How much is your rental property worth?
For many landlords, the natural answer is the amount they paid for it or what it might sell for today. However, neither figure necessarily tells an insurer how much it could cost to rebuild the property following a major fire, explosion, flood or other serious insured event.
Market value and rebuilding cost measure two different things. Confusing them can leave a landlord with an inaccurate buildings sum insured and potentially serious consequences when making a claim.
What is market value?
Market value is broadly the price a buyer may be willing to pay for a property.
It can be influenced by:
- Location
- Local housing demand
- Rental potential
- Transport connections
- Schools and amenities
- The size of the plot
- The condition of the property
- Comparable local sales
- Interest rates and wider market conditions
The value may include a significant amount for the land and location. A relatively ordinary building in a highly desirable area could therefore have a very high market value.
Market value is important when buying, selling or financing a property, but it is not usually the correct basis for setting the buildings sum insured.
What is the rebuilding cost?
The rebuilding cost—also called the reinstatement cost—is an estimate of what may be required to reconstruct the building following a severe loss.
It is not simply the price of bricks, timber and roof tiles. Depending on the property and the basis of the assessment, it may need to allow for:
- Demolition of the damaged structure
- Removal and disposal of debris
- Labour and construction materials
- Architects’, surveyors’ and engineers’ fees
- Planning and building-control costs
- Site access and safety requirements
- The effect of neighbouring buildings
- Reinstatement of services
- Specialist workmanship or materials
- The time required to design and complete the work
- Relevant taxes where applicable
Rebuilding a single damaged property can also be more complicated than constructing several new homes on an open development site. Contractors may need to work within a confined residential street, protect adjoining buildings and comply with current requirements during reconstruction.
The rebuilding cost may be higher or lower
Landlords sometimes assume that rebuilding cost must always be lower than market value. That is not necessarily true.
A modest property in an area with relatively low sale prices could still be expensive to rebuild. Specialist materials, difficult access or non-standard construction may make the reinstatement cost higher than the property’s market value.
Conversely, a property in a sought-after area may have a market value far above its rebuilding cost because much of the sale price relates to the land and location.
There is no reliable fixed percentage that can be deducted from market value to produce an accurate rebuilding figure.
Why underinsurance matters
If the buildings sum insured is lower than the correct rebuilding cost, the property may be underinsured.
The effect will depend on the wording of the individual policy and the circumstances of the claim. Some policies may apply an average condition or another form of proportionate reduction.
For example, if a property should have been insured for substantially more than the figure declared, an insurer may not necessarily pay the full cost of a smaller claim simply because it falls below the stated sum insured.
Other outcomes may be possible depending on the policy, the information provided and how the error occurred. Landlords should therefore never assume that the only risk is being unable to fund a complete rebuild.
The correct approach is to check the policy wording and provide a properly considered rebuilding figure from the outset.
Overestimating is not the ideal solution
It may be tempting to avoid underinsurance by selecting an unnecessarily high figure. However, this does not mean an insurer will pay more than the actual insured loss.
An excessive figure may also affect the premium without providing a corresponding benefit.
The objective is not to choose the largest possible sum. It is to establish a reasonable and supportable reinstatement cost that reflects the property being insured.
When should the rebuilding cost be reviewed?
A figure should not remain unchanged indefinitely.
A review may be appropriate when:
- The property has been extended
- A loft, garage or basement has been converted
- Additional bedrooms or bathrooms have been created
- The building has undergone substantial refurbishment
- The use or configuration of the property has changed
- Specialist fixtures or finishes have been installed
- Construction costs have risen
- The existing assessment is several years old
- A property has been added to a portfolio
- Previous information about the building may be inaccurate
Index linking can help a sum insured respond to general changes in construction costs, but landlords should not assume that it will correct a figure that was inaccurate at the beginning.
Properties that may need specialist attention
Generic rebuilding-cost tools may provide useful guidance for some conventional properties, but they may not be suitable in every case.
Additional attention may be needed for:
- Listed or historic buildings
- Properties in conservation areas
- Non-standard construction
- Thatched properties
- Houses converted into flats
- Blocks of flats
- Mixed residential and commercial premises
- Buildings with extensive flat roofing
- Properties with difficult site access
- Unusual extensions or outbuildings
- Large HMOs
- Properties with specialist architectural features
A professional reinstatement cost assessment may be appropriate where standard assumptions do not reflect the building accurately.
What about flats?
A landlord who owns a leasehold flat may find that the building is insured under a policy arranged by the freeholder, management company or right-to-manage company.
That does not mean the landlord should simply assume everything is correct.
The landlord should establish:
- Who arranges the buildings insurance
- Whether the entire block is included
- How the rebuilding cost has been calculated
- Whether improvements inside the flat are included
- What excesses and conditions apply
- Whether landlord-owned contents require separate protection
The lease and policy documents should be checked carefully. Responsibility can vary, particularly where properties have been converted or ownership arrangements are complex.
Does the position differ across the UK?
The fundamental distinction between market value and rebuilding cost applies throughout England, Wales, Scotland and Northern Ireland.
However, construction costs, building standards, planning requirements, access and the availability of specialist labour can vary between locations. A figure suitable for one part of the UK should not automatically be applied to an apparently similar property elsewhere.
The assessment must reflect the actual building and its location.
Check the figure before renewal
Landlords should look beyond the renewal premium and examine the buildings sum insured shown on the schedule.
Ask:
- Where did the current figure come from?
- When was it last assessed?
- Have alterations been completed since then?
- Does the description match the property?
- Is index linking included?
- Would a professional assessment be appropriate?
NetRent works with Clear Insurance Management and its experienced property-insurance team to help landlords examine their insurance requirements properly.
If your landlord insurance is approaching renewal, send us your existing documents. We can review the property information, cover, terms and premium and discuss whether the rebuilding figure requires further attention.
Telephone: 01352 721300
Email: insurance@netrent.co.uk
The market value tells you what the property may be worth to a buyer. The rebuilding cost helps determine whether the building is adequately insured. Landlords need to know the difference.
NetRent does not provide legal advice. This article represents our understanding of rental property law.