Managing a strata property requires understanding its value for purposes such as insurance and financial planning. However, terms such as “strata insurance valuation” and “market valuation” are often confused, even though the two concepts are distinct and serve different functions.
An estimate of market valuation is the likely selling price of the property in the current real estate market. On the other hand, an estimate of strata insurance valuation is the likely cost of rebuilding or reinstating the insured property in the event of substantial damage or loss.
Using the wrong valuation when arranging building insurance can expose an owners’ corporation to underinsurance or overinsurance. This is particularly important for apartment buildings, commercial strata properties and mixed-use developments throughout Sydney and NSW.
In this article, we explain the differences between strata insurance valuation and market valuation, what each assessment includes, and the importance of getting an accurate assessment of replacement costs.
1. What Is a Strata Insurance Valuation?
A strata insurance valuation is the estimated cost to rebuild or reinstate a property following an insured event. In the context of strata insurance, the term “strata insurance valuation” is largely interchangeable with building cost valuation.
The main function of a strata insurance valuation is to aid an owners’ corporation in setting the building sum insured in its strata insurance policy to the correct level.
While a traditional property valuation focuses on the selling price of the property, a strata insurance valuation focuses on the costs of constructing and reinstating the building.
A professional assessment may consider:
- Estimated building reconstruction costs.
- Demolition and removal of existing debris.
- Labour and material costs.
- Architects, engineers and other professional fees.
- Council, authority and statutory fees.
- Construction cost escalation and inflation.
- GST and other applicable costs.
- Shared facilities and relevant common property.
For example, an apartment block in a desirable Sydney location might have a high market value thanks to the value of the land and surrounding amenities. However, the costs to rebuild the structure might vary due to factors including the block’s size, construction type, material costs, the design of the building, and access conditions.
Because of this variation, a strata insurance valuation in Sydney should be based on reinstatement costs rather than sale value.
2. What Is a Market Valuation?
A market valuation is an opinion by a registered valuer about the estimated price that a particular property might achieve if it were sold in the open and competitive market at a given point in time.
It considers the maximum amount a buyer might reasonably pay and the least amount a seller might accept, assuming that each is acting freely and is not under any pressure to conduct the sale.
A market valuation may be necessary for various reasons, including:
- Buying or selling residential and commercial property.
- Mortgage and lending assessments.
- Refinancing and financial planning.
- Investment decisions.
- Property portfolio assessments.
- Certain legal and financial matters.
A property valuer may take into account several factors when performing a market valuation of a property, including:
- Location and neighbourhood demand.
- Recent comparable property sales.
- Land size and development potential.
- Building condition and presentation.
- Property layout and usable space.
- Local amenities and infrastructure.
- Current market conditions and buyer demand.
As an illustration, two similar apartment buildings may have extremely different market values, with the one nearer to Sydney CBD, transport and commercial links, services and facilities commanding a premium value.
It is therefore important to distinguish between the cost of rebuilding a property and its market value.
3. Strata Insurance Valuation vs Market Valuation: Key Differences
Although both assessments relate to property, their objectives and calculations are different.
| Comparison | Strata Insurance Valuation | Market Valuation |
|---|---|---|
| Main purpose | Establish an appropriate building sum insured | Estimate the property’s selling price |
| Main focus | Rebuilding and reinstatement costs | Current real estate market value |
| Land value | Generally excluded from the building replacement calculation | Considered where relevant |
| Construction costs | A major consideration | Not the primary basis |
| Location | Relevant to access, site conditions and rebuilding costs | Important for demand and sale price |
| Professional fees | Included where required for reinstatement | Not generally calculated as rebuilding expenses |
| Common property | Considered within the relevant insurance scope | Reflected in the property’s market appeal and value |
| Typical users | Owners corporations, strata managers and insurers | Buyers, sellers, lenders and investors |
The main difference is simple: market valuation determines what a property would sell for, while strata insurance valuation determines the cost to rebuild the insured property.
Neither assessment should automatically be substituted for the other.
4. Why Is Market Value Not Suitable for Strata Building Insurance?
The most common mistake made by property owners is assuming that the building’s market value is what is insurable for that building.
Market value can include land value and other factors that do not relate to costs to rebuild a building.
Consider an apartment building in a well-established suburb of Sydney. Its market value may be influenced by:
- Proximity to Sydney CBD.
- Nearby schools, shops and public transport.
- Land scarcity and development potential.
- Local property demand.
- Rental income and investment appeal.
If the same building was significantly damaged, the factors above would not impact how much it would cost to physically rebuild it.
In that instance, the owners corporation would look at the costs to demolish it, the materials and labour to build it, professional fees, approvals, and the cost to reinstate the building.
If the building has an inappropriate market value as sum insured, the insurance may not cover the cost of physically rebuilding it.
An accurate insurance valuation provides the owners corporation with more information on which to base its decision about the building sum insured. It does not, however, guarantee a claim outcome for any insurance event, which is subject to the terms of the policy, the exclusions and the insurer’s assessment.
5. What Happens If a Strata Building Is Underinsured?
Underinsurance occurs when the available building insurance cover is insufficient to meet the relevant repair or reinstatement costs following an insured loss.
For an owners’ corporation, this can create serious financial challenges. Some potential consequences include:
1. Financial shortfalls
If the insured amount is insufficient, the owners corporation may face a funding gap when arranging reinstatement works, depending on the policy terms and claim outcome.
2. Additional financial pressure on owners
A significant shortfall may create pressure on the owners corporation to arrange additional funding, potentially affecting individual lot owners.
3. Delays in reinstatement
Insufficient insurance funds can complicate the planning, funding and delivery of rebuilding work.
4. Unexpected costs
Construction cost increases, professional fees, demolition and statutory requirements may contribute to a higher reinstatement cost than initially estimated.
