This paper investigates how new EU sustainability regulations, specifically the
EU Taxonomy, Corporate Sustainability Reporting Directive (CSRD),
Sustainable Finance Disclosure Regulation (SFDR), and Corporate
Sustainability Due Diligence Directive (CSDDD), are reshaping highest and best
use (HBU) valuation in real estate. A literature review on Highest and Best Use,
sustainable real estate valuation and real options theory is conducted. A
theoretical model is developed for HBU analysis under regulatory constraints,
with formal stochastic calculus derivations illustrating how real options can be
valued. Investors must account for regulatory uncertainty and technological
change, which elevate the value of flexible strategies. A real options approach
enables the quantification of the value of waiting to retrofit, expanding green
features, switching asset use, or abandoning projects in response to stochastic
factors, such as energy prices or carbon costs. This study integrates the
impacts of EU sustainability policy with real estate valuation principles and
real options financial theory. A mathematical derivation for real estate
valuation under regulatory uncertainty is presented. The results inform
appraisers, investors, and policymakers on aligning valuation methods with
sustainability objectives.