Due to the ongoing impacts of Covid-19, building costs have escalated well beyond normal trends and the industry faces significant supply chain issues. New Zealand is also currently experiencing a significant rise in the inflation rate.
This raises an important consideration for commercial property owners and may require a rethink of when to obtain a valuation. Up until recently, the general approach taken by GSI is to maintain a valuation that is, at the maximum, two years old at the time of the policy renewing.
Ideally, we encourage clients to undertake a valuation every 12 months; however, the commercial reality is that commercial property owners are conscious of overburdening their tenants with this cost.
Considering the present supply chain issues and rise in building costs, and the replacement value of the properties our clients look after, we would recommend that valuations should be obtained annually - at least until escalating reinstatement costs settle.
To provide a recent example:
A valuation was completed on 1 January 2021, and the reinstatement estimate was $8,500,000. The valuer then applied an inflationary provision of $595,000 (circa 7%).
As noted in the valuation, this amount was estimated on the basis of a loss occurring on the last day of a 12 month insurance period: so ultimately, and in the absence of advice to the contrary from the valuer, the valuation catered in theory for inflationary pressure through to 1 January 2022 only.
Unfortunately, in light of current market changes, this valuation is highly unlikely to be sufficient to cater for inflationary pressures during reinstatement of the property following a major loss.
If a valuation was not undertaken in 2022 and inflationary pressure equalled a modest 10%, noting we are regularly seeing inflation provisions of circa 20%, by 1 January 2023 the client would be underinsured by at least $900,000. This would fail to take into account an escalation in costs during the reinstatement period, which is another issue to consider that obtaining valuations annually will not totally address, unless of course the valuer has advised they have considered inflation not only for the insurance period but for the total rebuild period, including the likes of, clearing debris, consent process and all other matters that attach to reinstatement of a commercial building.
The indemnity period is also a factor. As most clients know, this period needs to be sufficiently long to entirely reinstate the property and find tenants. In this example, we had a 36 month indemnity period in place.
It’s important to note that this is a complex issue and there are numerous factors to consider. We encourage our clients to minimise their risk of underinsurance by contacting their GSI broker to discuss their situation, and to explore the need to undertake a new valuation sooner than may be expected.