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VIEWProperty

Looking at the property owners’ business

Accommodating cautious lenders Finding the middle ground when it comes to insurance policies

Plus VAT? To add or not to add tax onto property values and rents?

Tackling metal theft Fighting back with smart technology

Over the Channel Looking to invest in Europe? Aviva can help

SPOTLIGHT:The state of real estate, topical trends and best practicesby Aviva Investors

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EDITORS LETTER

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EDITOR’S LETTER

Matters of the moment

Welcome to a broad-ranging edition of Property View, published by Aviva for property owners and the broker community.

We open with an overview of current markets in the UK and mainland Europe by Aviva Investors, one of Europe’s largest property investment managers. The team also shares its insights on three sector trends – shorter commercial leases, the environmental agenda and tenant insolvency – and explores best practices when working with managing agents; key to sound risk management.

Metal theft continues to dominate the headlines, with vacant buildings especially at risk. SitexOrbis, specialists in empty property solutions, advises on preventive measures, including the use of new videofied alarm systems.

We are also grateful to Barrett Corp & Harrington, a leading supplier of building insurance valuations, for tackling the big issues around three little letters, VAT.

If you need to know whether or not to add tax to property values and rents, you’ll find sound advice inside. Coming full circle, tenant insolvency, a trend highlighted by Aviva Investors, is explored further in PricewaterhouseCoopers’ quick guide.

We hope you find our third issue of Property View useful. If there are topics you would like covered in the future, just let us know. Please send your thoughts and comments by email to b2bdigital@aviva.co.uk

Thank you.

With thanks to: Martyn Barrett and Roger Corp Directors of Barrett Corp & Harrington

Colin Davison Corporate Sales Manager, SitexOrbis

Xxx Xxxxx [to be listed alphabetically]

TO BE ADDED

AVIVA INVESTORS

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The state of real estate by Aviva Investors

Aviva Investors is one of Europe’s largest property investment managers, taking care of some £23 billion of real estate funds. The specialist team provides an overview of current property owner markets, highlights three topical trends and sets out key factors behind sound risk management: the contract arrangements and relationship with managing agents.

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Market notesThe global recovery of prime real state continues, but risks remain present particularly for secondary properties. What follows is a macroeconomic view of the UK and European markets as at summer 2011.

In the UK• Location is everything. Although investors

continue to show an interest in real estate, this is confined to prime and best secondary properties. The strongest recovery to date is in Central London and the City.

• The property rent decline appears to have ended. According to the IPD (Investment Property Databank) UK Monthly Property Index, rents have remained static for around nine months.

• Prime rents for shops and offices are showing some signs of recovery, but appear to be flat in the industrial sector. The highest rent increases are in the Central London office markets. West End rents have increased by 6.8% over the past 12 months, while City rents are up 11.3%.*

• The above rent increases shouldn’t be seen as a general UK trend. Slow economic recovery and imminent government cuts mean there’s uncertainty as to the strength of demand for commercial real estate space in non-London office markets, as well as retail and industrial generally.

• As a general outlook, constrained property development means relatively tight supply conditions. This will support a recovery in prime rents when demand picks up. But anything other than a subdued improvement outside of the more internationally-facing market of Central London seems unlikely in the near term, given a weak job market and suppressed consumer spending.

*Source: CBR Investors’ data.

In Europe• The prime markets have seen continued

improvement, but secondary markets remain weak.

• Although prime rental markets have generally displayed significant resilience through the downturn, vacancy rates are high by historical standards. However, an increasing proportion of markets have achieved rental growth and further decline is only likely in Europe’s weakest markets.

• The core markets of Benelux, France, Germany and the Nordics remain strong.

• While core Europe, especially Germany, is expected to achieve a good rate of growth, several countries will continue to struggle. Economic contraction is expected in Greece, Ireland, Spain and Portugal throughout 2011.

+6.8% increase in London West End rents over the past 12 months

The core markets of Benelux, France, Germany and the Nordics remain strong.

Economic contraction is expected in Greece, Ireland, Spain and Portugal throughout 2011.

3 Tenant insolvenciesTraditionally, there are two main types of unoccupied buildings:

void properties, with no lease in place, and vacant properties, where a lease exists but the tenant is absent. In both cases, it’s generally straightforward to see who’s responsible for the unoccupied building (the property owner in the first case and tenant in the second). The difficult financial climate has made prevalent a third, more complicated type of unoccupied building, caused by tenant insolvency.

Aviva Investors has found that, when administrators are called in as a result of tenants going insolvent, they do not always comply with the lease covenants, including imposed insurance regulatory requirements around internal and external inspections for unoccupied properties. Indeed, the administrators may not even be aware of these requirements and their purpose.

