Building rate and sectional title insurance

Every year, ahead of the body corporate’s Annual General Meeting (AGM), owners should receive a copy of the Schedule of Replacement Values (SRV) usually included with the Agenda among items such as the financials, budget, etc.

Further information about understanding the actual Schedule of Replacement Values (SRV) can be found under the resources section of the Addsure website – CLICK HERE for more information.

It is not obligatory to reflect the “Building Rate Per Square meter” but owners need a benchmark in order to calculate the replacement values of their own sections and to estimate whether their own section is under-insured.

Over the years, valuers and quantity surveyors have relied on published building costs derived from credible sources. An annual publication, known as the Construction Handbook published by Quantity Surveyors, Davis Langdon (now AECOM) has always been an excellent reference resource.

There are quite a few “building cost per sqm valuation” definitions and models but to keep it simple, we work with a basic definition understood by most valuers who work in the South African sectional title environment when determining replacement value of the buildings.

For our purposes, the building cost rate per square metre is the actual construction cost at a given time including the cost of appropriate building services, e.g. air conditioning, electrical and so forth but excluding costs of site infrastructure development, parking, any future escalation, loss of interest, professional fees and Value Added Tax (VAT).

For example:

A building of 1,000 sqm costs R10,000,000 to build including VAT – this is the actual construction cost as quoted by a contractor.

By following the above definition, we remove VAT and divide by 1,000 sqm to arrive at our building cost per sqm.

Excluding VAT = R8,771,929.83

(R8,771,929.83 + VAT R1,228,070,18 = R10,000,000)

R8,771,929.83 divided by 1,000 sqm = R8,772 per sqm meter.

BUT, the actual insured sum or replacement value includes more:

  • Other common area improvements such as site infrastructure, parking, gates, etc. which we usually name “common area improvements”
  • Add 10% unless specified by a valuer.
  • Professional fees are usually around 12% of cost. This includes costs such as quantity surveyor, engineers, architect’s fees, planning costs, etc.
  • Demolition costs are the valuer’s estimated cost to remove all debris should the buildings be completely demolished. This is usually estimated between 3 and 5% of cost. We use 3% to be conservative.
  • By definition, we still need to add Value Added Tax (VAT) – a further 14%.

VAT 14%, without cumulative totals, 10% + 12% +3% + 14% = 39%, rounded off to 40%*

Therefore, the building rate of R8,772 per square meter plus an additional *40% added to meet the actual insured sum or replacement value.

The valuer or quantity surveyor normally sets out the summary as follows:

Square meters: 1,000

Building cost psqm: R8,772

Residential building

  8,772,000

Add: Common area items

     877,200

 9,649,200

Add: Professional fees (12%)

  1,157,904

10,807,104

Add: Demolition cost (3%)

      324,213

11,131,317

Add: VAT (14%)

   1,558,384

12,689,701

 

In this case, it equals a 45% increase.

The owner will divide his section’s sum insured by the stated square meters of his apartment and then derive a figure of R12,689 per square meter.

This is where many portfolio managers, trustees and owners misunderstand the building rate (construction cost) per square meter which in this case is actually R8,772 psqm.

The building construction cost is R8,772,000 and the total replacement value is R12,689,701.

Often owners in general meetings think that the building cost per square meter is R9,000 per square meter (for example) for this type of building and then incorrectly assume that R12,689 per sqm is the same thing. Then they resolve to reduce the building rate accordingly by 40% (for example). The result can be disastrous as, in effect, the buildings is then under-insured by 40% in this hypothetical example.

This is the main reason why we recommend that the SRV include a summary of the valuation or determination of value so the owners can see the bigger picture.

 

Author : Mike Addison

Contact Addsure – The Leaders in Sectional Title Insurance – to get fit and proper advice from advisors who understand sectional title. Contact us in Johannesburg on (011) 704-3858; in Durban on (031) 459-1795 and in Cape Town on (021) 551-5069