While market value is a common concept, you may not be all too familiar with rebuild costs. Yet these terms are very closely related and should both factor into your decisions when seeking a building insurance policy.

Read on to learn what rebuild costs are, how they can differ from market value, and what you need to do to ensure your property is sufficiently insured.

What is market value?

Market value is an estimate of the price buyers would be willing to pay should the property exchange hands on the day of the valuation. In other words, it’s the sale price of your property if you sold it today – and it’s calculated using a variety of factors, including:

• Property location
• The physical condition of the property
• The size and layout of the property
• The state of the property market & buyer demand
• Comparable sales
• Zoning laws, property taxes and other legal aspects
• Development potential

It may seem logical to insure your home or commercial property at market value. Then, should you need to make a claim, you’ll receive roughly what you’d get if you sold the property. However, while this sounds fair, market cost isn’t the only indicator of property value.

Another way to assess the worth of a building is to establish the rebuild costs.

What is rebuild cost?

Rebuild cost, also known as rebuild value, reinstatement value, or reinstatement cost, is the sum that would be required to completely rebuild your property from scratch exactly where it currently stands if it were completely destroyed.

Whereas market value considers tangible elements of your property in a very general sense, such as its size and location, it doesn’t drill down into the actual material value of a building. Rebuild cost, on the other hand, does – including:

• Construction materials costs: The stone, cement, lumber, roof tiles, insulation, furnishings etc.
• Professional / labour costs: Architects, engineers, chartered surveyors, builders, electricians, plumbers, etc
• Costs associated with meeting modern building codes and regulations
• Planning permit fees
• The cost of temporary accommodation for you during the rebuild
• The cost of clearing the remains of the existing structure to make way for the rebuild

Can market value be higher than rebuild costs?

On the whole, market value tends to be higher than the rebuild costs of a UK property. There are several reasons for this:

• Location & land value: Market value can be significantly increased if the land the property is built on is valuable, if the general location is desirable (think London or Padstow), or both. While these aspects are factored into rebuild valuations insofar as they impact the cost of reconstructing your building, they don’t consider the intangible value of the land or location.
• Market demand: The price tag of your home if put for sale can also be significantly inflated by supply and demand dynamics. Conversely, rebuild valuations are non-transactional, and if there is no buyer or seller, demand can’t be a factor.
• High ROI features: Sometimes, adding special features to a property, such as a swimming pool or green heating system, increases the market value of the home by an amount greater than the cost of installation.

That said, market value isn’t always higher than rebuild costs! Blindly insuring your property at market value can, in some cases, go very wrong.

Can rebuild costs be higher than market value?

Although not quite as common, there are several scenarios in which rebuild costs can exceed or even dwarf the market value of a property, including:

• If your property is listed or classed as having historical significance: Rebuild valuations are based on the goal of faithfully restoring a property with exacting detail. That means using all the same materials, and possibly even archaic techniques. As historic or listed properties often incorporate specialised construction materials and architecture, their rebuild value can skyrocket when compared to a standard, non-listed property.
• Special architectural features: It’s important to note that a property needn’t be listed or officially categorised as historic to have a high rebuild value. Those with unique architectural elements may still require niche craftsmanship during reconstruction. Compare, for instance, a character cottage with a thatched roof built in the late 1700s to a standard new build brick house. The former’s rebuild value will almost certainly far exceed its market value, while the latter’s will not.
• Non-standard materials: Any high value or non-standard materials, such as imported stone or exotic hardwoods, can also increase rebuild costs to the degree they exceed market value.
• Exemplary build quality: In the absence of architectural marvels or rare materials, rebuild costs can still eclipse market value if construction required a lot of skilled labour, resulting in above average build quality.
• Low property value area: In some regions, property might be quite expensive to build despite being comparatively affordable to purchase.

Should you insure your property at rebuild value or market value?

So, should you insure your property at market value or rebuild value? Well, before you make that decision, it’s important to weigh up the pros and cons of each option.

There are two key factors to consider.

1. Insurance premiums: Choosing whichever is highest will increase your insurance premiums – as the coverage offered is greater.
2. Sufficient cover: Choosing whichever is lowest may mean you’re not entirely covered if the worst were to happen and your property was destroyed.

In instances where rebuild costs are higher than market value, owners may see the immediate benefit of lower premiums worth the risk, adopting an “it probably won’t happen to me” attitude. However, from fires to floods to other natural disasters – emergencies do happen.

If you choose to insure your property at market value (despite it being lower than projected rebuild costs), and the worst does happen, you’ll be underinsured – and will only receive a fraction of the money you need to rebuild your home.

Potential consequences of underinsurance for commercial properties

For commercial properties damaged beyond use, underinsurance can lead to several issues:

• Financial loss: The property owner may need to cover the shortfall between the insurance payout and the actual rebuild cost, leading to significant financial strain.
• Loan covenant breach: If the property is mortgaged, underinsurance might breach loan covenants, potentially leading to penalties or even foreclosure by the lender.
• Business interruption: Insufficient coverage can extend the downtime of business operations, leading to prolonged loss of income and potentially driving the business into bankruptcy.
• Tenant turnover: Leaseholders dissatisfied with delays and inadequate facilities during the rebuild may choose to relocate, resulting in a loss of rental income and the added cost of finding new tenants.
• Increased insurance premiums: Future insurance premiums could rise significantly if an insurer views the underinsurance as a risk factor, impacting the property owner’s operating expenses.
• Regulatory compliance issues: There might be regulatory requirements for minimum insurance coverage. Non-compliance could result in fines or other penalties.
• Difficulty in selling property: A history of underinsurance issues can make the property less attractive to potential buyers, impacting its market value and saleability.
• Additional borrowing costs: To cover the rebuild cost shortfall, property owners might need to secure additional loans, often at higher interest rates due to the perceived risk.
• Devaluation of property: Inadequate rebuild might lead to a property being restored to a lower standard than originally, affecting its market value and rental potential.
• Stakeholder relations: Relationships with investors, partners, and stakeholders could be strained due to the financial and operational impact of underinsurance, leading to loss of confidence and potential withdrawal of support.

All expert advice suggests that, where rebuild value exceeds market value, it’s essential to insure the property for the full cost of restoration from scratch. The question is, how do you know if your property’s rebuild cost or market value is higher? Let’s discuss.

What is the rebuild value of my property?

If you recently purchased your property, you will find the current rebuild valuation either in your mortgage documentation, or, failing that, the deeds of ownership.

For property that isn’t a new purchase, the most accurate and therefore safest way to calculate the rebuild value of your property is to book a reinstatement cost assessment by experienced surveyors licenced by the Royal Institute of Chartered Surveyors (or RICS).

Rule out underinsurance with Cardinus

Cardinus are RICS-approved and specialise in comprehensive reinstatement cost assessments to ensure your property is adequately covered. Our team of experienced surveyors offers nationwide coverage, bringing their expertise directly to your door.

Don’t leave your property’s value to chance. Over 80% of the properties we survey have insufficient cover, and our reinstatement cost assessment service has helped to rectify upwards of £8 billion in underinsurance across the UK.

Book your reinstatement cost assessment with Cardinus – and secure the peace of mind you deserve.