As a first step, it’s worth informing administrators, in writing, of the insurance requirements and requesting to see at least quarterly copies of the inspection logs to ensure the administrators are complying with the requirements. If this is not forthcoming, then a careful way forward is essential. Act too firmly and a property owner may be construed as repossessing the building, with potentially undesirable repercussions. The property owner may lose any benefit remaining under the lease and, in the UK, is likely to incur now hefty Business Rates (Local Authority Rates), following the restriction on Empty Rates Relief which took effect on 1 April 2009. (See www.businesslink.gov.uk for further details and a tool to estimate your property’s Business Rate.) To compound matters, a property owner risks becoming an involuntary bailee for any tenant goods remaining in the property.

Aviva Investors adopts a two-prong approach to tackle this issue. To address the cause of the problem, it insists on stringent tenant vetting, with full credit checks and sight of proper references from previous landlords. This task is handled by its professional managing agents – the subject of the article’s final piece – and should significantly reduce the risk of a tenant becoming insolvent and an administrator being called in. If the worst case does happen and the asset is not being properly managed by appointed administrators, Aviva Investors may then offer to act on behalf of the administrator to ensure any insurance requirements are met. It is careful to stress – in writing – that it’s not repossessing the property.

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AVIVA INVESTORS

Top three trends

1Shorter commercial lease termsWith vacancy rates high due to the

recessionary environment, the balance of power has shifted between property owners and tenants. This is evident in the shorter lease terms being negotiated across markets today. A five to six year term for commercial premises is becoming the norm when, once, 25-year Full Repairing and Insuring (FRI) leases were standard. Exceptions to this general trend include the renting of large warehouses and retail outlets where tenants prefer the stability of a long lease.

Another factor may soon come into play. On the balance sheet, a lease is currently an asset for a tenant, but UK Government proposals (planned amoritsation rules) may turn this on its head. A lease could become a liability.

Given the competitive climate, Aviva Investors has looked for opportunities to get closer to its key tenants. One area stands out. In tough financial times, ‘upwards-only’ rent clauses have hurt some leaseholders, especially combined with clauses that only allow subletting at set rather than open-market rates. Consequently, Aviva Investors has signed up to a British Property Federation (BPF) agreement to allow subletting at going rates, subject to reasonable requirements being met. While this agreement risks having a short-term impact on an asset’s value, in the long term the move should pay dividends if it helps to retain those all-important tenants.

2 The ‘green’ agendaCompulsory requirements are becoming more commonplace.

In the UK, property owners should be aware of four main areas of responsibility, outlined below. The Carbon Trust website (www.carbontrust.co.uk) is a good place to visit for further information on CRC, EPCs and DECs.

CRC Energy Efficiency Scheme Previously known as the Carbon Reduction Commitment (CRC), this mandatory carbon emissions’ reporting and pricing scheme is applicable to all organisations that use over 6,000MWh of electricity a year (akin to an annual electricity bill of around £500,000 says the Carbon Trust). Although property owners with large portfolios are judged on the energy usage within their buildings, it’s their tenants who actually turn on the power. It’s therefore important for owners to work closely with their tenants on this matter and try to introduce ‘green’ clauses into new or restructured leases.

Energy Performance Certificates (EPCs)EPCs, or Asset Certificates, allow a property’s energy performance to be measured using a consistent formula. The idea is that the best performing buildings will attract higher rents. Increasingly, ‘blue-chip’ tenants with sustainability policies seek out energy-efficient buildings, as do public and government bodies. Every property transaction – including marketing a property for re-let – must be supported by an EPC. Where one doesn’t exist, the EPC rating defaults to the lowest level, potentially affecting marketability and asset value.

Display Energy Certificates (DECs)DECs, or Operating Certificates, measure a building’s actual energy usage. All public sector buildings with a usable floor area of 1,000m2 or greater must display a DEC publicly. DECs are renewed annually and there are calls for the certificate to be introduced more widely.

Environmental assessmentsWhen acquiring property, Aviva Investors’ general strategy is to commission an Environmental Assessment, as well as a standard Building Defects Report. The former covers important potential risks, such as flood exposure and historic and potential pollution. Professional Environmental Assessments and associated consultancy services are widely available.

Unoccupied properties: A soft targetIn the recent downturn, the number of unoccupied properties has been on the rise, with cases of scrap metal being stolen from empty buildings also increasing. The damage caused as a result of this crime can be widespread and costly (£2.5 million in a recent Aviva case). There can be public liability issues too. Read more about metal theft and how to guard against it in another article in this edition.

