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What Should Real Estate Investors Know About Net Asset Value?

A look at net asset value (NAV) from a real estate perspective.

[Updated: Feb 04, 2021] Sep 03, 2020 by Matthew DiLallo
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Net asset value, or NAV, represents the implied value of an investment fund (e.g., mutual fund, exchange-traded fund (ETF), or real estate investment fund) on a per-share basis. This metric helps investors determine if a fund trades at a premium or discount to its assets' underlying value, which can help them make decisions to buy or sell.

Here's a closer look at what net asset value is from a real estate perspective.

How to calculate NAV

A NAV calculation is relatively simple. It's a fund's assets (cash and securities) minus its liabilities (debt) divided by the number of outstanding shares.

For example, a real estate crowdfunded real estate investment trust (REIT) reports having real estate assets with a valuation of $140.5 million (net of mortgage debt) and $5 million in cash equivalents. The same fund also has about $500,000 in liabilities. Thus, it has approximately $145 million in net assets ($145.5 million of total assets minus $500,000 in liabilities). Currently, this fund has 11.156 million shares outstanding. That gives it a net asset value of $13 per share (145 ÷ 11.156 = 13).

How real estate investors can use NAV

NAV gives investors a good way to measure the current value of a fund's portfolio. That allows them to use it as a guide to help them make buy and sell decisions. For example, if shares of a real estate ETF sell for around $82 apiece and the fund's NAV is above that level, it trades at a premium. In a case like that, an investor might be more willing to sell than buy.

Conversely, if a real estate crowdfunding REIT has a NAV of $10 per share but will only allow investors to sell at a 5% discount to its NAV during their first year, it incentivizes them to hold, since selling would be at a discount to the fund's full value.

How to use NAV to value REITs

Publicly traded REITs don't typically trade based on their NAV. However, many provide this information so that investors can gauge whether shares are undervalued (and thus an attractive buy).

For example, following a stock market sell-off, a diversified REIT finds its shares trading at a market price of $11.50 apiece. However, the company estimates that:

  1. Its office portfolio's fair value is $14.55 per share.
  2. The retail portfolio is worth $14.76 per share.
  3. The book value of its limited partnership investments in private-equity real estate funds is $5.38 per share.

After subtracting its corporate liabilities, which it pegs at $5.80 per share, the REIT has a net asset value of $28.89 per share ($14.55 + $14.76 + $5.38 - $5.80 = $28.89). Thus, the REIT trades at a significant discount to its NAV, suggesting that real estate investors would be getting a bargain if they bought shares.

NAV helps real estate investors value investment portfolios

NAV can be a useful tool for real estate investors. They can use this metric to determine if they're paying too much for a real estate portfolio or getting a deal. Likewise, it also helps them determine whether they're selling at a fair price or giving away real estate assets at a discount. That makes it a good number to check before making a buy-or-sell decision involving a real estate fund or REIT.

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