Understanding Reinstatement Cost Assessments: What They Are and Why They Matter

The problem is that commercial property insurance is only as useful as the figure it’s based on. And for many landlords, that figure is wrong. Often significantly so.

A reinstatement cost assessment addresses that gap. It establishes what it would actually cost to demolish what remains of a building following a total or near-total loss and rebuild it to the equivalent standard, using current labour rates and construction costs. That number is what your commercial property insurance should be built around. Without it, you’re effectively guessing.

What a Reinstatement Cost Assessment Actually Involves

A reinstatement cost assessment, sometimes referred to as a property insurance valuation, is a formal exercise carried out by a qualified surveyor. It is not the same as a market valuation and it is not the same as an estimate of the building’s current sale value. It is a specific calculation of rebuilding cost.

The assessment considers the cost of:

• Demolishing and clearing the existing structure following a loss event
• Rebuilding to the same floor area, specification and use
• Meeting current building regulations, which may be more demanding than those that applied when the building was originally constructed
• Professional fees for architects, engineers and other consultants (such as Party Wall or Heritage) involved in the rebuild
• Any abnormal or site-specific costs, such as restricted access, specialist materials or unusual construction methods

For older buildings, listed buildings, or properties with non-standard construction, these figures can look quite different from what an owner might expect. A Victorian warehouse in Southampton or a purpose-built industrial unit on the edge of Winchester may have rebuilding costs that bear little resemblance to its market value in either direction.

Why Market Value and Reinstatement Cost Are Not the Same Thing

This is one of the most common sources of confusion in commercial property insurance, and it’s worth addressing directly.

Market value reflects what a willing buyer would pay for a property in its current condition. It takes into account location, demand, comparable transactions and the income the property generates or could generate. It has nothing inherently to do with what it would cost to rebuild.

In some cases, market value significantly exceeds reinstatement cost. A warehouse on a prime industrial estate might command a high price because of where it sits and the demand for that type of space, but the structure itself might be relatively straightforward to rebuild.

In other cases, reinstatement cost substantially exceeds market value. An older commercial building with solid stone walls, timber floors and period features may be worth a modest amount on the open market, but the cost of faithfully rebuilding it could be considerably higher. Listed buildings, in particular, often sit in this category.

Basing commercial property insurance on market value, or on an outdated reinstatement figure, leaves you exposed in ways that may only become apparent at the point of claim.

The Risk of Under-Insurance

Under-insurance is more common than most landlords realise and the consequences of it are often misunderstood.

When a property is under-insured and a significant claim is made, the insurer may apply what is known as the principle of average. This means the insurer pays only the proportion of the loss that the sum insured bears to the actual reinstatement cost. If your building would cost £2 million to reinstate and you are insured for £1 million, the insurer may pay only half of any claim, regardless of the total loss involved.

This matters even for partial claims. A major roof fire that causes £400,000 worth of damage might result in a payout of only £200,000 if average is applied. The balance falls to you.

Construction costs have also moved considerably in recent years. A reinstatement figure that was reasonably accurate five years ago may now be materially out of date. This is not a theoretical risk. It is a real and recurring issue we see when assessing properties.

It is common for Landlords or owners of property to commission a reinstatement cost assessment at purchase but then neglect any professional review of this assessment for years, which increases the risk of underinsurance over time.

When Should a Reinstatement Cost Assessment Be Commissioned?

There are specific moments when a property insurance valuation should be a priority and some general principles that apply throughout ownership.

As a starting point, a reinstatement cost assessment should be in place:

• When you acquire a commercial property, so that your insurance is correctly calibrated from the outset
• When you take on a lease where insuring obligations fall to you as tenant or where you need to verify the landlord’s figure is adequate
• Where the property is unusual in its construction, age or materials. Stone, timber frame, pre-cast concrete and the like all warrant particular attention
• Where listed building consent would apply to any rebuild, adding cost and complication to the process
• Where significant works have been carried out that have changed the building’s specification or floor area

In terms of frequency, RICS guidance recommends a formal reassessment every three to five years under normal circumstances, with an annual desktop review or check of figures. Where construction costs are moving quickly, as they have been in recent years, more regular reviews make sense.

What Happens Without One

We speak to landlords who have been managing commercial buildings for years without ever having commissioned a formal reinstatement cost assessment. In many cases, the figure on their policy was set at the outset by a broker’s rule-of-thumb estimate or simply uplifted each year in line with the policy’s built-in index-linking.

Index-linking is useful. It does not replace a proper assessment.

The index is applied to whatever figure was used as the base and if that base figure was wrong; too low, based on market value rather than reinstatement cost, or simply never properly verified; then the index-linking preserves the error rather than correcting it. After several years, the gap between the insured figure and the actual reinstatement cost can be substantial.

The other scenario we see is landlords who commissioned an assessment some years ago but have since carried out significant works i.e. extending the building, adding a mezzanine, upgrading the roof, improving the services. Each of those changes affects reinstatement cost and a figure produced before the works were completed is no longer reliable.

The pitfalls of the ‘Desktop Assessment’

We often see reinstatement cost assessments being commissioned on a ‘desktop basis’ which essentially means that the surveyor does not visit the site but instead relies on readily available information, such as; google maps, floor plans, planning and marketing information.

Whilst these assessments are invariably more cost effective to procure, in our view it is a false economy. For the following reasons:

• The surveyor never visits site so must rely on the quality of the information provided.
• Information provided may be out of date, incomplete or just inaccurate.
• Online resources tend to be historic and adaptations or changes to the property may have been made.

As a result the reports produced off the back of desktop assessments will likely contain figures that are based on assumptions and are ultimately more likely to be inaccurate, leading to either under or over insurance of the property.

Desktop reinstatement cost assessments are also riddled with caveats and limitations which reduces the value of the report in terms of reliance and protection.

These desktop assessments can have their place when conducting annual reviews but as a starting point we always recommend carrying out a more formal full reinstatement cost assessment which allows the surveyor to combine the desktop element with an actual physical inspection of the property, which provides a much more valuable and reliable report.

How We Can Help

Reinstatement cost assessments are a core part of what we do at Bressummer A.R.K. We carry them out for commercial landlords across Hampshire, London and the South of England, on everything from single industrial units to multi-let office buildings and mixed-use portfolios.

The process is straightforward. We inspect the property, gather the relevant information about construction, specification and floor area and produce a formal report setting out the reinstatement cost figure in accordance with RICS guidance. That figure can then be used as the basis for your commercial property insurance.

We also offer continuity of service whereby we are appointed to conduct the initial formal assessment, then follow up further formal assessments every three years with annual desktop reviews and checks annually. This allows you to have peace of mind to ensure your property always has the correct level of insurance.

We are also happy to speak with landlords who simply want to understand whether their current arrangements make sense. Whether that’s a property they’ve held for some time or one they are in the process of acquiring.

If you’d like to discuss a reinstatement cost assessment or if you’re not sure whether your current insurance cover is properly calibrated, we’re always happy to have an initial conversation.

There’s no obligation. Contact us for an initial chat to receive some practical, straightforward advice to help you make an informed decision.