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AVIVA INVESTORS

A s one of the largest property owners in Europe, Aviva Investors relies on professional managing agents to support its business.

It currently uses the five major firms: Collier & Madge, Cushman & Wakefield, DTZ, Jones Lang LaSalle (including King Sturge) and Savills. The team has carried out due diligence on each agent, encompassing financial stability, business continuity planning, health and safety capabilities, internal processes for appointing contractors and suppliers, quality management controls (ISO 9001) and environmental management standards (ISO 14001).

Generally, agents are appointed on a three-year initial term contract, with subsequent rollover provisions. Aviva Investors contracts its managing agents to provide a full range of services on its behalf, including the following.

Managing agent duties for Aviva Investors

• Collect quarterly rents and service charges in advance, and carry out credit control processes.

• Manage on-site staff, including security and cleaning personnel, and fire and bomb evacuation procedures.

• Manage on-site support services, encompassing monitoring and evaluation, treatment of air conditioning and water systems for legionella, asbestos assessments and fire risk assessments.

• Inspect multi-let buildings quarterly and single-let buildings annually to make sure tenants meet their lease obligations (for example, under a Full Repairing and Insuring lease).

• Make sure properties comply with the insurance unoccupancy condition (adopting a flexible approach where actively letting) and provide additional management measures for long-term unoccupied buildings.

• Facilitate Aviva insurance risk management building surveys.

• Help risk improvements required by the insurer to be carried out where the tenant has control of this area. Some risk improvement activities can be enforced under lease terms, while others cannot. In the latter case, a managing agent’s role is key. Tenants often don’t realise that failing to implement required improvements may lead to increased premiums.

• Work with tenants to reduce energy usage and, as a result, service charges.

• Arrange Energy Performance Certificates (see earlier).

Making the most of your managing agent Behind the sound risk management of property, you’ll find a busy managing agent, says the team at Aviva Investors.

Aviva Investors award-winning real estate team has expertise not only in the traditional sectors of the property market – offices, retail and industrial properties – but also in specialist areas, such as nursing homes, student accommodation, retirement housing and urban regeneration. See www.avivainvestors.co.uk for further details.

We hope it was useful to see how one of Europe’s largest property investment managers sees the markets, tackles the trends of the day and handles its business.” Matt Gordon, Commercial Property Owners Underwriting Manager, Aviva

METAL THEFT

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Tackling metal theftFrom commercial warehouses to blocks of flats and parish churches, the number of cases of metal theft continues to rise. Unoccupied properties are particularly at risk from the extensive damage caused by this criminal activity. Colin Davison from SitexOrbis shares some insights and explains how a smart technology solution is helping to fight back.

“A recent breakthrough technology is videofied alarm systems. These are rapidly deployable and cost-effective visual verification alarm systems that can be used anywhere. As soon as movement is detected, the alarm is triggered and the system automatically captures a ten-second recording of the scene.” A key benefit is that video identification dramatically cuts down on false alarms. “When sensors are tripped, images are sent straight to our 24/7 response centre, where we have trained operators. If that’s because of a fox, then no action is taken. But if we can see perpetrators, the police are called to the scene immediately.” SitexOrbis runs a BS5979 CAT II Alarm Receiving Centre.

Fighting backThe new security system has won praise from the police not just for reducing false alarms, but for helping to identify perpetrators. “In a recent case, a housing association lost £170,000 worth of boilers in a week. Our videos led to successful arrests and, hopefully, justice. The Crown Prosecution accepts video as evidence.”

When a property becomes vacant Colin advises that property owners take the following actions:

1. Get in touch with your insurer straightaway to be clear about any unoccupancy conditions.

2. Allow a professional surveyor to highlight the risks and implement any risk improvement measures suggested.

3. Cap off the utilities (gas, water and electricity) and chain and padlock isolation valves. Owners have a legal liability to make sure that people are safe inside their vacant properties, even if they happen to be burglars. Consider any other safety risks, such as the condition of the roof. ‘Ambulance-chasing’ legal firms have secured substantial payouts for clients and, on top of that, there’s the adverse publicity to worry about.

Preventative measures“Each property is different,” says Colin, “and will need a mix of security measures depending on its location.” One effective solution is the use of firmly fixed metal security screens (SitexOrbis use Sitex Steel Screens). “Wooden boarding is far less effective. In the recent London riots, for example, wooden screens have gone up in flames, leaving empty properties vulnerable to metal thieves.”

Some tipsConsider a layered approach to protection.

• If a building is being repaired or refurbished, replace metal roofing or flashing with unattractive materials, such as coated-steel sheets, glass-reinforced plastic and non-lead flashing or flexible (bitumised) felt.

