REIT–Net Asset Value (NAV) Valuation

Recently, I started to study the proper way in doing analysis and valuation for REIT counters. I came across Net Asset Value which is the common valuation in REIT.

We can easily obtain NAV from any REIT’s annual report. Thus, here, we won’t go into details of calculating NAV. In fact, I also don’t know how to calculate it.

In simple terms, NAV is an adjusted net asset value reflecting the market values of real estate properties held by an investment corporation. However, NAV does not directly affect unit-holders’ return. It is commonly used to determine if a REIT stock is undervalued or overvalued from a fundamental analysis point of view. This is done by comparing NAV per unit of a REIT to its current stock price. If the NAV per unit is higher than the REIT stock price, then it is said to be undervalued and vice-versa.

In real estate property, capital gain during disposal due to property value appreciation is the norm. However, for REIT, investors do not get the benefit of property value appreciation, reflected by NAV.

However, if a REIT reports that one of its property holdings has risen 20% in value, it will not benefit unit-holders until the REIT manager sells that property and realised their 20% gain. As long as they still hold onto that property and collecting rent from it, the 20% in value does not benefit investors directly in income distribution.

Even if the manager sold the property, the realised gain of capital revaluation on disposal is not the same as operating or rental income. Capital gain is tax-exempted in the first place. Therefore, there is no mandate or requirement that 90% of the realised capital gain must be distributed to obtain the tax-exempt benefit like rental income does (Money Compass).

Therefore, NAV is actually not really useful valuation for REIT.

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2 thoughts on “REIT–Net Asset Value (NAV) Valuation

    • Later, I will publish a “beta” version of REIT analysis. So far, I think DCF and DY% Valuation looks promising. For DCF, we cannot use owner earnings or free cash flow, but use adjusted funds from operations. Some people proposed Dividend Discount Model, but based on my observation, distribution per sen for most REIT companies are not really consistent.

      Please give comments after you see my first REIT analysis.

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