulations

Government planning policies

Land use laws

Building codes For example, a residentially zoned land cannot legally be used for heavy industrial purposes.

2. Physically Possible

This examines whether the proposed use can be physically accommodated on the land:

Is the land large enough?

Is the topography suitable?

Is the soil stable enough for construction?

Is there access to roads, water, or utilities?

3. Financially Feasible

This answers the question: will the proposed use be economically viable?

Will the cost of development be justified by the expected returns?

Will the project attract demand in that location?

If the cost outweighs the income potential, then it's not a viable use.

4. Maximally Productive

Out of all the legally, physically, and financially viable options, which one produces the highest value? This is the core of HBU. A use might meet the first three criteria but still not be the most valuable use of the property.

Practical Example: Urban Land in Nigeria

Imagine a parcel of land in Lekki, Lagos:

Legally, it is zoned for mixed-use.

Physically, it's a flat and accessible plot.

Financially, demand exists for both office spaces and residential apartments.

Maximally productive, however, residential apartments may yield higher returns due to rising housing demand in the area.

In this case, the highest and best use is residential development, even though office use is also feasible.

Why Highest and Best Use Matters in Valuation

Accurate Property Valuation:
The estimated value of land or property can vary significantly depending on its highest and best use. Undervaluing or overvaluing based on incorrect use assumptions can lead to poor decisions.

Investment Insight:
Investors use HBU analysis to determine whether to develop, redevelop, or hold a property.

Development Strategy:
Understanding HBU can guide developers on optimal designs, project types, and target markets.

Government and Policy Planning:
Valuers working with government agencies apply HBU in cases of compulsory acquisition, urban renewal, and public infrastructure development.

Conclusion

Highest and Best Use is not just a technical concept for valuers—it’s a strategic tool for unlocking a property’s full potential. By evaluating what is legally allowed, physically possible, financially feasible, and most productive, estate surveyors and valuers provide valuable insights that support smarter, more profitable real estate decisions.

Whether you're looking to sell land, invest in property, or embark on a new development, considering the highest and best use can be the key to maximizing your returns.