• Always display warning signs as a deterent.

• Fit intruder alarms, with fully monitored remote signaling. SitexOrbis recommends a videofied alarm solution (see above).

• Use firmly-fixed metal security screens to board up doors and windows.

• In some cases, manned guarding might be appropriate, but always make sure that any contracted guards hold Security Industry Authority (SIA) licenses.

• For empty residential properties, provide neighbours with contact details if possible and ask them to inform the police if they witness any unusual activity. Also, avoid hedges growing too high as they conceal the activities of thieves.

• Carry out regular site visits, inspecting empty properties internally and externally.

• Use an Aviva preferred supplier, such as SitexOrbis, who will ‘put a building to sleep’ professionally.

Compiled by Aviva and SitexOrbis.

Colin Davison is Corporate Sales Manager for SitexOrbis. The company is the UK market leader for integrated empty property solutions and people protection. www.sitexorbis.com

A serious issue Scrap metal thieves – from opportunists to the lackeys serving organised crime – will do almost anything to get to their prize, including risking their own lives. “The British Transport Police [BTP] has reported a 70% rise in copper theft from live railway lines in recent times,” says Colin. “The BTP is working with the UK’s Energy Networks Association [ENA] to highlight the seriousness of this crime.” In the past year, the ENA alone has reported more than 7,000 incidents, resulting in four fatalities and over 30 injuries.

To the victims of the crime, the loss of metal isn’t even half the story, points our Colin. Once a robber gets in, anything and everything goes with a second-hand scrap value. Criminals will think nothing of the implications of ripping out pipes and tearing off roofing sheets. “Unfortunate property owners often face costly bills due to structural and water damage,” says Colin. Aviva estimates that 75% of the cost of a typical metal theft claim tends to be the associated damage caused to the building, which far outweighs the value of the stolen metal. In addition, vital services are often disabled and there can be property owners’ liability issues if premises are rendered unsafe. The criminal activity even threatens innocent people’s lives. “Residential properties have be known to go up in smoke as a consequence of pipes being torn out that are connected to gas metres.” Colin points to two recent blasts in Liverpool and West Yorkshire.

Soft targetsAll types of commercial and residential properties are suffering, with trends showing that vacant buildings are viewed as soft targets, especially when located in isolated areas, such as business and industrial parks. It doesn’t seem to matter whether a property is empty for a short or long term. “We are seeing a generation of organised gangs and opportunistic thieves operating at all levels and there is no specific geographic area or particular type of property being targeted which makes it very difficult to police,” adds David Townsend, Senior Underwriter, Commercial Property, Aviva.

Any old scrapMetal theft has become increasingly attractive with the escalating value of scrap metal. “Copper prices, for example, trebled in value between August 2009 and 2011,” says Colin. Across the country, criminal activity has risen in tandem with higher values. “London’s Metropolitan Police alone has recorded a 10% rise in commercial burglary and a 30% rise in scrap metal theft.” Although copper sits on top of the scrap heap, robbers look for all types of other metal. To copper, add aluminium, bronze, steel and other ferrous and non-ferrous metals.

Preventing the crime “SitexOrbis is often called in by an insurance company when one of its client’s properties becomes vacant,” explains Colin. “Here, our approach is one of prevention and we work in close partnership with the landlord.

Metal theft: The hard facts

150% risein the past few years*

£770millionestimated cost to UK businesses annually

*BBC, Crimewatch www.bbc.co.uk/crimewatch/support/homesafety/metal_theft.shtml

Avoiding clients as victimsAviva urges brokers to advise their property owner clients about this serious issue. Trends show that large-scale metal theft occurs predominantly in unoccupied buildings.

When a property lies empty, it’s crucial that owners – or preferably their managing agents – put in place the necessary security measures.

Outside a property: the building structure

Materials and equipment stolen

Roofing Lead and copper sheet

GutteringLead hoppers and downpipes; especially from older buildings, Copper downpipes

Lightning conductors Copper

Air-conditioning or process cooling units Copper cooling coils and radiators

Drains and manhole covers Cast iron and steel

Signs Aluminium

Gates Wrought iron

Inside a property Materials and equipment stolen

Pipework Copper water and heating system pipes

Heating boilers Cast iron castings and brass fittings

Water cyclinders Copper

Radiators Steel

Cable Copper

Plant Generators and air compressors

Sub-station components Copper bus bars and cable

A metal thief’s wish list

BANK INTERESTS BANK INTERESTS

Accommodating cautious lendersSatisfying lenders’ requirements under insurance policies has become increasingly laborious for property owners and their brokers. James Bell and Matt Gordon from Aviva explain what’s changed and point to the middle ground.

