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27 June 2011

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If the value of our building has fallen, can I ‘sell on’ my share on the strength of the original value?

Question in full:

I am considering retirement in a few years. The building I work from was built 10 years ago. It has not been valued recently. If the value of the building has fallen, can I ‘sell on’ my share to a new incoming partner on the strength of the original value when new (the build cost) or does it have to be a current valuation – even if this leaves me with negative equity and a new partner getting a very good deal out of the notional rent?

A: Retirement planning is very important and you are right to be considering how you may best exit from your share of the property in the future. Clearly you will hope that the current market value, or the value at the time you retire, is above that which you originally invested at so that there is equity to be released.

However, this is not always clear-cut and an old adage within the valuation industry is that “cost does not equal value”. This applies across all property sectors where a building may have been designed to suit a particular occupier’s requirements in terms of layout, finishes, fixtures, etc.

This does not necessarily mean that a purchaser would value these in the same way as the vendor. For a medical centre it may be that operating practices have changed, requiring significant alteration, or else the finishes, fixtures and fittings are now somewhat ‘tired’ and will need upgrading.

The basis of valuation to be adopted on the retirement or death of a partner is set out within the Partnership Deed, and the valuer would have regard to this in preparing their views. Typically, this will state that the valuation is to be calculated on the assumption of vacant possession, but it may also specify continuing use as medical premises.

In that event, the valuer cannot have regard to potential for alternative uses and redevelopment, which may be higher than the medical use. The valuer will reflect the current level of rent reimbursement and also assess current market rent to see if any uplift at the next review is realistic. Regard will be given to the quality of the property, its age and whether there is a need for any capital expenditure for catch-up repairs or more major works.

As with any investment, this can go down in value as well as up. Clearly, if a GP wishes to take the upside of growth in value, this risk has to be countered against falls in value. You have indicated that the surgery was developed 10 years ago, since which time property markets went through a sustained period of significant growth until the crash in 2007. While many property sectors have experienced a significant fall in value since that time, the primary care market has been less affected. Furthermore, the last year to 18 months has shown improvement in capital values, although the rate of growth in rent has generally slowed.

Accordingly, I would expect that the value of your premises will have increased significantly during the last decade overall and, assuming the building is typical in terms of construction and finish, it is more than likely that the current market value will exceed the original cost of land and construction. You indicate that the property has not been valued since development. I would strongly recommend, in order that the practice can plan for the future, that an updated valuation is undertaken.