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BRICKS, BREXIT AND THE LATEST DATA AROUND REINSTATEMENT COSTS's Will Molland explains why fluctuations in reinstatement costs can be as volatile as the financial markets and reveals how accurately insured your portfolio of residential properties is currently likely to be.

An interesting thing happened in the construction industry following the financial crisis of 2008. As we all know, a lot of building work ceased at the time, but a knock-on effect of this was the moth-balling of many brick manufacturing plants.

A few years later when construction work started to pick up again, there was a significant shortage of bricks. In fact, low supply and increased demand meant that the cost of bricks rocketed. Data from the RICS’ Building Cost Information Service (BCIS) shows brickwork costs rising by as much as 26% in 2014 alone, with a 40% increase in the past four years coupled with significant regional variations. Other materials have also seen sharp spikes in price with reinforcing steel up by 20% and joinery timber by 35% in 2017.

How fascinating, but ‘so what' you might say! Well let’s take the House Rebuilding Cost Index for example, which is widely used by insurers to make annual revisions to sums insured and "is based on an average of house types”. This index is applied to blocks of flats by many insurers as a safeguard, but in reality, the fluctuation in cost of building materials in some areas and for some property types can differ considerably from index-linking, as can the cost of labour. Factor these variations in and over a period of time and the inaccuracy of reinstatement costs can become significant, even if a professional assessment has been carried out in the past and index-linking applied. BCIS themselves, who produce the index, recommend “that the rebuilding cost is checked regularly”.

What’s more, we are now going through another period of economic uncertainty as a result of Brexit. We’ve already seen a dramatic impact on imported building materials resulting from the fall in value of the pound and RICS are now warning that a ‘hard Brexit’ could dramatically affect the flow (and therefore the cost) of construction labour. Of course, all of this is still a bit “uncertain”, but what it all points to is the fact that reinstatement costs can be just as volatile as the financial markets.

What does this mean for you?

Perhaps the most important thing for Property Managing Agents to understand in all of this is the likely position with regards to your portfolio right now, in terms of the accuracy of building sums insured. I am sure you have all heard the much-quoted statistic of 80% of UK properties being underinsured. However, this figure, calculated by BCIS, is not only 6 years out of date, but was also derived from research into commercial properties only. So, anyone quoting you these figures is certainly not painting either a current or an accurate picture.

At we work very closely with the insurance industry and assess the reinstatement costs of around 10,000 properties every year. Our latest data for residential properties reveals some useful insights.

To begin with, we can say that around one in every 10 residential properties is insured for a figure that is reasonably accurate. So that’s a staggering 90% that are not, but that does not mean they are all underinsured.

One thing that is often not mentioned is overinsurance. This is where the property sum insured is more than it should be. When a property is overinsured, your client will be paying a higher insurance premium than they need to. According to our data, just over 2 out of every ten residential properties are overinsured, on average for around 120% of the correct reinstatement cost. We find that some properties can be insured for more than double the correct amount.

Of course, it is underinsurance that can have the most severe consequences for your clients. Claims disputes over hundreds of thousands and sometimes millions of pounds as a result of underinsurance can occur. Just a few months ago the Guardian newspaper featured a report it said would “alarm people across the country” about a claimant being almost half a million pounds out of pocket following a property fire. The reinstatement cost had been set using a free online calculator, but the figure fell way short of what the insurer believed it would cost to rebuild from scratch. Typically, there was also some confusion around the inclusion of VAT in the rebuild cost, which we will touch on a little later.

According to our data, almost 7 in every ten residential properties in the UK are underinsured. What is even more concerning is that on average, underinsured residential properties are only covered for around two-thirds of their correct reinstatement costs. So, if you don’t already have a programme of professional rebuild cost assessments in place there is a strong chance that 7 in every ten properties in your residential portfolio are a significant insurance claims disaster waiting to happen. In other words, our latest data shows that your clients are highly likely to be exposed to major financial risk.

What can be done?

Firstly, we believe it is really important to understand the basis upon which any reinstatement cost assessments are carried out, in order to have greater confidence in their accuracy.

We have already briefly mentioned VAT, which we find is often an area that is misunderstood, by property owners, insurers and even by Chartered Surveyors. In general, when it comes to residential properties, VAT is not applied to a new build property or to a 100% rebuild of a property, as they are zero-rated. However, if the property is only partially destroyed, VAT would normally be charged on the rebuild and, therefore, consideration of this needs to be taken into account when deciding how much to insure a property for.

On the basis that no one can predict a full or partial loss of a building, we tend to say it may be prudent to consider including the VAT element within the building sums insured. Additionally, if the residential property has outbuildings, swimming pools, and so on, these can also be subject to VAT for rebuilding purposes and, therefore, it is normally recommended to include the VAT element for all outbuildings of this nature. At we have recently added a White Paper to the Property Managing Agent’s section of our website, which you can download free-of-charge. It includes examples of VAT calculations on commercial as well as residential properties and highlights the complexity that often surrounds this issue.

Secondly, as BCIS suggests, regular reviews of reinstatement costs are essential given the volatility that exists around construction costs and the fact that index-linking cannot be entirely relied upon.

The desktop and portfolio approach

We are aware that a number of Property Managing Agents are now utilising desktop assessments of reinstatement costs to ensure buildings sums insured are as accurate as possible.

In general, these follow on from an initial site assessment, as part of an ongoing review programme. This makes sense, given the volatility around reinstatement costs already mentioned. However, at we have also found that desktop assessments can in most cases provide a highly accurate Rebuild Cost Assessment report from the very outset. The benefits of this in terms of keeping costs to an acceptable level for your clients are clear.

In addition, we have also found we can deploy a more sophisticated approach for the benefit of Managing Agents, by taking the knowledge around our wider data, applying it to portfolios of properties and then recommending a risk-based programme of assessments, both site and desktop based, that are targeted, highly cost effective and reliable.

Rebuild Cost Assessment Ltd is a ‘Regulated by RICS’ organisation. This year we are delighted to have become an ARMA Partner as we seek to make professional assessments of reinstatement costs on residential properties more affordable and far easier to implement.

Please visit our website for more information about our services and sign up for a Property Managing Agents account. We look forward to seeing you all at future ARMA events.

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