Buildings reinstatement valuations
By Rebeccah Dowell, May 14th 2019
Residential Property Reinstatement Valuations – Are you correctly insured?
Valuations carried out for companies in the residential management, PRS or student housing sectors, or for local authorities, housing associations or residents’ management companies almost always reveal that properties have been insured for less than their full replacement value.
Residential properties tend to be professionally valued significantly less often than commercial properties. Some never are.
Common reasons for residential properties being insured for less than their reinstatement value include:
- The declared value is based on market value at the time of purchase
- The value is based on the development cost (this is often the case with new-build flats)
- The building is listed or of historic importance
- The structure has been built from stone or has a stone veneer
- The property has been modernised or extended
- Fit-out costs have not been fully factored in
- A formal valuation for insurance purposes has never taken place
Can you insure for market value or development value?
It is very common for residential properties to be insured at their market value or original development value – either of which is likely to leave them underinsured. There is simply no correlation between a property’s market value and its insurable (reinstatement) value.
A reinstatement valuation is the estimated cost of replacing or rebuilding the property, should it be destroyed. Reinstatement costs vary from property to property, depending on their size, construction materials, location and style.
There is some correlation between a property’s development value and its reinstatement value. However, consideration must also be given to factors such as land acquisition costs, contract tendering and procurement times, one-off development costs that will not apply to reinstatement, and additional demolition and debris removal costs. The net effect of such factors can add between 10 and 15% to total reinstatement costs.
How to calculate reinstatement value
There is a fair amount of information on residential property reinstatement costs available on the internet, and one can calculate a guide figure simply by entering a property’s floor area and age.
Clearly, any estimate generated this way only reflects average reinstatement values and is unlikely to provide a particularly reliable figure for any particular property. For example, the estimate might not allow for the specifics of construction (e.g. modern methods of construction versus traditional structural masonry), whether the property is listed or has any unusual features, or the level of fit-out and building specifications.
Such considerations are especially important for new blocks of flats, where the insured party may be responsible for areas outside the shell and core of the building itself. On larger developments and estates, external site improvements such as walls, fencing or block paving for parking areas must be appropriately assessed. This, again, can add considerable cost to a project. The differing results produced by applying average rates against undertaking a formal professional valuation create a significant risk of underinsurance.
What about VAT?
Typically speaking, VAT is applicable on all new construction works. But the precise calculations can be quite complex, and if not handled correctly can lead to errors in valuation. For example, the correct application of VAT will depend on whether the property is commercial or residential, whether the landlord has elected the property for VAT, and whether the company that owns it is VAT registered. VAT may also need to be considered on professional fees and demolition contracts.
Energy-efficient plant or property can introduce further nuances, with discounts on standard rating available. Again, if the property owner is a charity, building works may be zero-rated. Although, underlining the vagaries of calculating an appropriate figure for VAT, a recent precedent suggests this may not always be the case.
We would always recommend that clients seek advice on VAT from an accountant or another appropriate professional. We would also suggest that they request a valuation report that includes a breakdown of each component in the reinstatement valuation (building value, external site improvements value, professional fees, demolition and debris removal costs). This allows appropriate application of VAT when confirming the reinstatement valuation for insurance purposes.
The above is taken from the article prepared by Gareth Williams for Lockton Real Estate.
About Rushton International
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