Key takeaways
- Highest and Best Use is the use of land that is legally permissible, physically possible, financially feasible and gives the highest land value.
- Compare the options using Residual Land Value so that the answers are in the same unit.
- In the example, the hotel gives the highest land value at THB 84 million, but when revenue falls by 10% the figure drops to THB 10.5 million. The highest-ranked option therefore still has to pass a resilience test and a funding test.
Owners of large plots often have an answer before the study begins. Some want a hotel because they like the idea; others want villas because a friend sold well. Land worth hundreds of millions is thus decided by feeling, when the question should be: working backwards from the money each type of project can generate, what is this plot worth most as?
The four tests, in order
- Legally permissible Zoning, FAR, OSR, height, setbacks, EIA, public access, and the conditions in the title documents.
- Physically possible Plot size, slope, load-bearing capacity, access, and water and electricity.
- Financially feasible The market can absorb it, prices and sales speed are supported by evidence, funding is available, and there is a suitable management team.
- Highest value Among the options that pass the first three tests, choose the one that gives the highest risk-adjusted land value.
The order matters, because calculating returns for a design the law does not allow wastes time and can lead to the wrong land price. Preliminary plans should therefore start from the saleable area that is actually achievable once the regulations have been checked.
Residual Land Value
Residual Land Value = completed project value − development cost − selling and administration costs − finance costs − the developer's required profit
The result is the maximum land price a developer can pay and still achieve the target profit. If the calculated figure is lower than the market land price, that type of development does not add value, unless the investor accepts a lower return than the target.
Example: a 20-rai plot, 4 options
Hypothetical example. All options have passed the legal and physical tests. Figures are in THB million. For the villas and the condominium, selling and administration costs are set at 10% of sales value, target profit at 20% and finance costs at 5% of construction cost. For the hotel, stabilised-year NOI is 70, the cap rate is 8%, selling costs are 1%, target profit is 15% and finance costs are 5% of construction cost.
| Item | Villas | Condominium | Hotel |
|---|---|---|---|
| Project value | 900.00 | 1,300.00 | 875.00 |
| Construction cost | (540.00) | (880.00) | (620.00) |
| Selling and administration costs | (90.00) | (130.00) | (8.75) |
| Finance costs | (27.00) | (44.00) | (31.00) |
| Target profit | (180.00) | (260.00) | (131.25) |
| Residual Land Value | 63.00 | (14.00) | 84.00 |
| Project value down 10% | 0.00 | (105.00) | 10.50 |
The last row cuts project value by 10% and recalculates selling costs and target profit proportionately; construction cost is unchanged. For the hotel, this means NOI falls to 63.
Immediate land sale option. Suppose a buyer offers 70 and the appraised value is 60. The seller bears SBT of 3.3% = 2.31, half of the transfer fee 0.60 and a 2% brokerage fee = 1.40. Net proceeds before corporate income tax are 65.69.
How to read the results
In the example, the condominium has the highest project value but gives a negative land value. A high project value therefore does not mean the best use of the land. The hotel gives a Residual higher than the buyer's offer, but it requires construction investment of THB 620 million and is highly sensitive: a 10% fall in revenue wipes out almost all of the land value.
The answer in this example is therefore not simply "build a hotel". It is that the hotel is the front-runner if there is funding, management capability and reliable NOI evidence. If not, compare it with a land sale, which yields net proceeds of about THB 65.69 million, or look for a joint-venture structure. The decision criteria must be set before the results are seen, so that numbers are not chosen to favour the original intention.
Common sources of distortion
| Issue | How to fix it |
|---|---|
| Using the same target profit for every option | Adjust for risk, duration and income pattern |
| Using selling prices from projects that are not comparable | Adjust for location, unit size, quality, sales period and discounts |
| Forgetting plot-specific costs | Access road, land filling and levelling, water and electricity systems, and EIA work |
| Ignoring time | After choosing the final 2 options, build a monthly cash flow and review the IRR and Peak Funding |
| Relying on a single cap rate | Test several levels of cap rate and NOI |
Next steps
- Check the legal and physical constraints of the plot before the architect starts detailed design
- Set 3–5 options, including a land sale or continued holding
- Calculate Residual Land Value using the same structure
- Test revenue, costs and time, then see which options remain positive
- Check that the best option has real funding sources and a management team
- Carry out a detailed Feasibility Study only for the final 2 options