Determining replacement values – the body corporate’s responsibility

[Updated: 19 November 2024}

The body corporate must determine the replacement value of the buildings professionally at least every three years and ensure that the schedule of replacement values is done on an annual basis (before each annual general meeting). Sectional Title legislation, regulations and prescribed rules make this very clear.

One of the first questions that arises “Then who should do the valuation and who should arrange it?”

Prescribed Management Rules 23.(3) and 23.(4) are the guiding rules in this regard.

They state:

“23.(3) A body corporate must obtain a replacement valuation of all buildings and improvements that it must insure at least every three years and present such replacement valuation to the annual general meeting.

23.(4) A body corporate must prepare for each annual general meeting schedules showing estimates of –

(a) The replacement value of the buildings and all improvements to the common property; and

(b) The replacement value of each unit, excluding the member’s interest in the land included in the scheme, the total of such values of all units being equal to the value referred to in sub-rule 4(a).

To answer the question, we can only look to these two rules. As one can see, not much detail.

Suitably qualified professional

It is highly recommended that a suitably qualified valuer or quantity surveyor, who carries sufficient professional indemnity cover and who has a clear understanding of what an insurance broker requires in terms of underwriting and layout, be engaged for the task.

Addsure provides clients with a list of valuers with whom we are satisfied that mostly meet these criteria. This list can be obtained upon request or by clicking on the blue button at the bottom of the article.

There are various opinions on who should arrange such, and some suggest that the insurer or insurance broker should arrange it. Experience has taught us that this is not a good idea and would place the insurer or insurance broker in a position of conflict of interest.  We feel that the arrangement of the valuation should be at arm’s length and, as such, be arranged by the body corporate independently or with the assistance of the managing agent.

How should trustees be dealing with this, especially ahead of policy renewal and during the years in between valuations?

The first step is to ascertain when a valuation was last undertaken. If a valuation has not been done for three years or more, it is time to engage a valuer.

If the valuation has recently been undertaken, these figures are used, with a little tweaking, usually under the guidance of the insurance advisor. The policy will have a stated “sum insured” which should reflect the replacement value as shown in the valuation, plus any additional sums insured.

The valuation should reflect in a format, as per this example below:

• R 100 million – Replacement value (sum insured)
• R 8 million – Escalation (for the year of insurance), estimated at 8%
• R 12.96 million – Escalation (for the period of redesign and reconstruction), estimated at 12%

This means that the valuer states that as at present, replacement cost is R100 million, but if the buildings were destroyed in six months (halfway through the year of insurance), half of R8 million (an extra R4 million) can be added to the sum insured to account for building inflation for that period.

The third figure (R12.96 million) starts to run from the date of loss until reconstruction is completed, i.e. inflation is accounted for during the period it takes to complete the reinstatement.

The policy schedule should reflect the same figures plus any additional sums that the owners or banks seek in respect of their estimations or needs.

Let’s consider the forthcoming year 2 at policy renewal time:

Insurers (insurance company) will automatically increase the sums insured under advice to the insured (the community scheme), usually by 10% to15%, depending on recent market trends or inflation costs.

Addsure is usually guided by the BER building inflation rates. The Bureau of Economic Research (BER) at Stellenbosch University is the recognised authority on a wide range of economic indicators based on research and the collection of data. For larger schemes, we do suggest that interim figures are obtained from the valuer so that more thought is given to sums insured during the years in between valuations.

Trustees are not obliged to accept the automatic increase invited by the insurer, but should consider it under advice from their insurance advisors. In this regard, Addsure has a very specific letter of advice format, including the relevant information to assist in this process.

In layman’s terms

The buildings are presently insured per last year’s valuation at R100 million.

The insurer invites renewal based on the sum insured of R110 million (10% default increase).

However, data indicates building cost inflation was 6% last year, with the outlook so far at similar rates going forward.

The trustees would be safe by increasing the sum insured by, say, 8%, i.e. by R8 million instead of R10 million.

Next AGM

At the next AGM, when presenting the schedule of replacement values, the chairperson may include the following statement and minute:

“The trustees used the information from last year’s professional valuation, plus a conservative increase based on official inflation data and professional insurance advice to support their decision.”

This trustees’ decision taken ahead of the AGM, should also be recorded in the minutes as a trustee’s resolution, for example (Fictitious inflation figures used):

 “The trustees resolved that, based on current available BER Inflation figures for the past year (2024 = 8%), the sums insured should be increased by 5% rather than 10% as invited by the insurer.”

“It was further resolved to follow Addsure’s advice and renew the policy with XYZ Insurance Co per the attached letter of advice dated 5 May 2024 for a sum insured of R100 million.”

Note to managing agents

We urge managing agents to deal with this correctly, attending to the proper preparation of schedules of replacement ahead of AGMs and consideration of sums insured on policy renewal dates.