Real Estate Insurance – potential implications affecting the sector and the importance of up to date building valuations

With the global economy still stuttering in the aftershock of the pandemic we take a look at the potential knock-on implications affecting the Real Estate insurance sector.

Cost of Claims Rising
There has already been much talk regarding construction supply chain issues, these leading to rebuilding delays and increased costs in the United Kingdom (UK) and beyond. In fact, some observers estimate that costs have reached a 40 year high mainly due to uplifts in global demand within the construction sector, combined with the multiple and complex logistical impacts of the pandemic. To put this into some context, it is now estimated that rebuilding works in the UK are 25% higher in 2021 than in the previous year and some experts are predicting that longer lead times and further cost increases are still yet anticipated as we progress into 2022.

It’s also worth noting that complications resulting from Brexit have exacerbated this situation, affecting all aspects of trade and labour availability. Whilst construction productivity has largely recovered from the initial shock brought on by the pandemic and in some instances significant efficiencies have been achieved as a result of new working practices, recent inflationary increases are affecting the longer term supply-versus-demand challenge. When it comes to large scale Real Estate portfolios this may be impacting on the validity of sums insured currently in place on many Commercial insurance policies both in the UK and globally.

War in Ukraine
The world is reeling from the Russia-Ukraine crisis with its impact being felt in so many different sectors and across so many industries that are already dealing with rising inflation, the pressure of the increasing cost of living – not to mention higher energy and fuel bills. In the UK we have very limited reliance on goods and services imported from Russia so recent sanctions will not, in themselves, materially impact our economy. We are however at the mercy of global economies and therefore any impacts across Europe and beyond will ripple through to Real Estate portfolios across the UK and beyond.

A rise in inflation
With inflation already at its highest for more than 30 years, it’s already impacting interest rates, and subsequently mortgage rates, as well as the cost of living and energy bills. This in itself has caused commercial property buyers and speculators to become much more cautious, coupled with the Ukraine crisis, it is likely to put more pressure on energy suppliers and this puts a strain on the cost of living, which in turn could mean that inflation will rise at a much faster rate than previously predicted. In turn this will lead to further interest rate hikes which again will place great pressure on Real Estate clients and subsequently their tenants.

It is expected that interest rates may continue to rise, potentially quite significantly, and this will impact both residential and commercial portfolios as it could lead to slowdowns in property markets.

Increased Fuel Costs
Oil prices are a vital macroeconomic variable and will impact all commercial sectors. In terms of Real Estate there is now evidence that supply chain partners are beginning to pass on increased fuel costs to their instructing clients which means that claims costs will continue to head north, especially in an environment where construction material supply is also adversely affected. The Ukraine war has only exacerbated this issue and regrettably there is no sign of this abating any time soon

What does this mean for the future of Real Estate?
The Commercial Real Estate Market in the UK was expected to grow by approximately 5% over a 5 year period from the end of 2021. The Russian invasion of Ukraine and the subsequent global implications from that will almost certainly see this number change. Real estate has already been badly hit with a sharp decline in values across all markets and sectors. Confidence in the UK property market had already been knocked by the uncertainty surrounding Brexit. Although Brexit has been sharply put into perspective, leaving the European Union has not helped the UK to address severe labour and material shortages as well as ongoing supply chain issues.

Some sectors that have been out of favour for some time, particularly shopping centres, were beginning to show signs of a renaissance. However, rising interest rates and swap rates are a key risk for the cost of finance and these green shoots may become false dawns.

In the world of insurance it is critical that properties are insured properly and accurately.

Under-insurance can lead to insufficient cover being provided by insurers and unpaid claims in the future; this is especially true if claim lifecycles are extended because of supply chain delays and increased costs. Any delays experienced in physical rebuilding projects will almost certainly lead to knock-on issues with regard to Business Interruption claims too.

At QuestGates our qualified adjusters and surveyors can deliver accurate values-at-risk to ensure that sums insured are relevant to all properties within a portfolio. Our experts will factor in all potential supply chain issues and potential timescales for delivery of materials, legislative changes, inflation factors, local authority planning, demolition and debris removal costs in addition to other considerations such as listed status of buildings and tax implications.

From a Business Interruption perspective our teams are supported by qualified Chartered Accountants who can provide a full financial portfolio review, including aspects such as type of cover needed, the sums insured, any required extensions and the length of the indemnity period (which is critical in the event of supply chain delays).

The world is constantly changing and it is more important than ever to ensure your insurance policy sums insured are kept up-to-date to ensure you are fully protected, now and in the future. Please contact us to find out more about our valuation services.