Most developers meet the phrase “highest and best use” for the first time inside a valuation report, usually as a single line that quietly drives the land value the whole report hangs off. By then the concept is being used on you rather than by you. The valuer has already decided what they think the site should become, run their numbers against that assumption, and handed you a figure your financier is now relying on. If you do not understand how that assumption was formed, you are negotiating a land price, and very possibly a loan, against a judgement you cannot interrogate.
This guide treats highest and best use the way a property developer should treat it: not as a valuation formality, but as the analysis you run yourself before you bid on a site. It is the structured way of answering the only question that matters at acquisition, which is what this piece of land is actually worth to you given what you can realistically build on it and sell. We walk through the four tests that define highest and best use, ground each one in the Australian planning system across all eight states and territories, show how the financially feasible test is really a residual land value calculation in disguise, and cover the traps that catch developers who assume the zoned use and the best use are the same thing. The aim is to help you form your own view on a site, then read someone else’s valuation with a sharper eye.
What highest and best use actually means for a developer
In valuation practice, highest and best use is generally understood as the reasonably probable and legal use of a site that is physically possible, financially feasible, and that results in the highest value. The definition has four moving parts, and a use only qualifies as the highest and best use if it survives all four. The concept sits at the centre of how market value itself is determined. Under the standards that govern valuation in Australia, a valuer is required to assess a property on the basis of the use that would generate the highest value for a market participant, not necessarily the use it is being put to today. The Australian Property Institute (API) adopts the International Valuation Standards (IVS) produced by the International Valuation Standards Council (IVSC), and has done so closely since adopting the international standards as the framework its valuer members work to. Those standards define market value around a willing buyer and willing seller acting knowledgeably and without compulsion, and highest and best use is the lens that connects that market value to the physical and legal realities of the land.
For a developer, the practical translation is simpler. Highest and best use is the development outcome that, after you account for what the planning system will allow, what the site can physically carry, and what the finished product will sell for net of every cost, leaves the most value in the land. It is the use that lets you bid the most for the site and still hit your margin. Two developers looking at the same corner block can reach different highest and best use conclusions, because each is reading the planning controls, the construction cost, and the end market slightly differently, and each has a different cost of capital. That is not a flaw in the method. It is the reason one developer wins the site at a price the other could not justify.
The concept also explains a pattern you will have seen in the market. A tired single dwelling on a large lot in a suburb that has been rezoned for townhouses will sell for far more than its value as a house, because the market is pricing the land at its development potential, not its current use. The house is, in valuation terms, an interim use. The land’s highest and best use has moved on, and the price has followed. Understanding that mechanism is what lets you tell the difference between a site that is genuinely underpriced and one where the redevelopment premium is already baked into the asking price.
Why the analysis matters before you commit capital
The reason to run this analysis yourself, rather than outsource it to a valuer after the fact, is that the highest and best use conclusion drives three numbers that decide whether your project is viable at all.
The first is the price you can pay for the land. Residual land value, the standard developer method for working out what a site is worth, takes the value of the completed development and works backwards by subtracting construction, professional fees, finance, holding costs, marketing, and your required profit. What is left is what the land can support. But that calculation is only as good as the development scheme you feed into it, and the highest and best use analysis is how you choose that scheme. Run the residual on a four-townhouse scheme when the site could carry eight apartments, and you will undervalue the land and lose the deal. Run it on a yield the planning controls will never approve, and you will overpay and erode your margin. The two analyses are joined at the hip, which is why it helps to read this alongside the detail in the residual land value guide.
The second number is your funding. Lenders size construction facilities against valuations, and those valuations rest on a highest and best use assumption. If the valuer assumes a more conservative use than the one you intend to build, your land value comes in lower, your Loan to Value Ratio (LVR) tightens, and you may need to find more equity than you planned. If the valuer assumes a more ambitious use than you can actually deliver, the valuation can look generous on paper while the project underneath it is shakier than the number suggests. Either way, knowing how the assumption was formed lets you have a sensible conversation with the valuer rather than simply accepting the figure.
The third number is your downside. A highest and best use analysis done honestly forces you to confront the uses that do not work before you own the problem. It is far cheaper to discover that the financially feasible scheme is a six-unit project rather than the twelve you hoped for while you are still in due diligence than after settlement, when the land is on your balance sheet and the holding costs are running.
