Two houses in the same street, similar age and condition, can be worth quite different amounts. One sits on a wide rectangular block that could be split into two lots. The other sits on a narrow, falling site with a sewer main through the back yard. The dwellings are close to identical. The land under them is not. Market value is assessed on the highest and best use of a property, not simply on what happens to be standing there today, and on some sites that difference is where most of the value sits.

What highest and best use means

Highest and best use is a defined concept rather than an optimistic one. For a use to qualify it has to pass four tests at once. It must be physically possible on the site. It must be legally permissible under the planning scheme and under the title. It must be financially feasible, meaning the finished product covers the cost of getting there with the margin a developer would require. And among the uses that survive those tests, it must be the one that produces the highest value.

Most properties fail early, and that is an ordinary answer. A standard house on a standard lot in a low density zone has a highest and best use of continued residential occupation, and the valuation proceeds on comparable house sales. The concept only does real work where a site could plausibly carry more than it does: a large block, a corner allotment, two street frontages, a tired cottage in a pocket that has been redeveloping around it.

What the planning scheme allows

In Queensland, what can be done with a parcel is governed by the local government’s planning scheme, made under the state planning legislation, together with the overlays sitting across it. Brisbane City Plan applies inside the city boundary, and each surrounding council has its own. The scheme puts every parcel in a zone, and the zone code sets the uses anticipated there and the standards development must meet, including minimum lot sizes and frontages for new lots.

Two further layers usually decide the answer. Overlays impose constraints that cut across zoning, and locally the common ones cover flood and overland flow, traditional building character, waterway corridors, transport noise and bushfire hazard. Then there is the level of assessment: some development is accepted outright, some is code assessable, and some is impact assessable, which brings public notification and third party appeal rights. Subdivision, known in Queensland as reconfiguring a lot, sits inside that framework, and a proposal complying with the codes carries a very different risk profile to one asking the council for a significant departure.

Splitter blocks and small subdivisions

The common residential case is the block big enough to become two. Whether it genuinely can turns on more than area, so a valuer works through the practical questions:

  • Area and dimensions. Each proposed lot must meet the minimum area and frontage in the applicable code, and both must end up a workable shape. A block large enough on area but too narrow for two compliant frontages is not a splitter.
  • Topography. A steep fall, a rock shelf or an awkward angle adds retaining and earthworks cost, and that comes out of what a buyer will pay.
  • Access. Every new lot needs legal and practical access, with driveway grades that work and a crossover the council will accept.
  • Services, easements and overlays. Sewer alignment matters more than most owners expect, and a registered easement, a flood overlay, character controls or a protected tree can add real cost or rule the split out entirely.
  • The existing house. Its position decides whether it can be retained on one of the new lots or has to go, and that single point often decides whether the numbers work.

Potential that adds value now, and potential that does not

A valuation is an assessment at a date, on the controls and market conditions in force then. Potential is reflected in value only so far as a buyer in that market would pay for it. Where the numbers stack at current prices and build costs, where the approval path is reasonably clear, and where buyers are competing for similar sites, the potential is priced in and the sales evidence shows it.

Where it depends on a rezoning that has not happened, on costs falling, on prices rising, or on assembling a neighbouring parcel, it is speculative. Speculative potential is not ignored, but nor is it treated as though the approval already exists. A property is also never worth less than its existing use, so a house with unrealised potential is underpinned by its worth as a house. The report should make plain whether the figure carries any component for potential, and on what evidence.

Why the house can be worth less than the land

On a genuine redevelopment site the buyer is buying land. The dwelling contributes nothing; it is an item to be cleared, so demolition, disconnection and asbestos handling are deducted rather than added. Valuers describe that as land value less the cost of removing the improvements, and it is why a perfectly habitable house can add nothing to the assessed figure.

The reverse also happens. Where a character overlay protects a pre-war dwelling from demolition, the house is not optional at all, and the site’s realistic future is retention with work behind or beneath the existing form. That can put the land below an unconstrained neighbour, and it is why a demolition assumption should never be made from the street.

How a valuer evidences a site with potential

The evidence is the same in kind as for any other valuation: settled, analysed sales of comparable properties. What differs is how they are analysed. Sites bought for redevelopment are commonly compared on a rate per square metre of site area, a rate per achievable lot, or a rate per developable unit, so parcels of different sizes can be measured against each other. Whether a development approval stood at the time of sale matters too, because an approval removes risk and time, and the market pays accordingly.

A feasibility, working back from the value of the finished product through construction cost, professional fees, infrastructure charges, holding and selling costs and a profit and risk allowance, cross checks that evidence. It stays a check rather than the driver, because small movements in the assumptions swing the residual land figure a long way. Where feasibility and site sales disagree, that disagreement is itself a finding, and the report should say so.

If a block might be worth more than the house sitting on it, or a decision to sell, hold or develop turns on that question, call the practice on 07 5550 4055 and talk it through before the decision is made.