In the past, adding a general interests clause to a buildings insurance policy would, by-and-large, keep financiers’ happy,” says James Bell. Then, the 2007 financial crisis struck. Amidst economic turmoil, running a property portfolio faces the same hurdle as most other areas of business; asking for money has got harder.” James Bell

concern of lenders and neither is property owners’ liability. After all, where is their insurable interest in the event of a claim? Yet banks increasingly wish to hold the same cover as their clients across the whole policy. Financiers are asking for more benefits, without considering the potential additional cost to the property owner or the potential claims’ complications.

“Aviva believes that, where there is a mandatory bank requirement, the most effective solution is to grant composite insured status to banks on the Buildings’ section of the policy. This is providing the property owner is comfortable that the arrangement may impact the premium, causing potential tensions with tenants,” continues Matt. “Effectively, the bank holds the same position as if it had taken out a separate policy in its name, but only in respect of its insurable interest. As a result, unlike the joint-insured approach, the lender’s interests can never be prejudiced by the action or lack of action of any other insured party, including the main policyholder, provided the bank isn’t aware of this action or inaction.”

The concern“More demanding lender requirements have led to a standard industry agreement between Association of British Insurers (ABI) members and banks coming under review,” says Matt. Currently, a financier can quickly notify an ABI member of its interests using an abbreviated form. The insurer will then automatically advise the lender if the policy isn’t renewed or if pertinent cover is restricted or cancelled. There are additional lender benefits.

The middle ground“A property owner needs to be conscious of the potential cost implications of bank insurance requirements,” says Matt. “But it is accepted that, for large assets, sometimes such requirements are necessary.”

Matt and James hope the insurance industry can educate lenders on the best way to tackle the two core issues, and that financiers see that the ‘middle ground’ works well for all parties involved. “The solutions are relatively straightforward,” concludes Matt. “All it really takes is a little care when wording loss payee clauses, so that they are for claims settlements in cash only for sums over £50,000.

We also need lenders to see the merits of requesting to be composite insured on the Buildings’ part of the policy, rather than joint insured across all sections of cover. These two solutions take care of each stakeholder’s interests.”

James Bell is Senior Underwriter at Aviva’s Corporate Property Investors’ division.

Matthew Gordon is the Property Owners’ Underwriting Manager at Aviva.

“In the past, adding a general interests clause to a buildings insurance policy would, by-and-large, keep financiers’ happy,” says James Bell. Then, the 2007 financial crisis struck. Amidst economic turmoil, running a property portfolio faces the same hurdle as most other areas of business; asking for money has got harder.”

“Banks today are more risk adverse, especially with the financial climate remaining shaky,” continues James. “As a consequence, UK-based property owners have seen lenders exercise ever-greater requirements. The problem’s been exacerbated by an influx into the sector of foreign banks, mainly from the USA and mainland Europe, with new lending requirements, based on their local market conditions.” Many argue that these novel demands are unnecessary in the UK; they fix problems only encountered over the Atlantic. “The broker is often stuck in the middle as a go-between, liaising with solicitors to best serve their client, the property owner, while also trying to please the bank.”

Two core issues

1 Loss payee clauses“Some banks are asking to be joint insured under the policy with poorly

worded loss payee clauses,” says Matt Gordon. “It’s vital that brokers point out the business implications to their clients of such clauses.”

A loss payee clause exists to protect the lender’s security interest in the property. In the event of a claim to put right property damage, the bank (as the loss payee) is entitled to the insurance proceeds. “Aviva fully understands the need for this type of clause, but only to avoid cash payments being settled with the property owner directly, as that is where a potential risk lies.” Banks are concerned that claims settlements may not go on fixing their investment; a relatively moot point given a property owner’s vested interest. “Any such clause needs to be clear that it only applies to cash settlements. If the insurer is reinstating a property rather than making a cash settlement, then there is no risk to the bank given the asset they have lent against is being restored.”

The level set for loss payee clauses is also critical. If it’s too low there can be unwanted repercussions. Resolving cash settlement claims with loss payee clauses inevitably takes longer, as the settlement will pass through more hands before the money goes where it needs to: into repairing property damage. “There’s a real risk that settlements for relatively minor work will be delayed, which might mean the property owner loses tenants,” says Matt. “Levels should not adopt a ‘ground-up’ approach,” emphasises James. “We’re increasingly seeing demands for £5,000 clauses. Aviva’s benchmark is £50,000.”

2 Joint insurance policiesBanks sometimes request to be ‘Joint Insureds’ on the insurance contract

without specifying what they are trying to achieve. True joint insurance policies should be avoided by both parties. “With this type of arrangement, interest cannot be divided between the two parties,” says Matt. “So if one party invalidates the policy, both stakeholders lose out.