The four tests, run as an acquisition decision
The four tests are usually presented as a checklist a valuer applies. For a developer they work better as a sequence of filters, run in order, each one narrowing the field of possible uses until only the genuine candidates remain. The order matters because the early tests are cheap to run and the later ones are expensive, so you want to eliminate the obvious non-starters before you spend money modelling them.
Test one: legally permissible
The first filter asks what the planning system will actually allow on the site. This is where most developer mistakes are made, because the gap between what a site could physically hold and what the controls permit is often wide, and the controls are not always obvious from the zone alone.
In every Australian jurisdiction, land use is controlled by a statutory planning instrument that sorts uses into broad categories: permitted outright, permitted only with consent or a permit, and prohibited. A use that is prohibited cannot become your highest and best use no matter how profitable it would be, because no approval pathway exists to deliver it. A use that is permitted with consent is a candidate, but only if you can realistically obtain that consent, which brings in the discretionary controls that sit on top of the zone.
In New South Wales, the controlling instrument is the Local Environmental Plan (LEP), made under the Environmental Planning and Assessment Act 1979. The Local Environmental Plan (LEP) sets the zone and, through the land use table, lists what is permitted without consent, permitted with consent, and prohibited in that zone. Sitting above the Local Environmental Plan (LEP) are State Environmental Planning Policies (SEPPs), which can override or add to local controls, and below it sits the Development Control Plan, which carries the detailed numerical controls. The NSW planning portal sets out how local plans and zoning work together. For a developer, the legally permissible test in New South Wales means reading the zone objectives, the land use table, the height of buildings and Floor Space Ratio (FSR) maps, and any applicable State Environmental Planning Policy (SEPP) together, because a use can be permissible in principle yet capped so hard on yield by the Floor Space Ratio (FSR) and height controls that it fails the financial test later. The recent low and mid-rise housing changes and the transport oriented development controls have shifted what is permissible on many sites, so the test is also time-sensitive: a site’s legally permissible envelope today may differ from what it was eighteen months ago.
In Victoria, planning schemes are built from the Victoria Planning Provisions (VPP), a standard template that gives every scheme the same structure. As Planning Victoria explains, all land sits in a zone, and the use of land is controlled by the table of uses in that zone. That table sorts uses into Section 1 (permit not required), Section 2 (permit required), and Section 3 (prohibited), and the practitioner guidance on how provisions work sets out how the zone, overlays, and particular provisions combine. The legally permissible test in Victoria means checking the zone’s table of uses, then layering on overlays such as heritage, environmental significance, or design and development overlays, each of which can require a separate permit trigger or impose controls that shape what you can build. Victoria’s Plan for Victoria and the Development Facilitation Program have also created faster assessment pathways for certain developments, which can change the practical permissibility of a scheme even where the underlying zone is unchanged.
In Queensland, the framework runs through the Planning Act 2016 and local government planning schemes, which assign development to categories of assessment: accepted, code assessable, or impact assessable. The category matters to a developer because it sets both the level of discretion the assessment manager has and whether the public can object and appeal. A code assessable proposal that complies with the relevant codes is generally understood to carry a reasonable expectation of approval, while an impact assessable proposal is fully discretionary and exposed to submissions. The legally permissible test in Queensland therefore asks not just whether a use is contemplated by the scheme, but which assessment category it falls into and how much risk that category carries.
The smaller jurisdictions each run their own system, and the legally permissible test has to be re-anchored to the local instrument in each:
- In South Australia, the Planning and Design Code made under the Planning, Development and Infrastructure Act 2016 is a single state-wide instrument that replaced the old council development plans. Zones and overlays in the Code set what is envisaged, and development is classed along a spectrum from deemed-to-satisfy through performance assessed to restricted. A use that is listed as restricted carries the heaviest discretion and the highest refusal risk.
- In Western Australia, the system layers region schemes, local planning schemes, and the Residential Design Codes (the R-Codes) under the Planning and Development Act 2005. The R-Code density coding on a site, expressed as an R-number, often does more to set the achievable yield than the zone label, so the permissible test in Western Australia leans heavily on reading the coding.
- In Tasmania, the Tasmanian Planning Scheme, rolled out as a combination of state provisions and local provisions schedules, sets zone use tables and codes in a structure broadly comparable to the mainland, with uses listed as permitted, discretionary, prohibited, or no permit required.
- In the Australian Capital Territory, there is no council layer; the Territory Plan, administered by the territory planning authority, sets zones and the development tables, and leasehold purpose clauses on the Crown lease add a further layer of control over what a site can be used for that has no direct equivalent in the freehold states.
