Specialist properties
Avison Young anticipates that rateable values of specialist properties, either valued on the replacement cost methodology or receipts and expenditure basis, will experience uplifts in RV in the 2026 rating list.
REPLACEMENT COST VALUATION
Our national rating team advise public sector and specialist organisations located across more than 7,000 sites, delivering emergency services, healthcare, education, defence, power, and communications.
Government specialist hereditaments do not have an active rental market and therefore are valued using the ‘contractor's’ method.
The capital cost of replacing the building with a modern equivalent is calculated and then adjusted by an appropriate age/obsolescence allowance to reflect the actual property. The adjusted replacement cost is converted to an annual rental value (rateable value) by applying a decapitalisation rate which is set by the government for each revaluation cycle.
To assess likely movements in rateable values for the 2026 revaluation we have evaluated three fundamental elements of the contractor's valuation basis: construction costs, age/obsolescence allowances and the decapitalisation rate.
In England overall, we anticipate the potential for increases of over 30-40% for specialist properties valued on replacement cost. We anticipate this could be lower in Wales and they have already frozen the decapitalisation rate.
SPECIALIST SECTORS - TOTAL RV CHANGES BETWEEN 2023 - 2026
IS THE CONTRACTOR'S VALUATION BASIS STILL APPROPRIATE?
While the contractor's method of valuation is still an acceptable method of valuation for many specialist hereditaments, when considering the value of a property, vacant and to let in the open market, it is also producing rateable values that continually increase over time. In reality, however, demand for certain types of property has significantly diminished over the same period. Avison Young continues to explore alternative valuation methods to adopt in the wake of recent case law, to ensure that rateable values are not too remote from reality and can be justified.
RECEIPTS AND EXPENDITURE
Often termed the third method, the receipts and expenditure basis is typically applied where a property’s value is difficult to assess because there is no or limited rental evidence. Including assessments in the central list, approximately 12% of the total RV pool in England and Wales is valued using this approach.
It is most relevant when dealing with specialist operations who derive a commercial profit. An understanding of a businesses’ financial performance is essential to determine, at the valuation date, the rent a hypothetical tenant would be prepared to pay to deliver a fair going concern margin (ie. one which reflects the intricacies of running the business).
Avison Young acts across many specialist operations valued on a receipts and expenditure basis including hotels, specialist leisure facilities, commercial car parks, cinemas, theatres, museums, public houses, airports, water companies, telecommunications networks, and rail networks.
As with all bases of valuation, receipts and expenditure has pros and cons, and caution must be exercised in ensuring this residual valuation is not overstated with relatively minor changes in inputs often resulting in severe swings in valuation. Expertise is needed to justify the inputs and to understand known operational factors which will affect future performance.
In the 2023 rating list many assessments valued using receipts and expenditure were significantly reduced in value because of the operational restrictions they faced at the April 2021 valuation date, a point in time where the country was still under the final Covid-19 lockdown.
The most obvious were hotels, hostels, cinemas and indoor leisure facilities who were not permitted to re-open until the 19th May 2021. It was recognised that any tenant would seek a significantly discounted rent given the continued uncertainty of the pandemic, even though they might accept that the roadmap for removal of the lockdown was known and the vaccination programme was proving successful.
Across the hotels sector values fell by 25% from a total 2017 list RV pool of £2.3bn to total 2023 list RV pool of £1.8bn. Locations affected by business and tourist travel restrictions, namely London and the major cities, as well as hotels servicing international airports, received the largest discounts. Staycation hotels, who would experience a quicker bounce back, received the lowest discounts.
The vast majority of properties valued on a receipts and expenditure basis for the 2026 revaluations will be affected by three adverse valuation factors:
1. All Covid-19 allowances will be removed.
2. We are now valuing at April 2024. This means that because of Covid-19, the underlying performance growth across many sectors has not been picked up since April 2015, the valuation date for the 2017 list
3. After a very sluggish 2021, many sectors, most particularly in hotels and leisure, returned to healthy trading performance much quicker than forecast, and by 2023 performances in many cases were above pre Covid-19 levels.
There are of course some significant mitigation offsets, most notably the substantial cost and wage inflation over the last two years which has eroded margins across all sectors.
The Valuation Office Agency continues to push this valuation methodology for commercial airports, which have traditionally been valued on a replacement cost valuation. Again, the substantial allowances built into many of the commercial airport valuations for the 2023 list will be lost. When coupled with the change in valuation approach, the largest commercial airports will experience some of the largest increases.
Of the c. £10bn total RV pool increase Avison Young predicts for England in the 2026 rating revaluation, we estimate that almost £4bn of that increase will arise from valuations undertaken on a receipts and expenditure basis. It is therefore essential that the new government continues to offer support through tempering the resultant rates liability increases.