Highest and Best Use
Treating the subject as briefly as possible, the HBU concept can be reduced to the following statement:
The most beneficial use of a property ( or “optimal” or simply HBU) is one that is:
1. physically possible
2. legally permissible,
3. market justifiable
4. financially feasible,
5. giving the highest value to the property.
The above 5 criteria, are sometimes reduced to three, but for the sake of understanding the subject I propose to use the most expanded version.
Physical possibility
Point 1 seems obvious. The valuer should not assume in the valuation a use for the property that cannot be done for technical reasons. However, I recently heard from a candidate while sitting on an RICS examination panel that anything can be done these days – it is just a matter of money. Whether this is true is almost a philosophical problem, but I wouldn’t go that far.
Legal permissibility
Point 2. concerning the legal permissibility of a particular use of the property is also quite obvious. However, it is of particular relevance because the current definition of market value allows, under certain specific conditions, a use that is not yet legally permissible to be taken into account in the valuation. This is how the so-called “hope value” is taken into account in the market value, but this is a topic for a separate article. Since hope value is the next step beyond the HBU here I will only focus on the fact that, in order to comply with the HBU concept, the use of the property must be legally permissible.
It is worth mentioning that TEGOVA, in its latest European Valuation Standards 2020 call the “legal permissibility” with the words of “legal or likely to become so”. So let’s have a look, what is meant by that.
“Potential buyers perceive that:
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A planning authority is likely to allowa change of use or oermit a proposed develooment in the forseable future; or
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Legislation is likely to to render a currently ilkegal use or development legal;
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A licensing regime is considered likely to become more or less.”
As may be seen TEGOVA has extended the definition of HBU to incorporate the former concept of “hope value”, which lost its place as a separate valuation concept.
Market justification
Point 3 – market justified. In short, the valuer cannot assume that a large office building can be built in the middle of a field in a small rural village. There simply won’t be a demand for it there and any use according to the HBU must have market support. I remember at one time accusations by opponents of HBU that the concept was “selling dreams”, artificially pumping up values leading to a crisis, etc. As you can see, the optimum use does not give the opportunity to set up something against the market.
Financial feasibility
Point 4, in principle, is also self-evident. This is because it is necessary to adhere to the principle of the rationality of the investor’s actions, who will not undertake an unprofitable investment or at least will not do so having such a conviction when making an investment decision.
Maximum productivity
Point 5 on the criterion of the use of the property generating the highest value was perhaps the most controversial and difficult for opponents of the HBU concept to accept. It drew the erroneous conclusion that there was a kind of imperative to look at the property optimistically and thus to inflate its value. However, nothing could be further from the truth.
The correct understanding of the HBU concept is that if, after verifying several possible potential uses of a property against the criteria listed in points 1-4, there is still more than one potential use of the property, the one that will generate the highest value should be selected.
It is worth noting that this is a perfectly rational decision that can be expected from any typical market participant. Therefore, the assumption of maximising the value of the property is in no way a manifestation of the valuer’s optimism, but a correct reflection of the market behaviour of market participants, i.e. a manifestation of realism.
The current definition of market value is therefore unequivocally on the side of the most advantageous use of the property.
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