By Altus Group | May 3, 2017

Hospitals are overpaying for business rates due to an out of touch valuation methodology and a lack of transparency that makes their rateable values difficult to understand and challenge.

Rateable values are derived from a building’s rental values.  April’s revaluation heralded some significant changes in rateable values and subsequently increased bills for many.

On average, the rateable values of UK hospitals increased by 18.85 percent since the last rating, though as a consequence of the uniform business rate adjustment between the two revaluation periods (2010 and 2017), the average liability will go up by 14.3%.

We’ve seen significant individual rises in the value of some hospitals, and many healthcare occupiers will undoubtedly feel penalised by the revaluation.

There’s a case to be made that their increased rateable values may be unfair, as well.

The method by which business rates are calculated for hospitals is quite unlike the principles applied to other assets such as offices, high street shops or warehouses, which are all freely traded in a competitive market, and have rates assessed according to their obvious market value evidenced by comparable transactions.

Hospitals are rarely leased, and even when they are the specialist fit out – much of which feeds into the rateable value – is added as a tenant’s improvement.  Getting to an equivalent market rent is therefore more problematic.

Fortunately, there is a way to calculate rates.  By looking at the replacement cost it is possible to ascribe an annual rental value. This approach is commonly used for a range of unusual asset types that are rarely let and do not generate an identifiable income stream.

The starting point involves an analysis of the cost that would be incurred building a replacement hospital. To this figure, fees are added and then the value is adjusted to take age and obsolescence into account.  Finally, a proportion of that cost is devalued to provide an annual equivalent.  In essence, this is what the hospital would pay per annum in lieu of the upfront total replacement cost. As hospitals age and obsolescence erodes the adjusted build cost, rateable values should fall.

Nominally, we would expect to see small adjustments in value from one revaluation to the next, but not significant increases.  A hospital this year is, logically, worth roughly the same as it was last year, ignoring any improvements.

It will have been a surprise to many to see significant increases. The average increase masks some notable individual changes, in some cases over 500 percent.

This is driven by the Valuation Office’s “hard-wiring” of the valuation principle they adopt when determining the current basic build cost.  In a like-for-like comparison, the VOA’s benchmark hospital construction cost has risen significantly from circa £1,600 per square metre in 2010 to £3,166 per square metre for the 2017 list.

The Valuation Office has not provided a justification for this.

Additional costs relating to all aspects of the base build cost also appear to have been added to this latest calculation, including percentile increases in contract fees which is, in effect, double counting, and other changes such as the removal of allowances for hospitals over 3 storeys, newly costed multi-storey parking and the arbitrary addition of land to the calculation.

A headline reduction in the decapitalisation rate from 3.3 to 2.6 percent was applauded as a sensible reflection of the real world value of hospitals.  It is remarkable, therefore, that the end result constitutes such a large increase.

For the sake of fairness and clarity, the way that a hospital’s rental value is calculated should be addressed urgently.

Previously, following the last rates revaluation in 2010, the VOA set out the principles for valuing hospitals (based on ‘beacon’ hospitals) and provided full details.  This time around, beyond disclosing build costs and fees, they have not provided any additional transparency around these principles, or how they have arrived at a valuation.

Is this a tactic to avoid disputes or appeals around business rates?

If the method of calculation isn’t disclosed, it is extremely difficult to calculate the valuation independently, and this is even before you get to the point of actually disputing it. We would like the Government or Valuation Office to direct valuation officers to permit hospitals, or their advisors, to view the underlying valuation / method of calculation behind the set rateable value. For other classes of property, such information is routinely and freely published on the Valuation Office’s website.

For parity, hospitals need to be afforded a similar privilege.


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