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

Section 505: NHS hospitals and health care

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

Practice Note 2: 1995: NHS Hospitals and Health Care: Stage 2 - Co-ordination and Valuation Guidance

1. General

In Practice Note 1, VOs were advised to apportion the GIAs used for asset valuations of each block involving accommodation which was either domestic property or exempt. This action was necessary in order to apply these GIAs in rating valuation. It is confirmed that greater reliance should be placed on these areas than on the Gross External Areas hitherto used. All referencing for the purposes of the 1995 List should be in GIA (broken down into the categories given in Appendix 1), although areas in GEA will also need to be taken in any cases involving alterations to the 1990 List.

2. Co-ordination

For the purposes of the 1995 Rating Lists NHS Hospitals and Clinics have been classified as a Regional Co-ordination class.

3. Valuation Basis

3.1 NHS Hospitals

The Contractor’s Basis is normally the only valuation method likely to be of assistance; further guidance is provided in para 4 below. Exceptionally, rental evidence may exist for the smaller NHS clinics; VOs should make full use of such evidence, and provided that it is adequate, should not regard themselves as bound to the Contractor’s Basis.

3.2 Ambulance Stations

In applying the advice contained in Section 840:4, VOs should not be constrained by the basis which was adopted for the 1990 List. Use of the rental/comparative basis depends upon the availability of rental evidence in comparable property, the probability of getting planning consent for alternative uses of the subject hereditament, and the suitability of the hereditament within the restrictions of the rebus sic stantibus rule, for such uses. Where no adequate rental evidence exists, the Contractor’s Basis must be used; further guidance is provided in para 4 below.

3.3 Out-patient Clinics, Health Centres, Surgeries & GP Health Centres

A wide type of property falls into this category, and should be divided into the following sub groups:

a. specialised hereditaments: those which are designed for particular operations, whether surgical, or merely diagnostic/therapeutic without involving surgery. Provided that such hereditaments are, rebus sic stantibus, unsuited for use as a GP Health centre, the Contractor’s Basis should be adopted, unless, exceptionally adequate rental evidence exists.

b. non-specialised hereditaments: these include GP Surgeries and Health Centres, and certain other Health Centres operated by Health Service bodies rather than by GPs, but fully comparable with practice premises occupied by GPs. Provided that adequate rental evidence exists, a rental/comparative basis should be used. The Contractor’s Basis should, for this sub group, be used only where rental evidence is not available.

Where for either sub group (a), or exceptionally (b), the Contractor’s Basis is to be used, see para 4 below.

4. Application of The Contractor’s Basis

4.1 General Principles

Where the Contractor’s Basis is applied, it should be in accordance with the principles set out in Rating Manual: section 4 part 3. For hospitals, since the non-domestic, non-exempt portion will vary between different blocks, and the level of obsolescence within each block will vary, it will be necessary to proceed with Stages 1 and 2 of the valuation on a block by block basis, and to assemble the total ARCs before the addition of land value at Stage 3. For hospitals, therefore, the starting point will be the apportioned GIAs as calculated in accordance with Practice Note 1.

4.2 Stage 1 - Estimated Replacement Costs

a. Hospitals

Most NHS hospitals have been designated piecemeal over a long period of time. For the purpose of the Contractor’s Basis, costings based on exact replacement of existing structures (the basis adopted by DVs for asset valuation purposes) may be unreliable where the replacement in modern form using modern materials and construction, and a uniform design with an integrated layout would result in lower costs. The costs adopted for asset valuation purposes cannot therefore be used for rating purposes. See Appendix 1 for guidance on the cost levels to be adopted.

Link blocks and subways which contain no areas which are used for any purposes other than for passage between adjoining blocks should be left out of the costing exercise. This omission is justified because their presence is dictated by the absence of a uniform design and denotes an attempt to reduce the drawbacks of dispersal which would not have arisen if the hospital had been designed as an integral whole.

a. Other NHS Hereditaments

See the Rating Cost Guide Beacons for:

ambulance stations

health centres

mortuaries.

In each of these cases, external works are excluded, and reference should be made to Rating Manual: section 4 part 3 - practice note 1 appendix C for guidance on percentage additions.

See Rating Cost Guide for advice on percentage addition for professional fees.

4.3 Stage 2 - allowances for physical and functional obsolescence

(i) Hospitals

For hospitals the appropriate obsolescence allowance should be assessed on a block by block basis, using the age-related guidance in Appendix 2. For each block containing rateable property, VOs should determine a notional age having regard to the known age of its constituent elements. The “equated life” of each block as calculated for the purposes of asset valuation should not be used in the estimation of a notional age. This is because the proportion of total cost relating to a specific element within an asset valuation beacon is likely to differ markedly from the proportion attributable to the same element in ERCs derived from the guidance in Appendix 1. In particular the proportion of asset valuation costs relating to internal finishes and engineering is likely to be inadequate, and that relating to superstructure is likely to be excessive, especially when derived from the beacons for older buildings.

