How Is Net Asset Value Used in Real Estate?

By Published On: November 18, 20213.5 min read

Net asset value (NAV) is frequently used with common funds to define the value of assets held. The net asset value signifies a fund’s market value, representing the per-unit market value when it is expressed at a per-share value. The per-share value is the price at which investors can purchase or sell fund units.

If the value of securities in the fund increases, the NAV of the fund increases, and if the value of the securities in the fund decreases, the NAV of the fund decreases. Therefore, the net asset value represents the net value of a unit and is calculated as the total value of the unit’s assets minus the overall value of its liabilities. NAV represents the per share/unit price of the fund on a precise date or time and is the price at which the shares/units of the funds registered with the U.S. Securities and Exchange Commission (SEC) are invested or redeemed.

How Is Net Asset Value Used in Real Estate?

Net asset value represents the implied value of an investment fund, which can be a mutual fund, exchange-traded fund (ETF) or real estate investment fund on a per-share basis. This metric helps investors to determine whether a fund trades at a high rate or at a discount to its assets’ fundamental value, which can help in the decision-making of buying and selling.

NAV is indeed a useful tool for real estate investors, as it can be used to determine if investors are disbursing too much for a real estate portfolio or getting a contract. Likewise, it will also help to determine whether investors are selling at a reasonable price or giving real estate assets out at a discount.

The Net Asset Value Formula

The formula for calculating NAV is:

Net Assets = Assets – Liabilities

First, calculate the total assets. Similarly, calculate the total liabilities that the investor must pay in the future. Then, add line by line liabilities to get a total amount for liabilities.

Total liabilities can include total borrowings, provisions or current and other non-current liabilities.

Then, deduct the total liabilities from the total assets to get the NAV.

Example of a Net Asset Formula Calculation

The calculation of NAV is relatively simple.

A fund’s assets (cash and securities) minus liabilities (debt) divided by the number of unsettled shares.

For instance, let’s say a real estate crowdfunded Real Estate Investment Trust (REIT) reports having real estate assets with an estimate of $140.5 million (net of loan debt) and $5 million in cash. The same fund also has about $500,000 in liabilities. Therefore, it has roughly $145 million in net assets ($145.5 million of total assets minus $500,000 in liabilities). Currently, this fund has 11.156 million shares unpaid.

Result: Net Asset Value of $13 per share (145 ÷ 11.156 = 13).

Benefits of NAV in Assessing Real Estate Investment Trust-REITs

The NAV is an essential metric to utilize when evaluating REITs. The use of the NAV is an attempt to avoid book value in favor of providing a more exact estimate of definite market value for REIT assets.

To calculate a net asset value, a market analyst generates a subjective assessment of the REIT’s asset. A way of getting this done is looking at the capitalization of the operating income, based on market rates. A cap rate for the contemporary market is determined and used to divide the operating income of a property, with the estimated market value as the resulting amount.

The market value minus any debt liabilities gives the NAV.

The total NAV can be divided by unpaid shares to provide a per-share NAV.

Although the NAV is a good metric to analyze REITs, it is only as good as the market analyst affecting the assessment of each property of the REIT. The market value of assets has to be carefully calculated to arrive at a precise NAV for the entire REIT.

The Real Estate Difference

Real estate is different from other industries, as the value of assets owned by an investor can be estimated with a realistic precision NAV. There are considerable benefits to understanding why NAV is essential and how an investor can be informed both in the public and private real estate markets.

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