All about REIT - Net Asset Value (NAV) and Asset Valuation

Previously I have wrote about gearing and yield, two basic figures that are usually used in assessing a Reit. The Net Asset Value (NAV) per unit is another basic figure that is frequently used in assessing a Reit. NAV is the total assets minus the total liabilities of the Reit. NAV per unit is simply the NAV of the Reit divided by the total number of units in issue. Theoretically, the NAV per unit is the remaining assets of the Reit in which the unit holders will receive per unit in the event that the Reit is liquidated, and after its assets were sold off and used to pay off existing debts to debtors and bond holders. In practice this is usually not true, reason of which I shall elaborate in the section on Asset Valuation.

Determining NAV and NAV per unit from Financial Reports
To get the latest NAV, you should refer to the Balance Sheet statement of the latest quarterly earnings report. The Balance Sheet statement will list all the assets and liabilities of the latest quarter, and somewhere below the statement there should be an item call Net Assets or Net Asset Value, which is the NAV. Otherwise, the NAV can also be easily calculated by deducted total liabilities from the total assets.

The earnings report will usually list the assets and liabilities for the same quarter of the previous year alongside figures of the latest quarter. This will give you an idea of how much the NAV has changed over the year, and which item is the main cause of it. Example, the NAV may have reduced drastically due to devaluation of the property assets. In this case you should see a huge reduction in the item "Investment Properties" under "Non-Current Assets" compared to the a year ago. For a real life example you can refer to the 4Q 2009 earnings report of Capital Commercial Trust. There is a page showing the Balance Sheet as at 31 December 2009 vs 31 December 2008. The Investment properties has dropped by 17.1% to about S$5.5 billion in Dec 09 from about S$6.7 billion in Dec 08. The Net assets shows a drop of 4.8% to about S$3.9 billion from about S$4.1 billion. The drop in NAV is not as drastic as the investment properties because of the payment of debts which reduces the liabilities. This info can also be found in the balance sheet, under the Long Term and Short Term borrowings.

The NAV per unit is usually quoted in the earnings report. Otherwise it can be easily calculated by dividing the NAV determined above by the total number of units in issue.

Asset Valuation
The asset valuation of the investment properties of a Reit is one of the most important factors that impact the NAV. Section 8 of Appendix 2 in the MAS Code on Collective Investment Schemes contains the details about Valuation of the Property Fund’s Real Estate Investments.

As mentioned above, in the event that a Reit is liquidated, the unit holder should get back assets equivalent to the NAV per unit. However, this is usually not true in practice and one of the reason is closely related to the frequency of valuation of the properties. Following are 2 related sections in the MAS code covering the frequency of valuation:

"8.1 A full valuation of each of the property fund’s real estate assets should be conducted by a valuer at least once a year, in accordance with any applicable Code of Practice for such valuations."
                                                                                   
"8.2 Where the Manager proposes to issue new units for subscription or redeem existing units, and the property fund’s real estate assets were valued more than 6 months ago, the Manager should exercise discretion in deciding whether to conduct a desktop valuation of the real estate assets, especially when market conditions indicate that real estate values have changed materially."

From the above, we find that the Reit is only required to do a valuation of its assets once per year. So the NAV we see in the earnings report could sometimes be outdated by several months, and does not reflect the true value the property will fetch if it is to be sold in the market. This is especially so if the property sector is in a severe down trend, like what has happened to the office sector in the past few quarters.

Desktop valuation mentioned above means a valuation based on transacted prices/yields of similar real estate assets, without a physical inspection of the property. Sometimes we will see Desktop valuation being used in Analyst reports of a Reit, in which the analyst will try to give a more updated estimate of the asset valuation of the properties based on the latest transacted price of similar properties, usually properties in nearby locations that are of a similar grade.

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