In determining a notional age for each block, VOs should exercise the same judgment as is used in other applications of the Contractor’s Basis. It is helpful to bear in mind that certain elements are normally resistant to physical and functional obsolescence:

Ie substructure

frame

upper floors

stairs,

and that in older buildings these may be the only elements which date back to the original construction. Elements of substantial cost, such as heating and ventilation systems, may be comparatively new installations within older buildings. The original date of construction is therefore not necessarily an adequate guide to the appropriate percentage deduction for obsolescence. The objective should in each case be to assess:

a. the extra running and maintenance costs, and

b. the functional shortcomings

of the actual block, as compared with modern alternative accommodation within a hospital of integrated design. The age-based scale should be used in this context.

Care should be taken to avoid double counting between this Stage and Stage 5, particularly in respect of fragmentation/dispersal/poor layout. Where these problems are found within blocks, and are caused by bad internal design, the Stage 2 allowance may be increased by up to 10%. But where the problems arise from bad external arrangement between blocks, the additional allowance falls to be considered at Stage 5.

Redundancy should be reflected at Stage 2. Where property within a hospital or other specialised hereditament is either:

a. disused at AVD with no prospect of future use, or

b. disused post AVD as a consequence of the coming into use of new premises (whether on or off the hereditament), and with no prospect of future use,

AND there is no other demand for the hereditament as a whole, the unused property should be treated as of no value and should be given a 100% obsolescence allowance. Where clinical space is unused for the purpose for which it was designed, and is used solely for storage, the relevant block or portion thereof should be costed as storage space by reference to Beacon, unless at AVD storage use was temporary and clinical use was to be resumed.

Deduction of appropriate allowances from the ERC of each relevant block will produce Adjusted replacement costs (ARCs).

(ii) Other NHS Hereditaments

For all other types of NHS hereditaments, the age-based scale for non-industrial hereditaments, contained in the Rating Cost Guide should be followed.

4.4 Stage 3 - Land Value

a. Hospitals

At this stage the Adjusted Replacement Costs of all relevant blocks should be aggregated to produce the ARC of the hospital as a whole. Land Value will be added to the aggregated ARC as follows:

i. Developed land (ie the immediate site of the buildings together with associated landscaping, soft or hard - eg car parks, roadways etc): adopt the percentage of ARC as listed in Appendix 3. This approach ensures that developed land receives the same aggregate allowance as the blocks.

ii. Undeveloped land (ie playing fields, amenity land in excess of that strictly needed for landscaping of buildings). It is necessary to identify land which is strictly required for amenity purposes; areas in excess of this requirement should be omitted from valuation. Valuation should be on the basis of the appropriate rate per hectare for amenity land/sports fields in the area. No obsolescence allowance should normally be deducted from the value of undeveloped land.

a. Other NHS Hereditaments

For other NHS hereditaments, there is unlikely to be evidence to support the adoption of a consistent percentage of ARC as site value. Instead VOs should arrive at a cost per hectare consistent with the principles set out in Rating Manual: section 4 part 3 - part 6. It will not normally be appropriate to adopt values higher than those appropriate for residential land in the locality, although for ambulance stations regard may be had to values of land used for commercial development of a physically similar type. The resulting land value should be subject to the same aggregate obsolescence deduction as the buildings.

4.5 Stage 4 - Decapitalisation

The lower rate applies only to hospitals and clinics where at least some patients stay overnight.

The higher rate is appropriate for all other health care hereditaments, including ambulance stations and health centres/surgeries.

5. Stage 5 - End Adjustments

Problems associated with dispersal of blocks within a hereditament, piecemeal development and lack of integrated design should be addressed at this stage. These are common features within most NHS hospitals; the allowance made in respect of these features should not exceed 10%. Care must be taken to avoid double counting of allowances already conceded at Stage 2.

Practice Note 2 : 1995 : Appendix 1 : Cost Guidance for NHS Hospitals

A Building Costs

(i) General Hospitals

An average rate of £700 per square metre GIA applies, subject to variation for a. mix of accommodation b. size.

The valuation of each hospital on an overall basis will vary depending on the proportions of the different use elements and number of floor levels. For this reason valuation on an overall basis may be prone to error.

Differences in proportionate areas of eg operating theatres and kitchens have a marked effect on overall cost. For the same reason analysis of costs per bed space are unreliable.

It is therefore preferable to cost out specific use elements of the buildings as follows. In the absence of adequate survey details these areas should be apportioned on a best of judgment basis. The overall rate per square metre should only be used where it is not possible to make such a judgment.

The apportionment of construction costs has been restricted to the main elements where significant differences can be identified. No further refinement is considered necessary.