- In the Northern Territory, the NT Planning Scheme 2020 sets zones and use categories across the territory, with the consent authority varying by development type.
The common thread across all eight jurisdictions is that the zone is the starting point, not the answer. Overlays, codes, density controls, height and floor space limits, heritage listings, restrictive covenants on title, and easements can each cut down what is genuinely permissible, and several of them sit outside the zoning map entirely. A site zoned for medium density that is also covered by a heritage overlay and burdened by a drainage easement may have a legally permissible envelope far smaller than the zone suggests. Working through the residential zoning controls and the floor space ratio rules that apply to your site is how you turn the zone label into a real, buildable envelope.
A word of caution on rezoning. It is tempting to base a highest and best use conclusion on the use a site could be rezoned to, rather than what it is zoned for now. Valuation practice treats this carefully: a potential rezoning only feeds into highest and best use to the extent it is reasonably probable, not merely possible. For a developer, betting your land price on a rezoning that has not happened is one of the fastest ways to overpay. If the uplift depends on a planning change, that change belongs in your analysis as a risk-weighted scenario, not as a settled assumption.
Test two: physically possible
The second filter asks what the land can physically carry. A use can be perfectly legal and still fail because the site cannot accommodate it. This test considers the site’s size, shape, frontage, topography, geotechnical conditions, flooding and bushfire exposure, contamination, access, and the availability and capacity of services.
For a developer, the physically possible test is where the abstract yield permitted by the planning controls meets the stubborn reality of the dirt. A site might have a Floor Space Ratio (FSR) that theoretically supports thirty apartments, but if it is a narrow battleaxe lot with a single point of access, a cross-fall that forces expensive basement excavation, and a sewer main running diagonally through the buildable area, the physically achievable yield may be far lower. Steep sites carry retaining and access costs that flatten margin. Contaminated former industrial land carries remediation costs that can swallow the rezoning uplift that made the site attractive in the first place. Flood-affected land may be developable only with fill and raised floor levels that change the product and the cost base.
The practical move here is to run the physically possible test before you spend heavily on the financial test, because the physical constraints often quietly reset the yield assumption that the financial test depends on. Early-stage investigations such as a feature and level survey, a preliminary geotechnical assessment, and a services check are relatively cheap insurance against modelling a scheme the site cannot actually hold. Physical possibility is also not static: works to a site, such as remediation, filling, or service augmentation, can change what is possible, but those works carry costs that flow straight into the financial test.
Test three: financially feasible
The third filter is the one developers understand best, because it is the residual land value calculation by another name. A use is financially feasible if the value it creates exceeds the cost of delivering it, leaving a positive return. In valuation terms, a use is generally considered financially feasible if its net present value is greater than zero. In developer terms, the question is whether the completed development is worth more than everything it costs to build, fund, and sell, by enough to leave your required profit and a residual that supports the land price.
This is where the earlier tests pay off. By the time you reach the financial test you should be modelling only uses that survived the legally permissible and physically possible filters, which means you are not wasting feasibility effort on schemes that can never be built. For each surviving candidate use, you build a feasibility: estimate the gross realisation from sales or the capitalised value if you are holding, subtract construction cost, professional fees, statutory contributions, finance and holding costs, selling and marketing costs, and Goods and Services Tax (GST) treated correctly under the margin scheme where it applies, then subtract your target development margin or return. What remains is the residual land value, the most you can pay for the site under that use and still hit your numbers.
The use that produces the highest residual land value, not the highest gross realisation, is the financially strongest candidate. This distinction trips up developers who chase the biggest building. A larger scheme that generates more total revenue but carries disproportionately more cost, longer programme, and higher finance can produce a lower residual than a smaller, faster, simpler scheme. The residual land value is the honest scorecard because it nets all of that out. Building these comparisons properly has traditionally been the job of a development feasibility spreadsheet, and is increasingly the job of dedicated feasibility software like Feasly; either way, the comparison only means something if each scenario is built on the same cost and revenue assumptions.
Financial feasibility is also the test most exposed to the assumptions you cannot control: end sale prices, construction cost escalation, interest rates, and absorption rates if you are selling in stages. A scheme that is feasible at today’s prices and rates can become infeasible if either moves against you during a multi-year programme. This is why the financial test should never be a single point estimate. Running the feasibility across a range of values for the variables that matter most, through sensitivity analysis, shows you how well each candidate use holds up, not just whether it works on a good day. A use that stays feasible across a plausible range of outcomes is a safer highest and best use conclusion than one that only works if everything breaks your way.
