Understanding the difference between a property's market value and the rebuild cost is essential for securing the right insurance cover. While both terms relate to your home or commercial property, they represent distinct differences that impact how your home is protected. In this article, we’ll clarify what each term means and explain why understanding rebuild cost and market value is crucial for safeguarding your investment and avoiding a significant financial burden.
What’s the difference between rebuild cost and market value?
Market value
When considering a building's value, market value is often the figure that comes to mind. However, this is not the value used in the context of insurance purposes.
This is essentially the price your property would fetch if you sold it today. It’s influenced by factors like location, demand, the neighbourhood, and today's real estate market. Market fluctuations and the open market also play a role. Average housing prices and the property's overall value reflect what a buyer is willing to pay for your property right now.
Rebuild cost (reinstatement value)
This is the amount it would cost to completely rebuild your property from scratch if it were completely destroyed. An up-to-date accurate rebuild cost assessment is what your insurance company needs to use for your building’s sum-insured, including:
- The cost of materials
- Labour costs
- Professional fees (like chartered surveyors and architects)
- The cost of clearing away debris.
The true rebuild cost focuses solely on the physical structure, not the land or the market conditions.
Because labour expenses remain high and materials can fluctuate in price, the rebuild cost ensures you have the necessary funds to restore your property. This goes especially if it incorporates rare or intricate architectural features. This is particularly important for historic or listed properties that require very careful restoration and may incur higher reinstatement costs.
Why is rebuild cost sometimes lower than market value?
It’s possible for rebuild cost to be less than market value, and here’s why:
Location matters
In high-value areas like London or the South East, property prices tend to be higher due to demand and desirability. However, the cost to rebuild the structure itself may be lower than the market price. This is because rebuild cost doesn’t factor in land value or location premiums.
Special features and extras
Market value often includes extras like landscaped gardens, swimming pools, or proximity to amenities. Rebuilding your home doesn’t necessarily mean replicating all these extras, which can reduce the property's rebuild cost. Properties that include extra bells and whistles may lead to higher premiums for insurance. However, understanding the full cost of rebuilding helps you avoid financial setbacks if a disaster occurs.
By ensuring your rebuild value is accurately assessed, you can receive adequate coverage and potentially benefit from lower insurance premiums while maintaining comprehensive coverage as a safety net.
Land value is not included
Market value includes the price of the land your property sits on, which can be a significant portion of the total value. Rebuild cost only covers the building itself and does not factor in local costs related to land.
Can rebuild cost ever be higher than market value?
Yes, in some cases, the home's rebuild cost can actually exceed the market value:
Listed or historic properties
These often require specialised materials and craftsmanship to restore. This can significantly increase rebuild cost imagine and overall expenses. When a property incorporates rare materials or techniques, accuracy matters to ensure the insurance payout reflects the true cost of restoration.
Areas with low property prices but high construction costs
In some regions, market values are low, but building materials and labour remain expensive. This pushes rebuild costs higher than expected.
Unique architectural features
Properties with intricate designs or rare materials may cost more to rebuild accurately. A property includes extra bells and whistles that add to the rebuild cost imagine beyond what the market value suggests.
Use of rare or expensive materials
If your property includes imported stone, antique wood, or other costly materials, replacing these can raise rebuild costs beyond market value. This is particularly true in pricier properties, where restoration demands are higher.
Many people mistakenly insure their property based on market value, thinking it’s enough. But this can lead to underinsurance, especially if you rely on free online rebuild cost calculators that don’t consider important factors like building type, listed status, or local costs. For this reason, it’s best to avoid generic tools and seek a professional rebuild cost assessment.
How does using market value for the sum insured contribute to high rates of property underinsurance?
Recent data shows that in the UK, 93% of properties are insured for incorrect amounts, 70% of these are underinsured. Often, underinsurance occurs when property owners insure a building for the market value when the reinstatement value is higher. This is a growing concern as inflation, and the cost of materials, goods and services continue to rise pushing reinstatement values up.
Many property owners only learn they are underinsured when a disaster strikes and they make a total or partial loss claim. At this stage, an insurer can reduce their insurance payout by the percentage they believe the client is underinsured. Or, in some cases, void the policy altogether.
How to insure your buildings for the correct amount
Understanding the difference between rebuild cost and market value is key to making sure your insurance policy truly protects your property. For the best coverage, always base your insurance on a professional rebuild cost valuation rather than market price or generic online calculators. Watch our short video on the importance of getting the reinstatement value correct.
To support you, we offer desktop and onsite valuations:
Desktop valuations for just £150+VAT
Desktop valuations provide a trusted rebuild cost imagine estimate within days, with no site visit required. You will receive a reliable, insurance-approved assessment and a detailed report to demonstrate to insurers that your property has been professionally evaluated. This is suitable for commercial properties insured up to £10 million and owner-occupied residential properties up to £5 million. Note: Grade 1 and Grade 2+ listed buildings cannot be assessed via desktop.
Onsite valuations
Premium onsite assessments are offered for any property that does not fit the desktop criteria. This is often due to an unusual feature of a building, typically found in:
- Heritage properties
- Large estates
- Commercial properties
- High-profile venues.
Reach out to your Marsh Commercial advisor to discuss your property’s sum insured, or alternatively email riskmanagement@marsh.com.
Sources
1. rebuildcostassessment.com/2025-property-insurance-infographic
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Download our brochure on how to decide the reinstatement value of your property and avoid underinsurance.
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