Operating Theatres, Sterile Areas, Pathology £900 per sq m GIA
     
X-rays Cells £1000 per sq m GIA
     
Kitchens (excluding dining rooms) £1100 per sq m GIA
     
Plant Rooms and Service Areas £400 per sq m GIA
     
Boiler Houses £450 per sq m GIA
     
Laundries £750 per sq m GIA
     
General Areas (including wards/outpatients/casualty) £680 per sq m GIA
     
Temporary Buildings (including EMS buildings) £300 per sq m GIA

Variations for size should be made on the following scale:

(ii) Community Hospitals

(iii) Maternity, Geriatric and Mental Hospitals

The same approach to costs should be adopted as for either general or community hospitals of similar sizes. In the absence of sufficient survey details, areas should be apportioned between the specialised areas identified above, on a best of judgment basis. Provided that there are no operating theatres, an overall rate of £650 per square metre may be used, subject to the following variations for size, but only where it is not possible to make such a judgment:

Care should be taken to distinguish such hereditaments from nursing homes where no treatment is given other than that associated with nursing care. Nursing homes are unlikely to feature medical facilities and should be costed by reference to Rating Cost Guide beacons.

B External Works

Costing should be in accordance with the rates contained in the Common Elements section of the Rating Cost Guide, and reference may be made to data (other than costs) used in asset valuations. Where that data is inadequate for application of that section of the Cost Guide, the following percentage additions should be made to the aggregate ARC of all buildings:

2.5% Town centre or island site with 90% or greater building ratio, no more than small yard or garden area, and no car park within the hereditament.

5% - 2.5% As above, but with 80%/90% building ratio with limited staff parking and landscaping.

7.5% - 5% Site with 50%/75% building ratio, some landscaping around buildings, secure boundary fencing, adequate staff parking, and limited general parking within the hereditament.

10% - 7.5% As above, but with 25%/50% building ratio, landscaping around buildings, secure boundary fencing, adequate staff parking and general parking within the hereditament which falls short of full requirements.

15% - 10% Site with less than 25% building ratio, extensive landscaping around buildings, secure boundary fencing and adequate parking within the hereditament for staff and all other users.

C Professional Fees

The scale for fees and charges should accord with section 7 of the Guidance Notes and Common Adjustments within the Rating Cost Guide, subject to the following qualifications: a. for all structures (and external works when costed separately), other than temporary buildings, the addition will be not less than 15% of ERC b. for temporary buildings the addition will be not more than 5% of ERC. For temporary structures such as portacabins which are brought onto the site complete, rather than for assembly in modular form the addition should not exceed 2.5%.

Practice Note 2 : 1995 : Appendix 2

NB This scale is not appropriate for other NHS hereditaments

Having assessed the notional age for the individual block, the following age related allowances are recommended. It should be noted that physical and functional obsolescence are not directly related to age and that an older building, especially after recent refurbishment, may operate as efficiently as a newly constructed block, and with no greater running costs; in such cases VOs should ascribe a minimal age to the older building and apply little or no obsolescence allowance.

Notional Age for block Percentage Deduction
Pre 1936 40% - 50% max
1936 - 1950 30% - 40%
1951 - 1965 20% - 30%
1966 - 1980 10% - 20%
post 1980 0% - 10%

[For temporary buildings (including those of inferior construction which were erected for temporary purposes and have outlasted their intended lives), the following scale should be adopted:

Notional Age for block Percentage Deduction
Pre 1950 40% - 50%
1950 - 1960 30% - 40%
1961 – 1970 20% - 30%
1971 – 1980 10% - 20%
post 1980 0% - 10%]

The depreciation allowances used in asset valuations may be in excess of the appropriate obsolescence deduction for rating purposes. This is because asset valuations have regard to the anticipated life of the hereditament and allow for the cost of eventual replacement which, in the rating hypothesis, does not fall upon the tenant; the hypothetical tenant is responsible only for repair, not renewal of the entirety.

A maximum allowance of 50% has been related to all buildings with a notional age pre 1936. It is considered that few buildings erected before this date will remain in their original state, and that none will have a greater notional age. Allowances in excess of 50% may be justified (even for younger buildings) on the basis of particular facts, eg excessive repair costs, or extreme functional unsuitability for current uses.

B. Allowances on ERCs of external works within NHS hospital hereditaments

The ERCs of external works within a hospital hereditament should be regarded as subject to the same degree of obsolescence as the buildings considered in aggregate.

This will be automatically achieved where the external works are costed as a percentage of ARC. Where they are costed as percentage of ERC, or where they are costed individually by reference to the rates given in the Common Elements section of the Cost Guide, it will be necessary to adopt the aggregate percentage allowance conceded for buildings.

C. Allowances on land values within NHS hereditaments

Developed land should be regarded as depreciated by the same extent as all buildings and external works in aggregate.

This will be achieved automatically by the adoption of developed land value as a percentage of aggregate ARC.

Undeveloped land will not normally need any allowance, provided that superfluous areas have been eliminated from the valuation.