Rating Manual section 6 part 3: valuation of all property classes

Section 485: health farms

This publication is intended for Valuation Officers. It may contain links to internal resources that are not available through this version.

1. Co-ordination arrangements

This is an SRU class. Responsibility for ensuring effective co-ordination lies with the SRUs. For further information see Rating Manual: section 6 part 1 - practice note 1 : 2000.

The R2000 Special Category Code 125 should be used. As a SRU class the appropriate suffix letter should be S.

2. Introduction

There are about ten large health farms in the ‘top flight’, mainly located within reach of London. There are a further 15-20 ‘second division’ health farms, being little more than country hotels offering special diets, limited treatments and some leisure facilities.

3. State of the industry

The larger health farms generate very high levels of turnover, largely due to treatment income which can easily be greater than the accommodation income. This aspect of the business is very labour intensive, so wages bills are significantly higher than for hotels, although compensated to some extent by lower food costs. Bar sales are also low, but at relatively high profit margins as a much higher proportion of sales are of ‘soft’ drinks.

Typical total turnover per letting DBU for 1998 is £70,000 to £90,000 for the better ones, compared to £45,000 to £55,000 for 1993. This figure can be affected by the incidence of ‘day stay’ only customers, and private leisure club membership. It appears therefore that the top end of the market is likely to be more profitable than in 1993.

On the other hand, it is understood that some of the ‘second division’ health farms are finding trading conditions difficult. It is likely that the surge in private sports/leisure/fitness clubs has affected this part of the health farm market.

4. Evidence of value

No rental evidence has been disclosed to date. It is considered unlikely that there will be any reliable rents upon which to base a valuation scheme.

Accounts received to date for two ‘top flight’ health clubs are difficult to analyse without further information due to the incidence of ‘other’ group activities included within the accounts. Nevertheless, looking at the figures for 1993 and 1998 provides some interesting comparisons. Gross turnover at these two increased by factors between 1.55 and 1.7 over the period. Pre-tax profits as a percentage of turnover increased by between 5 and 10 percentage points.

1995 list agreements for ‘top flight’ farms, based on receipts and expenditure valuations, equated to around 7% of turnover. The increase in profitability suggests receipts and expenditure valuations will devalue to higher percentages of turnover for revaluation 2000.

5. Valuation Considerations

The smaller ‘second division’ health farms may be compared with hotels, both in terms of a percentage of receipts and comparison by reference to DBUs or ADBUs. The principal determinant in considering the valuation should be expected profitability, and all factors which would either tend to increase or decrease net profit should be taken into account.

The predominance of ‘non hotel’ services at the larger health farms however suggests a significantly different stream of profits and costs to hotels, and therefore these can only be assessed accurately by undertaking a receipts and expenditure valuation. Comparison between such health farms by reference to receipts or DBU/ADBU may still be made as a check, or in the absence of full accounts, so long as the differences between properties are appreciated.

Accurate assessment of fair maintainable receipts can present a problem with the high treatment income and the existence of franchise arrangements for treatments and boutiques/sports shops/ hairdressers which must be correctly reflected. Where comparison is being made between different health farms a consistent approach is required.

6. Valuation Scheme

The ‘top flight’ health farms should be valued by the receipts and expenditure method. Where full accounts are not available, comparison should be made with health farms where values have been arrived at on the R & E method. Comparison should primarily be as a percentage of gross receipts. It is expected that valuations arrived at on the R & E method will devalue to between about 7.5% and 8.5%. In the absence of accounts, therefore, valuations of ‘top flight’ health farms should be made at between 7.5% and 8.5% of fair maintainable receipts, having regard to relative profitability.

As outlined above it is understood that the ‘second division’ health farms have experienced strong competition from new private sports/leisure/fitness clubs. In the absence of full accounts, valuations should be made at between 6% and 8% of fair maintainable receipts, again having regard to relative profitability.

Where a ‘second division’ health farm could be used as a hotel without offending the principle of rebus sic stantibus, there would be demand for that use, and such demand would lead to a value higher than that as a health farm, the property should be valued having regard to similar hotels in the locality.