“The interests of banks are different from those of property owners,” Matt also points out. “Loss of rent, for example, isn’t really the

A property owner needs to be conscious of the potential cost implications of bank insurance requirements,” says Matt. “But it is accepted that, for large assets, sometimes such requirements are necessary.”Matt Gordon

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VALUATIONS AND VAT

Brokers have quite correctly been advising clients to increase their buildings cover to reflect the VAT increase from 17.5% to 20%. This isn’t a general rule of thumb, however.”Roger Corp, Director, Barrett Corp & Harrington

Plus VAT?Should you include Value Added Tax on property values and rents? Two Directors from Barrett Corp & Harrington get to grips with the broad implications of three little letters.

T o the genius, Albert Einstein, tax was reputedly “the hardest thing in the world to understand.”

What for those of us whose business is less about intellectual property and more about bricks and mortar? There are some fundamentals worth knowing and a few myths worth dispelling, explain Martyn Barrett and Roger Corp of Barrett Corp & Harrington, specialist providers of building insurance valuations. This article is a summary of their advice.

Valuations, rebuilding and repairs There are three main questions that inform the decision of whether or not to add VAT to a sum insured figure: what’s the building’s use, are you VAT registered and is VAT charged on any rent paid?

Residential propertiesIf any building for residential use (including blocks of flats) needs to be substantially rebuilt rather than repaired, the cost of rebuilding is ‘zero rated’ for VAT purposes. This means, for all but a handful of works, VAT doesn’t need to be added to the rebuild cost. The relevant HM Revenue & Customs VAT Notice (708 Customs: Buildings and Construction, February 2008) gives exceptions that can’t be ‘zero rated’, but the list is not exhaustive. These include:

• detached buildings comprising swimming pools, tennis courts, stables and other leisure (as opposed to residential) facilities – unless that work is closely connected to the construction of the building, allowing the construction of the building to take place

• landscaping, fish ponds, rockeries and garden walls

• fees and demolitions.

Roads, boundary fences and garages do qualify for zero rating.

Adding VAT to a rebuild: How it worksLet’s take an example. If the cost of fees, demolitions, landscaping and rebuilding a detached swimming pool adds up to 30% of the total rebuild bill, add VAT to this percentage only; not the total cost.

Dispelling some common mythsMany property owners assume that, if a residential building is more than 80% destroyed when compared to the sum insured, the repair cost will be subject to VAT. By inference, at the current 20% rate, the sum insured will be exceeded and consequently VAT should be added in total. The reality is very different. For a severely damaged building (80% plus destroyed), not a lot remains. It would be more cost effective to demolish and rebuild the property, rather than repair it. And the cost of rebuilding is ‘zero-rated’, as mentioned.

Property owners are also surprised as to what constitutes a rebuild over a repair. Existing foundations, such as a flank wall, can often be kept where sound and still be considered a rebuild. Again, VAT Notice 708 provides some useful guidance. To paraphrase: A zero-rated building is one constructed from scratch. Before work starts, any pre-existing

building must be demolished completely to the ground level (cellars, basements and the slab may be retained). However, a zero-rated building can make use of a single facade (or double facade on a corner site) provided:

• the existing building is demolished completely (other than the retained facade) before work on the new building is started

• the facade is retained as an explicit condition or requirement of statutory planning consent.

The best advice is to set out your plans clearly with the Revenue. Explain what you need to rebuild and what can be salvaged and be guided by the experts.

In terms of repaired damage, insurers will pay the VAT element up to the sum insured, a figure based on the total rebuild as opposed to the repair cost.

Please note This article is for guidance only. Always take professional advice in setting the declared value or sum insured and in VAT matters.

Useful reading

• Insurance for commercial property managers, RICS Practice Standards, UK (1st edition, guidance notes).

• HM Revenue & Customs. VAT Notice 708 Customs: Buildings and Construction, February 2008.

VALUATIONS AND VAT

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VALUATIONS AND VAT

VAT registered?While most residential building owners aren’t, some are. If you fall into the latter category and are able to recover VAT, there’s no need to include VAT within the rebuild calculation (including fees and demolitions, etc) when setting the building sum insured.

Mixed-use propertiesA good example of this type of a building is a block of flats, with shops on the ground floor. Here, the rebuild cost of the flats would be zero rated, while the shops would be standard rated, as commercial usage doesn’t qualify for zero rating.

If the property owner isn’t VAT registered, VAT will need to be added to the commercial part of the building only. Bear in mind that, as with residential properties above, the total cost of fees, demolitions and rebuilding of detached swimming pools and so forth is subject to VAT.

