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This latest article in our series on the HMT Thematic Review summarises the possible issues with implementation across the UK central government’s varied property portfolio.

It follows on from Gary Howes’ initial article on how HMT changes could impact the healthcare sector, including healthcare trusts.

HMT have been reviewing all the responses to their Consultation Paper, which closed on 18th May. The paper set out proposed changes to the way public sector non-investment assets are valued and subsequently prepared for financial reporting purposes. HMT proposed that historic (deemed) cost accounting would be used for specialised property assets except for networked assets. For non-specialised properties, Existing Use Value would be phased out in favour of Fair Value.


Specialised property is a prominent feature within the UK central government estate; schools are 50% of the estate by floor area, defence 20%, health 18.5% and prisons 3.6%, with non-specialised offices ranked fifth of the twelve property categories at 2.9%. (Source – State of the Estate 2020.21). This means that most of the c.157m m2 of the central government estate would be directly impacted by the proposed HMT changes.


It is fair to say that HMT has valid concerns about the assumptions used in Depreciated Replacement Cost (DRC) valuations for specialised properties. DRC is based on the service potential of properties, but any surplus land may be disregarded if it is not deemed specifically surplus to requirements. For example, for any large legacy schools that are assessed as being under capacity, the service potential needed to meet the valuation assumptions may only be a small part of the land and buildings. Users of government accounts cannot, therefore, establish what could be potentially a surplus, how much this would sell for in the open market, and whether it is capable of sub-division from the retained school.

HMT want to ensure a ‘true and fair’ view of the UK government’s estate position while at the same time considering ‘value for money’ in the cost of preparing accounts. While the proposed changes may address ‘value for money’ concerns, there is widespread scepticism about whether ‘historic (deemed) cost’ provides end users with visibility over the measurement of specialised assets and whether they are an accurate reflection of service potential or operational capacity.


There are a variety of concerns about the application of ‘historic (deemed) cost’ for specialised property. We have summarised three key issues below, with a focus on schools due to the variability of their service potential:

  1. Historic cost still does not solve the issue of identifying and quantifying surplus elements. In any case, on the transition to HMT’s proposed methodology, the ‘historic (deemed) cost’ is likely to be the DRC value at that point. This means that many of the issues with DRC will be inherited by the new historic cost approach at the start.
  2. There will have to be close monitoring of property spending with judgements on what adds to the historic cost (say, an extension) and what does not (e.g. day-to-day maintenance). Even if the cost is correctly allocated to an extension, in our experience, the amount spent on a new extension does not necessarily translate into the same amount of added asset value. This is particularly the case where some costs do not relate to the physical building, such as decanting staff/pupils from space whilst works are undertaken.
  3. DRC can adapt to the reduction in the service potential of schools by derecognising individual buildings impacted by inherent defects such as RAAC. For schools that have a low pupil roll relative to capacity, there might not be any impact on value as the service potential of the school can satisfied through the remaining buildings on site. For a smaller school that is over capacity, the impact of RAAC will be higher, with the economic life of the school adjusted accordingly. This ability to adjust the depreciation depending on impact is not possible with the proposed historic cost methodology.


HMT has the challenging task of balancing ‘value for money’ with ‘true and fair’ accounts. It is important that those involved in the valuation of central government property estate closely monitor any announcements from HMT HERE and in the wider media.

Should there be changes to HMT’s proposals or delays to publication and implementation, contracts with external valuers will need to build in enough flexibility. If there are no delays to implementation, finance teams are likely to have a requirement for significantly more DRC valuations prior to the 2025 transition. If these valuation demands are not anticipated, there might not be the resources with the right level of expertise to cover the increased valuation volumes in view of their highly specialised nature, and this may lead to issues with auditors and finalising accounts.


healthcare, insight, central government