How a developer decides what to build on a plot by comparing two permitted schemes on revenue, cost, risk and speed rather than on preference.
Highest and best use is not a search for the grandest building a plot can hold. It is the test of which permitted, physically possible and financially supportable scheme produces the best result for the owner, once risk and time are included. The practical method is to take the two strongest candidates and run them through the same appraisal. This comparison shows how that decision actually divides.
The maximum area scheme at a glance
The scheme that uses as much of the permitted envelope as possible, typically a larger number of smaller units, a basement for parking and a construction cost at the top of the range. It maximises gross revenue and generally maximises absolute profit if everything sells or lets as planned. It also takes longer to build, needs more capital and depends on absorbing more units into the same market.
The lower density, faster scheme at a glance
A scheme that deliberately builds less: fewer, larger units, possibly no basement, simpler structure and a shorter programme. Gross revenue is lower, but so are cost, finance period and absorption risk. Profit per riyal of capital and per month of exposure can be higher, and the exit is quicker, which matters in an uncertain market.
Gross revenue
The maximum area scheme: Higher in absolute terms, because more saleable or lettable area is produced.
The lower density, faster scheme: Lower in absolute terms, though the rate per square metre may be better.
Cost per square metre
The maximum area scheme: Often higher, because basements, lifts, longer programmes and more services push up the rate.
The lower density, faster scheme: Usually lower, with simpler structure, less plant and a shorter preliminaries period.
Capital required
The maximum area scheme: Substantially more, and needed for longer before any revenue arrives.
The lower density, faster scheme: Less, with a shorter peak funding period and an earlier return of capital.
Absorption risk
The maximum area scheme: Higher, since more units have to find buyers or tenants in the same window.
The lower density, faster scheme: Lower, because fewer units need to be placed to complete the exit.
Sensitivity to cost inflation
The maximum area scheme: More exposed, because a longer programme gives prices more time to move against you.
The lower density, faster scheme: Less exposed, with a shorter construction period and fewer specialist packages.
Return measure that favours it
The maximum area scheme: Total profit, and profit on gross development value where demand is deep.
The lower density, faster scheme: Return on capital employed and profit per month of exposure.
Reversibility
The maximum area scheme: Low, since the design and the funding commit you early to the larger scheme.
The lower density, faster scheme: Higher, because a smaller scheme can sometimes be extended later if the envelope allows.
When the maximum area scheme wins
- A district with deep, proven demand for the unit type you are producing.
- An owner with the capital to fund a longer build and a slower absorption period.
- A market where the price per square metre is stable across a wide range of unit sizes.
- A plot where the permitted envelope is generous relative to the land price.
- A hold strategy, where the asset will be let and retained rather than sold quickly.
When the lower density, faster scheme wins
- A first project in the Kingdom, where speed of learning is worth more than scale.
- A market where larger units are underprovided and command a premium.
- Limited capital, or capital you want back quickly for the next project.
- A plot where a basement would be expensive because of ground conditions.
- An exit by sale rather than a long-term hold.
How to decide
Choose on return per unit of capital and per month of exposure, not on total profit, unless you have both deep demand evidence and the capital to sit through a slow absorption. Run both schemes through the same appraisal with the same assumptions, then test each with a fall in price and a rise in build cost. The scheme that still works under both pressures is your highest and best use, whatever the larger one promises on the base case.
You need four documents to settle this properly: an envelope study confirming both schemes are permitted, a test-fit layout with net areas for each, a cost plan for each prepared on the same basis, and revenue evidence by unit type from an accredited valuer or from your own letting research in that district. Without the same assumptions on both sides, the comparison simply rewards whichever scheme was estimated more optimistically.
Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.
Frequently Asked Questions
What does highest and best use mean for a development plot?
It is the use that is legally permitted, physically possible, financially supportable and maximally productive for the owner. All four tests apply together. A scheme that is permitted and buildable but cannot support its own cost fails, and so does a profitable idea that the plot is not designated for. The analysis compares realistic candidates rather than searching for a theoretical maximum.
Should I always build the maximum area a plot permits?
No. Maximum area maximises gross revenue, but it also maximises cost, capital, programme and absorption risk. On many plots a smaller, faster scheme delivers a better return on the capital you commit and a shorter exposure to market movement. Appraise both on identical assumptions and stress test each before deciding that bigger is better.
Who should carry out a highest and best use analysis?
In practice it is joint work: a licensed engineering office establishes what each scheme requires and produces test fits, a cost function prices them on the same basis, and an accredited valuer or your own market research supplies revenue evidence. A development manager pulls it together into one appraisal. The owner signs off the assumptions, because they drive the answer.
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