Test four: maximally productive
The fourth and final filter selects among the uses that passed all three earlier tests. Several uses might be legal, physical, and financially feasible at once; the highest and best use is the one that produces the highest value, adjusted for risk and timing. In valuation practice this is the use with the highest risk-adjusted return, typically measured by net present value or internal rate of return.
For a developer, the maximally productive test is a reminder that the highest and best use is not automatically the most intensive use the controls allow. The eight-apartment scheme might be legal, physical, and feasible, and still be the wrong answer if a six-townhouse scheme delivers a similar residual on a shorter programme with materially less planning, construction, and sales risk. Risk and time are real costs, and the maximally productive test is where you weigh them. A scheme that returns a slightly higher residual but takes two years longer to deliver, carries a contested impact assessable approval, and depends on selling thirty units into an uncertain market may be less productive, properly understood, than a smaller scheme that settles faster and sells more easily.
This is also where your own cost of capital and risk appetite legitimately enter the analysis. A well-capitalised developer who can carry a longer, larger project may reach a different maximally productive conclusion than a smaller developer for whom programme length and sales risk weigh more heavily. Both can be correct for their own circumstances. That is why two developers can run the same four tests on the same site and arrive at different highest and best use conclusions without either being wrong.
As if vacant versus as improved
A subtlety that matters enormously to developers buying sites with existing buildings is that highest and best use is assessed twice: once for the land as if it were vacant, and again for the property as it is currently improved. Valuation practice treats these as two separate analyses, and the gap between them is where the demolish, retain, or refurbish decision lives.
The land as if vacant asks: if this site were bare, what would you build on it? That answer sets the development potential and, usually, the land value. The property as improved asks: given the building that is actually there, what is the most productive thing to do with it, accounting for the cost of removing or changing it? Sometimes the two answers align, and the existing building is already at or near the site’s potential. Often they diverge, and the existing building is worth less than the cleared land, because its value as a standing structure is lower than the land’s value for redevelopment minus demolition cost.
For a developer, this comparison is the analytical core of the buy decision on an improved site. If the land as if vacant is worth materially more than the property as improved, the existing building is an interim use and the highest and best use is redevelopment, with demolition treated as a cost in your feasibility. If the property as improved is worth more, the building is contributing value and the better play may be to retain and refurbish, or to retain and add, rather than clear the site. The cost of demolition, any heritage constraints that prevent removal, and the holding income the existing building generates while you obtain approvals all feed into which side of the line a given site falls.
This framing also disciplines a common error, which is paying for redevelopment potential and then failing to realise it. If you buy at the as-if-vacant land value, you have paid for the development outcome, and retaining the existing building as a long-term hold means you have left that premium on the table. The as-if-vacant and as-improved comparison keeps you honest about what you are actually paying for.
Interim use, landbanking, and the consistent use principle
Two further concepts from valuation practice are worth a developer’s attention, because both bear directly on sites held ahead of development.
An interim use is a temporary use that earns its keep while the site waits for its ultimate highest and best use to become feasible. When market conditions, infrastructure, or planning controls do not yet support the ultimate development, the highest and best use today may be to continue an existing income-producing use, or even to hold the land largely as is, until conditions improve. A leased older building, a car park, or a holding tenancy can all be the rational current use of a site whose redevelopment is a few years away. For a developer landbanking ahead of a rezoning or an infrastructure trigger, recognising the interim use as a legitimate current highest and best use helps you value the holding income properly and avoid paying full development value for a site whose development is not yet feasible.
The consistent use principle is a trap to avoid. It holds that land and improvements must be valued on the same use basis; you cannot value the land at its redevelopment potential while simultaneously valuing the existing building at its current-use contribution as if both could be captured at once. In developer terms, you cannot have the uplift and the standing building’s value both. If the site’s value lies in redevelopment, the existing improvements are generally worth only their contribution to that redevelopment, which is often little or nothing once demolition is accounted for. Developers who add the full value of an income-producing building to the full redevelopment land value are double-counting, and will overpay.
How a valuer’s assumption shapes your funding
Because highest and best use sits inside the definition of market value, it also sits inside the valuations your financiers rely on, and it reaches beyond development valuations into financial reporting. Under the Australian accounting standard on fair value, AASB 13 Fair Value Measurement, the fair value of a non-financial asset is measured assuming its highest and best use by market participants, and where that highest and best use differs from the asset’s current use, the standard requires that difference to be disclosed. The same logic that drives your land valuation drives how development sites and investment properties are carried on a balance sheet.