An accurate insurance valuation helps the owners’ corporation make a more informed decision about the building’s sum insured. It does not guarantee a particular claim outcome, which remains subject to the insurance policy, exclusions and insurer assessment.
6. What Does a Professional Strata Insurance Valuation Include?
A replacement cost assessment is an understanding of the costs involved in reinstating a building to its pre-loss condition. For a strata title property in NSW, some factors to consider include:
Building construction and specifications
An assessment of the rebuilding cost may depend on the size and design of the building, the construction type, finishes, services and the components of the building structure.
Demolition and debris removal
In the event of a major building loss, the remaining structure may have to be demolished and the site cleared before the new construction can begin.
Labour and material costs
The cost of rebuilding is impacted by the available construction labour and materials, the condition of the site and the demands of the work, trade skill requirements, and the location of the site.
Professional and authority fees
The rebuilding of a structure may require the professional services of an architect, structural engineer or quantity surveyor.
Escalation and inflation
There may be a time lapse between the valuation date and the date the policy is issued. It is prudent to include an allowance to account for inflation.
GST and applicable charges
The insurance assessment should account for applicable fees and taxes.
Archi-QS compiles insurance valuation reports, taking into account reconstruction costs, demolition, debris removal, professional fees, escalation, inflation and GST allowances.
7. How Often Should a Strata Insurance Valuation Be Updated in NSW?
Construction costs change, and building regulations can also change over time. Relying on an old insurance valuation can lead to an inaccurate estimate of the cost to reinstate the property.
The NSW Government advises that a qualified valuer should obtain a new building valuation every 2 to 5 years.
Archi-QS recommends that insurance valuation reports be reviewed on an annual basis to assist owners and corporations in determining changes to construction costs and to help alleviate the risk of underinsurance and overinsurance.
It may be of greater importance to obtain an updated valuation when any of the following occur:
- Construction labour and material costs have increased significantly.
- Major renovations or building upgrades have been completed.
- Common property or shared facilities have changed.
- Significant defects or remediation works have affected the building.
- The existing valuation is several years old.
- The owners corporation is reviewing its insurance arrangements.
It is important to understand the difference between the legal requirement to maintain appropriate strata building insurance and the recommendation for how often a new valuation should be obtained. The NSW Government states that valuations should be obtained every 2 to 5 years to provide guidance, and there are strict building insurance and minimum threshold requirements in NSW legislation.
8. Why Use a Quantity Surveyor for a Strata Insurance Valuation?
A quantity surveyor is qualified to estimate construction costs, including materials and labour. This is the type of cost estimation that is required to determine how much it would cost to reinstate a strata building.
A quantity surveyor can evaluate construction specifications and details to assess the quantities required for a replacement cost assessment.
An independent report can provide strata managers and owners’ corporations an assessment of replacement cost for insurance purposes.
Archi-QS provides insurance valuation reports for residential and commercial properties. With its specialist knowledge in the area of building reconstruction costs, Archi-QS helps property owners determine the appropriate insurance level.
With a background in quantity surveying and building consultancy, Archi-QS provides strata managers and property professionals in NSW with the support they need.
To find out more about Archi-QS Insurance Valuation Reports, please visit our website.
9. Choosing the Right Valuation for Your Property
The right valuation depends on the decision you need to make.
If you are selling or buying an apartment, or arranging finance on an investment property, then a market valuation may be required.
However, if you are managing a strata scheme and need to assess the building insurance, you will need a replacement cost assessment.
For strata managers and owners corporations, understanding the difference between valuation types is essential for making the right insurance decisions, monitoring changes in rebuilding costs and managing the risks of underinsurance.
If your strata building’s insurance valuation has not been reviewed for some time, you may wish to have it assessed based on the current construction specifications and reinstatement costs.
Need an Insurance Valuation Report for Your Strata Property?
Archi-QS offers independent insurance valuation reports to help strata managers, strata title owners corporations and property owners assess the replacement cost of their buildings and evaluate their insurance needs.
Visit Archi-QS Insurance Valuations to learn more or request a fee proposal.
Frequently Asked Questions
1. What is the difference between strata insurance valuation and market valuation?
A strata insurance valuation is an estimate of the cost to rebuild or reinstate the insured building. Market value is an estimate of what a property could sell for. Insurance valuation considers the cost of construction whereas market valuation considers location, land value and market demand.
2. Does strata insurance valuation include land value?
No, usually not. A strata insurance valuation estimates the cost to replace the building and applicable insured property, not the market value of the land. The scope depends on the insurance requirements and policy.
3. How often should a strata insurance valuation be updated in NSW?
The NSW Government recommends that you have your building re-valued by a qualified valuer every 2 to 5 years. To reduce the risk of being under or over insured, Archi-QS recommends an annual review to reflect changes in construction costs.
4. Can a quantity surveyor prepare a strata insurance valuation report?
Yes. A suitably qualified quantity surveyor with appropriate construction cost experience can prepare a replacement cost estimate. They work out how much it would cost to reinstate a property based on their knowledge of building materials, labour, construction methods and professional fees.
5. What happens if a strata building is insured below its replacement cost?
If a building is underinsured, the cover may not be sufficient to meet the costs of reinstatement following an insured event. The financial consequences depend on the specifics of the insurance policy and claim. The owners corporation may be left to fund any shortfall.
Conclusion
Strata insurance valuation and market valuation are not the same thing, and it’s important for property owners, strata managers and owners’ corporations to know the difference.
A market valuation is an opinion of what a property will sell for. An insurance valuation is an estimate of what it will cost to rebuild the building that is insured. A proper assessment will enable owners corporations to make informed choices about their building insurance and reduce the risk of inadequate cover.