Interim Use or Redevelopment on a Constrained Edge-of-Centre Site
A 0.32 ha edge-of-centre site contains a 1970s two-storey retail and office building of 1,150 sq m gross internal area. It is 70% let at a passing rent of €210,000; market rent is €240,000. The main tenant has a break in three years. The adopted local plan permits a six-storey residential scheme of up to 4,800 sq m, subject to 20% affordable housing and a €450,000 infrastructure levy. Demolition would cost €180,000. Residential GDV is €18.0m, construction €9.8m, professional fees 12%, contingency 5%, developer profit 18% of GDV, and finance 7%. A residual appraisal suggests a site value of about €2.1m after demolition and levies. The existing building, valued as an income-producing investment, is worth €3.1m. A neighbouring owner has informally offered €4.0m for the site, conditional on planning permission. The planning authority has indicated that it will resist loss of the retail frontage unless the scheme includes a replacement unit.
1. Apply the four tests of highest and best use and explain which use is the HBU today.
Read the worked answer
Legally permissible Residential redevelopment is permitted in principle, but the affordable housing, levy and retail-frontage requirement reduce the developable value. The scheme is not automatically permissible as assumed.
Physically possible A 4,800 sq m scheme on 0.32 ha is feasible in engineering terms, subject to access, demolition and construction management. The existing building must be cleared.
Financially feasible The residual site value is about €2.1m after demolition, levy and profit. That is below the €3.1m existing-use value. On the stated numbers, redevelopment destroys value today, so it is not financially feasible relative to continued holding. The 18% profit and 12% fees are also sensitive to cost or GDV movement.
Maximally productive The current income use is worth more than the cleared site. The HBU is therefore an interim use: hold the investment, collect income to the tenant break, and preserve the redevelopment option. At the break, reassess the residual; if residential values rise or costs fall enough to exceed the existing-use value plus loss of income, redevelopment becomes the HBU.
Conclusion The mere existence of a planning permission does not make redevelopment the HBU. The four tests must be applied together, and interim use is a legitimate HBU.
2. How should the €4.0m conditional offer be treated in your valuation? Distinguish market value from price and identify the evidence you would require.
Read the worked answer
Price is not value A €4.0m offer from a neighbouring owner may reflect assembly value: the neighbour may gain a larger site, control of access or a strategic advantage that no ordinary buyer would obtain. That is a special-purchaser price, not necessarily market value.
Conditional and unverified The offer is informal and conditional on planning. It is not a completed transaction and may never be binding. It should not be adopted as the valuation.
Treatment
- Do not use €4.0m as the primary indication.
- Ask for the offer in writing, the conditions, proof of funds, the neighbour's timetable and the planning status.
- Test whether the offer reflects value available to the market generally or only to that neighbour. If only the neighbour, it is evidence of a special buyer, not market value.
- If there are several potential assemblers, competition could make the assembly premium relevant to market value; that requires evidence, not one approach.
- Disclose the offer in the report as supporting market interest, with its limitations.
Conclusion Market value assumes a willing buyer and seller, not a particular buyer with a special motive. The offer is a data point, not the value.
3. What would change if the main tenant's break were exercisable in 12 months rather than three years?
Read the worked answer
Shorter break If the break is exercisable in 12 months, the owner is closer to vacant possession and to the redevelopment option. The interim income stream is shorter, and the probability of the tenant leaving may be higher.
Effect on HBU Re-run the residual with earlier demolition, lost rent, void, finance and fees. A 12-month break reduces the opportunity cost of redevelopment and may make the residential scheme the HBU if the residual plus the value of immediate possession exceeds the existing-use value. The €4.0m offer also becomes more credible because the neighbour could obtain possession sooner.
Valuation response
- Value the existing use for the shorter term, then the reversion to redevelopment or reletting.
- Consider a probability-weighted scenario: tenant stays, tenant leaves, planning granted or refused.
- Do not assume the break will be exercised; check the lease conditions, notice requirements and tenant's intentions.
- Update the report with a sensitivity table, because the HBU conclusion now depends on a near-term event rather than a three-year horizon.