For a developer the practical consequences are concrete. When a valuer assesses your site, the highest and best use they adopt determines the land value, which in turn determines how much a lender will advance against it. If the valuer adopts a more conservative use than you intend to deliver, perhaps because they are not persuaded a more intensive scheme is reasonably probable, the valuation comes in below your own assessment, your Loan to Value Ratio (LVR) tightens, and the equity gap widens. The remedy is rarely to argue; it is to give the valuer the evidence that your intended use is reasonably probable. Planning advice, a clear approval pathway, comparable approved schemes nearby, and a credible feasibility all help move a valuer’s highest and best use assumption toward the use you are actually pursuing. Understanding that the valuation is built on this assumption, rather than treating the number as fixed, is what lets you have that conversation productively.
Common mistakes developers make
A handful of errors recur often enough to be worth naming directly.
The first is assuming the zoned use is the highest and best use. A zone permits a range of uses and intensities; it does not tell you which one leaves the most value in the land. The zone is the start of the legally permissible test, not the conclusion of the whole analysis.
The second is skipping straight to the most intensive scheme the controls allow. Maximum yield and maximum value are not the same thing. The largest building often carries disproportionate cost, programme, and risk, and a smaller scheme can produce a higher residual land value. The four tests exist precisely to stop you from confusing biggest with best.
The third is pricing in a rezoning or a planning change that has not happened. Reasonably probable and merely possible are different standards, and the gap between them is where overpayment lives. Speculative uplift belongs in your analysis as a risk-weighted scenario, not as a settled land value.
The fourth is running the financial test on a single set of assumptions. End prices, costs, and rates all move, and a use that is feasible only at today’s figures is a fragile highest and best use. Testing each candidate across a range is what separates a sound conclusion from a hopeful one.
The fifth is double-counting under the consistent use principle, paying both the redevelopment land value and the standing building’s income value as if you could realise both. You cannot, and the maths will punish the assumption.
Bringing it into your feasibility model
A highest and best use analysis is only as useful as your ability to compare candidate uses on a like-for-like basis, and that comparison is fundamentally a modelling exercise. For each surviving use you need a complete feasibility built on consistent assumptions, so that the residual land values you are comparing are genuinely comparable rather than products of different cost bases or revenue optimism. This is where running the scenarios in a structured feasibility platform earns its place. The Feasly platform includes a built-in residual land value calculator, so you can model several candidate schemes for the same site side by side, hold the shared inputs constant, and read off the residual land value each use supports, which is exactly the comparison the maximally productive test calls for.
The same modelling discipline supports the conversation with your valuer and your financier. A clean set of feasibilities, each showing the residual land value and return for a clearly defined scheme, is the evidence that moves a valuer’s highest and best use assumption toward the use you intend to deliver. Feasly’s sensitivity analysis then lets you show how each candidate use holds up as sale prices, construction costs, and interest rates move, so your highest and best use conclusion rests on a use that stays feasible across a plausible range rather than one that works only on a good day. The broader method of pulling these pieces together is covered in the development feasibility guide.
Key takeaways
Highest and best use is the structured way of working out what a site is worth to you, and it is far more useful run before you bid than read off a valuation after you have committed. The four tests, applied in order, filter the field of possible uses down to the genuine candidates: legally permissible narrows it to what the planning system will allow, physically possible narrows it to what the land can carry, financially feasible narrows it to the schemes that leave a positive residual, and maximally productive selects the one that delivers the most value adjusted for risk and time.
The legally permissible test has to be re-anchored to the right instrument in each jurisdiction, because the zone is only ever the starting point, and overlays, density codes, heritage controls, and title burdens can cut the buildable envelope down sharply. The financially feasible test is a residual land value calculation, and the use with the highest residual, not the highest gross realisation or the biggest building, is the one that should set your bid. For improved sites, the as-if-vacant versus as-improved comparison is where the demolish-or-retain decision lives, and the consistent use principle is there to stop you double-counting. And because highest and best use sits inside the definition of market value, the assumption a valuer adopts flows straight through to your land value and your funding, which is reason enough to understand how that assumption is formed rather than simply accepting the number it produces.
This guide is general information for property developers and does not constitute valuation, planning, legal, or financial advice. Planning controls, valuation standards, and costs vary by site and change over time. Confirm the current position for your specific site with a registered valuer, a planning consultant, and your own advisers before relying on a highest and best use conclusion.