NHS Healthcare
Specialist NHS Healthcare properties are largely valued adopting the Contractors valuation method, where the capital cost of replacing the building is calculated. This modern equivalent replacement value is then adjusted by an appropriate age and obsolescence allowance to reflect the actual property. The adjusted replacement cost is converted to an annual rental value (rateable value) by a percentage figure known as the statutory decapitalisation rate (decap rate).
To assess the likely level of rateable value increases for the 2023 revaluation it is important to assess the anticipated changes in the three fundamental elements of the Contractors valuation basis; construction costs, age and obsolescence allowances and the decap rate. We will deal with each of these in turn.
Building costs for NHS hospitals between 2015 (the valuation date for the 2017 rating list) and 2021 (the valuation date for the 2023 revaluation) have increased on average by over 27%. This will vary significantly from location to location but in general, substantial increases in building costs are expected due to the perfect storm of supply and labour shortages resulting from brexit and the pandemic. Older hospitals, built prior to 2010, are likely to see even larger increases of up to 50% in the building costs adopted, as the Valuation Office seek to redress the difference between the lower cost base used for older hospitals in previous revaluations and the higher cost per metre of new healthcare facilities.
We expect to see a similar significant increase in the building costs applied to health centres and surgeries for the 2023 revaluation, of over 35%.
In previous revaluations, the percentage allowances for age and obsolescence have increased by 1% per annum between Lists, for each age group. By 2023, 6 years will have passed since the last revaluation and we therefore expect the current age and obsolescence allowances to increase by 6%, which will temper the anticipated uplifts in building costs.
The third element of the contractors valuation basis is the statutory decap rate, which is multiplied by the adjusted capital replacement cost of the building to derive an annual equivalent rental value. The decap rate is reset at each revaluation and has a significant effect on rateable values. The decap rate for healthcare premises for the 2017 rating list is currently 2.6% in England and 2.1% in Wales.
The methodology for setting the decap rate is largely based on the cost of securing capital to build an alternative property, adjusted to allow for the positives and negatives of renting v ownership. As many specialist properties are owned and occupied by the public sector, interest rates from the Public Works Loans Board are often used as a guide for the setting of the decap rate. In Q2 2015, the weighted average interest rate was 4.46% and this reduced to 3.57% by Q2 2021, a reduction of over 15%. In addition, building costs have increased between rating valuation dates by some considerable margin and as it is the Government's intention to ensure the business rates tax base remains fairly constant following a revaluation, the Governments in England and Wales could afford to reduce the decap rate.
Welsh Government announced in November 2021 a reduction in the Welsh decap rate for health properties from 2.1% to 1.9%. However in May 2022 Westminster announced that the decap rate for health in England would remain the same at 2.6% for the 2023 revaluation.
Therefore, in Wales, despite the likelihood of building costs on many NHS healthcare properties increasing by up to 50%, this will be offset in part by higher age and obsolescence allowances and a lower decap rate. Rateable value increases will be higher in England, without the mitigating affect of a reduced decap rate.
We have shown below our anticipated average shifts in rateable value for both hospitals and health centres/surgeries.
NHS HEALTHCARE PROPERTY TYPE / PERCENTAGE SHIFT IN RATEABLE VALUES FOR ENGLAND
NHS Hospitals Built Post 2010
NHS Hospitals Built Pre 2010
NHS Health Centres/Surgeries
HEALTH SECTOR: ESTIMATED RATEABLE VALUE PERCENTAGE INCREASES PER REGION