Commercial propertiesGenerally, this is a simpler affair. Although the cost of rebuilding commercial buildings is subject to VAT, most owners of commercial

buildings are VAT registered and able to recover this tax. In these cases, there’s no need to include VAT within the rebuild calculation when setting the building sum insured.

There’s an important exception. Many commercial buildings are owned in a personal capacity (such as by the owner of the business that occupies the building or by a private pension fund that is responsible for insuring the building). If owners or pension funds aren’t VAT registered, they should include the tax at the standard rate.

What about VAT on rents?Property owners may choose to charge VAT on their rents (know as ‘election to waive exemption’ or ‘option to tax’) and, consequently, be able to claim VAT on rebuild and repair costs. Where this isn’t the case, there will be no right to reclaim VAT on any reconstruction bill. VAT should be included in full where VAT isn’t charged on the rent and the property owner is responsible for insuring the building under the terms of the lease.

The recent VAT hike Brokers have quite correctly been advising clients to increase their buildings cover to reflect the VAT increase from 17.5% to 20%. This isn’t a general rule of thumb, however. Take the following two circumstances.

• If the client is VAT registered and, if applicable, VAT is charged on rent, there’s no need to make any adjustment for the new VAT rate.

• If the client is unable to recover VAT and VAT needs to be incorporated, the most that will need to be added is 2.5%, which represents the VAT increase. In many cases, the increase will be far less, depending on the building’s use.

Martyn Barrett and Roger Corp are Directors of Barrett Corp & Harrington.

The value of valuationsLast edition, we picked up on a growing problem, especially in the current financial climate: the inadequacy of insurance cover when substantial repairs need to be made to properties. To make sure you’re fully covered, Aviva recommends you obtain a professional property valuation.

If you do this, the insurer will include the ‘waiver of average’ for buildings valued within the last three years by an RICS firm, such as BCH. So if it transpires that your property is underinsured by, say, 25% when claiming for a partial loss, you’ll still receive a 100% settlement (rather than 75%).

The benefits of having an up-to-date valuation• Ensures your Buildings Sum Insured

is adequate.

• Significantly reduces the risk of an underinsurance provision being applied to

reduce the amount payable in the event of a claim.

• Enables Aviva or the loss adjuster to immediately focus on the claim rather than any underinsurance issue which might delay the repair process and lead to potential unrecoverable increased costs.

• Provides good corporate governance for any commercial business, helping to protect the rights of directors, employees and shareholders in the event of any insured major disaster.

• Allows buildings of historic or environmental value to be restored without being lost to the wider community due to a lack of funds.

• Provides peace of mind to all parties of the insurance contract.

About Barrett Corp & HarringtonCombined experience in insurance, loss adjusting and surveying gives BCH a unique perspective into the valuation of buildings for insurance purposes. The company is a preferred supplier of Aviva, regulated by RICS and at the forefront of developments within the industry. All Aviva customers using BCH automatically benefit from preferential rates. www.bch.uk.com/aviva-customers

VALUATIONS AND VAT

Over the ChannelUK-based property owners are increasingly looking to invest in mainland Europe. Graeme Thurgood, Business Manager at Aviva, explains why clients are turning to the insurer to support this move.

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EUROPEAN SPOTLIGHT

What’s behind this trend?The UK’s economy is obviously a key factor. Investment in the UK, especially with recent economic changes, is limited. Global financial instability is also playing its part. People want to spread their risk; they don’t want all their eggs in one basket in case it develops a big hole. All sorts of property owners are looking at how the largest, most prestigious companies act. These businesses have always had diverse investment strategies.

Why diversify?Spreading your risk so you’re not hit by one event or financial crash gives an investment longevity, ensuring constant returns are received.

Where can Aviva help property owners?We write risks anywhere in Europe. We’re able to offer programmes on a Freedom of Service basis for all territories within the European Economic Area.

What do your clients most value about your service?We specialise in the broad European market and have developed specific policy wording to meet our clients’ needs. We can include some local excluded cover and match UK property owners’ liability limits of indemnity, including

for key risks such as terrorism, legionnella and asbestos. And in the event of something going wrong, specialist handlers are on hand in all our claims departments, with a nominated loss adjuster programme up-and-running with the main service providers. Clients also appreciate the choice of being able to settle premiums in the UK or locally.

How is the European arm run?The majority of our business is written on a global style centrally managed programme. We’ve developed a European network especially for property owners, comprising our offices and reciprocal business partnerships. Service Level Agreements (SLAs) are in place across the network, which we strive to beat as often as possible. All business is reinsured back to our paper and therefore our security, so clients and their financiers always have peace of mind.

