The Present Use of Your Property Might Just Not Provide You with Maximum Value – Why Highest and Best Use Appraisals form a Critical Component of Real Estate Developments.
In a world where real estate has gained popularity as a viable long-term investment asset class, it is important that investors place real estate assets in a position that affords them maximum value. Although Accra’s real estate market has far advanced among the real estate markets of other major cities in Ghana, there still remain parcels of land that are underutilized or abandoned, resulting in a waste of wealth. While owners of obsolete properties are beginning to appreciate the prospects of maintaining the highest and best use of land, it is important that land owners understand the concept of ‘highest and best use’ and the idea behind its application by valuation and estate surveyors.
A Short Scenario:
After years of dilapidation, an old structure spotted within the Ringway Estates has been redeveloped into a hotel apartment. The land is located in a prime suburb with commercial and residential users.
This area was initially developed by the State Housing Corporation as a government residential area. However, over the years, the real estate market dynamic of the area has shifted towards commercial use due to conversions and modifications by property owners. The neighbourhood is currently characterized by the presence of businesses, corporate offices and hotel apartments. Key developments in the neighbourhood include the Phoenix Insurance Company, NTHC, PZ Gardens, GIJ and the British High Commission.
Despite the transformation, certain parcels of land still remain in their previous state as built, have not seen any major repair or renovation and have fallen into a state of dilapidation with a good number of them under-utilised. This was the state of the property when spotted within the vicinity in 2011.
State of Property in 2011
Presently, the property has been demolished and redeveloped into a hotel apartment with full occupancy rates for most parts of the year. Revenue generated from its present use obviously outweighs its previous use.
Present State of Property
The situation presents a perfect scenario of the application of the concept of Highest and Best Use. It also reflects the importance of assessing the highest and best use of a development.
Aside the key determinants of real estate value such as location, nature of title/interest, neighbourhood conditions, social amenities and infrastructure, it is important that the real estate asset is put to its highest and best use in order to achieve maximum value.
The concept of highest and best use plays an important role in minimizing losses associated with underutilization, misallocation or abandonment of real estate investments. It is therefore advisable that property investors and developers engage the services of qualified appraisers/valuers to undertake a thorough analysis of a real estate project at any given point in time to determine its highest and best use.
In analyzing the highest and best use of a real estate investment, appraisers/valuers assess the development with four major questions:
- Is the prospective project/existing use physically possible?
- Is the prospective project/existing use legally possible?
- Is the prospective project/existing use financially feasible?
- Is the prospective project/existing use maximally productive?
It is highly recommended that developers or investors carry out Highest and Best Use assessments before implementing developments.
Author: Makafui Kuffo