Building rate and sectional title insurance

(Updated 15 January 2025)

When managing sectional title schemes, understanding the concept of “building rate” is critical. Unfortunately, many portfolio managers, trustees and owners make costly mistakes by misinterpreting this figure during annual general meetings (AGMs). Let’s break down what a building rate is, how it differs from replacement cost, and the errors to avoid.

What is a building rate?

The building rate per square meter is a figure commonly used in construction and insurance to estimate costs. It reflects the contract or tender price for construction (at date construction commences), excluding VAT. This rate is often used as a benchmark for new building projects and is defined by the base construction cost without considering additional factors like professional fees, demolition, or value-added tax.

While this figure is a starting point, it is not the same as the replacement cost per square metre, which is crucial for determining the correct sums insured for the scheme.

What is the common mistake made with building rate per square metre?

A frequent error occurs when trustees or owners divide the total insured value (e.g., R100 million) by the total square meters of the property to calculate a building rate. They might conclude (assume) that the scheme is insured for, say, R20,000 per square meter, and compare this to an expected rate of R10,000 per square meter, assuming they’re over-insured. This assumption is incorrect and potentially dangerous.

Here’s why – the simple building rate per square meter excludes critical costs that affect the true replacement value of the property.

What should be included in the replacement cost?

The replacement cost per square meter accounts for more than just the base building rate. To arrive at an accurate figure, the following must be added:

• Common area replacement costs: Sectional title schemes often include shared facilities such as swimming pools, parking decks, paving, retaining walls, and recreational areas. These elements often add in excess of 20% to the total cost.
• Professional fees: Rebuilding after damage usually requires updated plans, engineering expertise, and professional oversight. These fees can range between 12% and 20% of the total contract price.
• Demolition and removal costs: Before reconstruction can begin, rubble must be cleared, and the site restored to a usable condition. Demolition costs typically add between five and seven percent.
• Value-Added Tax (VAT): VAT (currently at 15%) is applied to the total rebuilding cost, significantly increasing the figure.
• Escalation costs: These costs are usually added after replacement value is determined, however, often factored in. This can further skew the figures by another 20% or more.

Key takeaways for trustees and owners

• The building rate per square meter is not the same as the replacement cost per square metre.
• Ensure that all factors, common areas, professional fees, demolition, VAT, and escalations, are accounted for in the insured value (replacement value).
• Avoid using a simple division of the insured value by square meters as a benchmark without verifying what the figure represents.
• Engage with specialist insurance advisors to ensure your sectional title scheme is adequately insured.
• By understanding these distinctions and avoiding common pitfalls, trustees and owners can protect their schemes from financial shortfalls in the event of a disaster.

By following these guidelines, you’ll ensure your property is properly covered, safeguarding both its value and the financial well-being of its owners.

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