The London team has direct contact with our local offices, access to CAT modelling systems and Hawkeye has been expanded to include anywhere outside the UK.

Meet the underwriting teamGraeme Thurgood, Business Manager Audrey Mcdowall, Senior Underwriter Mark Holder, Trading Underwriter Nick Layton, Trading Underwriter Richard Smith, Trading Underwriter Stuart Somerville, Trading Underwriter

Q&A

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EUROPEAN SPOTLIGHT

Graeme Thurgood works for Aviva’s Property Investors team, one of the most established specialist underwriting units in the market.

NEED HI RES

WHAT MAKES A SECTOR LEADER

Our Property Investors team goes from strength to strength. In the last three years, we have built on our successes, using our market-leading position and capacity to write many landmark buildings and flagship portfolios both in the UK and Europe. Our experienced underwriting and servicing teams are backed by the largest insurer-owned risk management and survey team.” Ann Kelly, Head of Property Investors, Aviva

The elevator pitch...

1 Aviva is a property specialistAviva is the only major UK composite insurer to have a ‘Segment Team’ at

head office that specialises in the business of owning property. Underwriting and servicing experience in this sector is exemplary. To this, add dedicated regional experts across the country and the industry’s biggest trading division for the London property market.

Aviva is involved in the vast majority of UK property owner insurance programmes, such as Canary Wharf. It also operates the largest risk management survey force of any UK insurer (point 5). In addition, brokers and their clients benefit from the insurer’s market-leading IT documentation system, helping to provide a speedy service and cut out any unnecessary paperwork. (This system supports Aviva’s credentials as the world’s first carbon-neutral insurer.)

2 Aviva leads the wayAs a leading player in this sector, Aviva continues to improve its offering to

property owners. Recently, it remodeled its property owners’ proposition from the ground up. This result? Unprecedented simplicity, clarity and breadth; a suite of all-encompassing solutions relevant to the risks and issues which its clients face daily.

3Aviva offers moreFrom bespoke policy wordings to comprehensive, competitive cover and

generous limits, Aviva strives to exceed client expectations. It also sets clear, guaranteed service levels, especially when it comes to supporting claims.

The insurer appreciates that every client is different. It’s experienced in meeting a range of needs, covering legal expenses and legal indemnities for property transactions, for example, and providing the five main types of bonds.

Clients can also make full use of the insurer’s preferred supplier scheme. Besides receiving healthy discounts, they know that qualifying suppliers have been vetted for quality, service and their commitment to customer satisfaction.

Aviva policyholders also take advantage of telephone helplines and online support. These complimentary services help customers overcome the burden of red tape around the key areas of finance and employment law, and provide invaluable advice on other legal matters, sales and marketing and risk management.

4 Aviva reaches furtherAviva is a global insurer, with extensive experience of helping property owners

in all markets. The insurer has specialist functions for overseas underwriting, claims’ handling and risk management support and operates a network of partners and Aviva General Insurance (GI) subsidiaries in Europe to provide ‘local-fronted’ policies. Premiums can be paid in a number of ways to best suit a client’s business.

– Freedom of Services licences in all European Economic Area countries – allowing hold cover decisions from the UK.

– Fully integrated Controlled Master Programmes – all underwriting decisions made centrally in the UK.

– Conventional Terrorism capability i.e. where no local pools.

5 Aviva tackles risk Aviva Risk Management Services (ARMS) takes a leading approach to

managing risk. No other insurer can provide an in-house operation with as wide a range of consultancy support and training services on a range of health, safety, environmental and business continuity issues within the workplace.

ARMS consultants have a wealth of practical experience regarding the real safety issues facing business today because of their continued practice in industry (all are Corporate Members of the Institution of Occupational Safety and Health (IOSH) and are Registered Safety Practitioners).

For further details, please visit [insert link].

6 Aviva stands strongIn difficult economic times, Aviva’s financial foundations remain firm.

• Aviva is rated as AA- (Very Strong) by Standard & Poor.

• As the world’s sixth largest insurance group, it has 44.5 million customers worldwide.

• The groups’ annual premium income and investment sales totalled £47.1 billion in 2010.

• The insurer currently has £260 billion assets under management.

WHAT MAKES A SECTOR LEADER

A-star Aviva What makes a sector leader?

Aviva is the largest property insurer in the UK, with over 300 years’ experience of taking care of the needs of its clients. Why do so many property owners count on the insurer? Here are half-a-dozen reasons.

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Did you find this edition of Property View useful? Are there any topics you would like us to cover next time? If so or you have any feedback, please email: b2bdigital@aviva.co.uk

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