Rebuild cost vs market value: What landlords need to know about insurance
When arranging landlord insurance, knowing how much your property should be insured for is key. It’s common for business owners, including residential landlords and commercial landlords to make the mistake of insuring their property for its market value rather than its rebuild cost.
Understanding the difference between the two should help you get the right level of cover and avoid being underinsured or overinsured.
What’s the difference between rebuild cost and market value?
Rebuild costs are not the same as your property’s market value. It’s important for landlords and property owners to know the difference between them.
Rebuild cost (reinstatement value)
The rebuild cost, also known as the reinstatement value, is the amount of money it would cost to rebuild your premises if it was destroyed beyond repair and you had to rebuild it back from the ground up. For example, it could be destroyed by an accidental fire or bad storm. Learn about loss of rent insurance which could help protect against loss of income if you rent out your property and a disaster strikes.
The total amount shouldn’t just include the building and labour costs, but also all the factors involved, such as clearing the site, all materials and professional fees for surveyors and local councils.
But you don’t need to take into consideration the value of the land the property stands on, as this won’t need to be ‘rebuilt’.
Market value
Market value is the price your property would fetch in the market, based on the price that buyers are willing to pay and sellers are willing to accept. It is influenced by factors like location, demand and neighbourhood. It’s basically the price that would be determined if a professional were to value your premises to put it on the market to sell.
Why is are rebuild costs often lower than market value?
Rebuild costs are usually lower than market value because the two figures measure very different things.
Rebuild cost reflects what it would cost to reconstruct the property from scratch, including materials, labour and professional fees. It doesn’t include the land your property sits on.
The market value is the price the property could sell for on the open market, including the value of the land, location, local demand, school catchment areas and other factors that can significantly drive up the price.
When might the rebuild cost be more than the market value?
In some cases, the reinstatement cost of a property can be more than the market value. This could happen if the property is listed, located in an area with lower property prices but high construction costs, or has unique architecture (for example, it’s a listed building). It could also apply to properties built with rare or premium materials, such as imported stone, antique timber or other expensive materials, which can greatly increase reconstruction expenses.
Why is the rebuild cost important for landlords?
When you take out landlord insurance, your insurer needs to know how much your property should be insured for in case it is destroyed and you need to make a claim. It’s your responsibility to get the rebuild cost right.
The rebuild cost affects how much your property should be insured for and the amount of your insurance premium. If it's calculated too low, you could be underinsured and if it’s calculated too high, you could be paying too much for your landlord insurance. You should review your rebuild cost regularly to make sure you have the right level of cover.
It’s particularly important to make sure your rebuild costs reflect cost of rebuilding your property now – not 5 or even two years ago because not only can materials go up in costs every year but also labour costs.
For more information on landlord and tenant obligations, check out our helpful insurance guide.
How to calculate your rebuild cost?
The most accurate way to calculate your rebuild cost is to get a professional RICS rebuild survey, but you could use a rebuild cost calculator if you own a commercial property to get an estimated figure, if you are a members of RICS.
RICS survey
If your home is listed, thatched, made of non-standard materials or recently extended, you may need to invest in a professional RICS rebuild survey.
A RICS building survey evaluation involves a RICS-approved chartered surveyor carrying out an assessment to calculate how much it would cost rebuild your property from scratch. The assessment is based on a number of factors, including how big your property is, the type/quality of construction, building materials and labour costs.
What building factors could affect rebuild cost?
The cost to rebuild your property can be affected by several things about your property.
- Size - Larger properties generally cost more to rebuild than smaller ones due to the more materials and labour needed.
- Location - Rebuild costs can vary a lot across the UK. For example, areas like London often have higher labour and material costs, whereas small cities and towns in areas like the Northeast may be more affordable.
- Construction type and materials - The method of construction can play a major role. Standard brick-built properties will typically cost less to rebuild than homes made with specialist materials like specific style of stone. Listed properties need specialist renovators, so will likely cost more.
- Recent extensions or renovations - If your property has been extended or recently renovated to the newest materials, the rebuild cost may be higher to reflect the updated layout, additional space, or upgraded finishes.
Comparing landlord insurance quotes with Bionic
If you want to help protect your property in case of a disaster, it’s a good idea to consider building insurance as part of comprehensive landlord insurance. At Bionic, our knowledgeable brokers can help you compare insurance quotes from trusted insurance providers, so you can choose cover that suits your property and protects your business asset(s). Policies vary per insurer, and limits and exclusions apply. Always check your own policy schedule to see what cover is and isn’t included.
We can also help with other business essentials such as business energy, broadband and more.
Rebuild cost FAQs
How often should landlords review their rebuild cost?
You should consider reassessing it at least every two years, arguably you should do it every year due to inflationary increases in building and labour costs, or after major renovations or extensions.
What happens if I underinsure my property?
Your property won’t be fully protected against risk. If a disaster were to happen – like a fire or flood and you need to make a claim, you may not receive the amount, leaving you to cover the shortfall. This could become very expensive, very quickly. And if your property is severely underinsured, this could lead to the claim being denied or the policy being cancelled due to misinterpretation of the risk.
