What it means
Property does not have a live market price, so the starting point is a valuation of each building. Most portfolios are valued by capitalising net operating income, that is, dividing the annual rent left after property costs by a market yield known as the capitalisation rate.
Independent surveyors typically do this quarterly or twice a year, which is why property net asset value moves in steps rather than continuously. The debt side is usually large and matters enormously.
Property is financed with substantial borrowing, so a modest change in property value produces a much bigger change in the equity left underneath it. This gearing effect is the single most important feature of a property net asset value.
The figure is used in three main ways: pricing subscriptions and redemptions in open-ended property funds, judging the premium or discount at which a listed property company trades, and setting management or performance fees. Because so much rests on it, valuation methodology and independence attract close scrutiny from investors and regulators alike.
Analysts often adjust the reported number before using it. Common variants strip out deferred tax on gains that would only arise on a sale, add back the fair value of derivatives, or restate development projects at completed value less costs to complete, producing measures such as EPRA net tangible assets.
The adjustments aim to show the value a long-term holder would realistically capture. The nuance to hold on to is sensitivity to the capitalisation rate.
Because value is income divided by yield, a small rise in the yield cuts the property value sharply, and with debt fixed in amount the whole reduction lands on the equity. Any serious analysis shows net asset value at a range of yields rather than a single point estimate.
In practice
Real-world examples.
Example
A logistics property trust reports net asset value per share of $3.20 while its shares trade at $2.56, a 20% discount. The board announces a share buyback, arguing that buying its own shares at that level is better value than acquiring new warehouses.
Example
An open-ended property fund receives large redemption requests. Because units are priced at net asset value and selling buildings takes months, the manager suspends dealing rather than pay out early redeemers at a value the remaining portfolio cannot support.
Example
A private landlord refinances an apartment block. The lender values the building at $18,000,000 against existing debt of $11,000,000, so net asset value in the property is $7,000,000 and the landlord can draw a further $1,600,000 while staying within a 70% loan-to-value limit.
Think of it
“NAV is what the properties are worth minus debt-the underlying value of the real estate.
Formula
Calculation
Property value = net operating income / capitalisation rate, then net asset value = property value + other assets - debt - other liabilities, and net asset value per share = that figure / shares outstanding.
A listed property company owns a portfolio generating net operating income of $24,000,000 a year, and comparable buildings trade at a 6% capitalisation rate. Property value = $24,000,000 / 0.06 = $400,000,000. Add cash of $10,000,000, deduct mortgage debt of $260,000,000 and other liabilities of $6,000,000: net asset value = $400,000,000 + $10,000,000 - $260,000,000 - $6,000,000 = $144,000,000. With 16,000,000 shares in issue, net asset value per share = $144,000,000 / 16,000,000 = $9.00. Now move the capitalisation rate to 6.25%: property value = $24,000,000 / 0.0625 = $384,000,000, net asset value = $384,000,000 + $10,000,000 - $260,000,000 - $6,000,000 = $128,000,000, and the value per share falls to $128,000,000 / 16,000,000 = $8.00. A 4% fall in property value produced an 11% fall in net asset value per share, which is gearing at work.Case study
Seen in the real world.
Fenwick Yard Estates is an invented property company used here as an illustrative example. It owned nine suburban office buildings generating $30,000,000 of net operating income, valued at a 5.5% capitalisation rate for a portfolio value of roughly $545,000,000, against debt of $330,000,000.
When market yields moved out to 7% over eighteen months, the same income supported a value of about $429,000,000. Property value had fallen by around 21%, but because the debt stayed at $330,000,000 the equity fell from roughly $215,000,000 to about $99,000,000, a drop of more than half. The share price fell further still, since investors also doubted whether the rent roll would hold as leases expired.
Fenwick Yard sold two buildings to cut debt to $250,000,000 and lengthened the leases on three others before refinancing. The fictional sequence illustrates the point every property investor eventually learns: net asset value is an equity figure sitting underneath fixed debt, so it moves far more violently than the buildings themselves.
Watch out
Common mistakes.
- Reading a property net asset value as a precise number. It rests on a surveyor's estimate and a chosen capitalisation rate, and both are opinions supported by comparable evidence rather than facts.
- Ignoring how gearing amplifies changes. A 10% fall in property values can easily halve the equity in a portfolio financed with heavy borrowing.
- Comparing companies on reported net asset value without checking the adjustments. Deferred tax, derivatives and development assets are treated differently across reporting standards.
Questions
People also ask.
Why do listed property companies often trade at a discount?
Investors may doubt the valuations, want compensation for illiquidity and running costs, or expect values to fall before the next revaluation catches up.
How often are property valuations updated?
Typically quarterly or twice a year by independent valuers, with directors' valuations in between, which is why the figure lags the listed market.
What is a capitalisation rate?
It is the yield used to convert annual net operating income into a capital value, so a higher rate means a lower value for the same income.
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