How to invest
As a real estate investor, it is important to understand how assets are valued to make well-informed investment decisions. Prior to investing in real estate, any savvy investor will want to know if the units within that property, fund or trust are priced fairly. There are two key metrics that should be used when completing that assessment.
Both GAV and NAV communicate the investment value of a property. These measures are commonly used in relation to REITs and property funds. The measures are broadly used to calculate on-going management fees, performance fees and by investors when considering entering an investment on the secondary market.
GAV is used to describe the current value of all assets held within a property fund. It includes debt and equity positions but excludes acquisition and establishment costs. GAV can also be understood as the market value of all assets within a fund.
NAV is used to describe the current value of all assets held within a property fund less any debt associated with the fund. NAV typically works on a per-share basis, meaning it shows the market value of an individual share within a fund. Investors looking to enter an investment on the secondary market will compare the NAV with the current asking price to ensure it is inline with the underlying market value.
In a property fund, GAV and NAV are measures used by a manager to communicate the investment value of the assets within the fund. The methods of calculating such measures vary with geography, industry and investor preferences. GAV is the sum of the market value of all assets within a fund whereas calculating NAV accounts for the debt associated with the fund. One of the most common valuation methods used to determine GAV and NAV is based on the discounted cash flow (DCF) analysis. At the core of this concept is the notion that the value of an asset is determined by the future cash flows the asset generates. In the case of commercial property these future cash flows are it’s ongoing rental stream and future sale proceeds.
Using DCF analysis an investor will begin by forecasting future rental streams, potential vacancy, tenant incentives, operating expenses and future sale proceeds to determine the future cash flows to the asset. This will yield the ‘unlevered cash flow’ (or ‘property level cash flow’). The use of leverage is very common in commercial property and most investors seek the asset class given leverage is such a prominent feature. As such an investor will deduct interest expense on the debt secured on the asset. The amount leftover is distributed to investors over time. At the end of the investment horizon the manager will sell the asset and distribute the net proceeds to investors after repaying debt, paying selling costs and other transaction costs. This is considered the ‘levered cash flows’ (or ‘cash attributable to investors’).
Money today is worth more to an investor than money in the future. As a result the promise of future cash flows will be discounted by investors at an appropriate rate to reflect their perception of future risk of a property’s cash flows. A combination of high future rent growth, low operating expense growth and minimal expected volatility of cash flows will result in a higher GAV and NAV.
Using the DCF analysis, GAV is determined by applying a discount rate to future unlevered cash flows and NAV is calculated by applying a discount rate to future levered cash flows. Investors will often use NAV as a benchmark to assess the attractiveness of a deal when entering through the secondary market
The Investment Team at Jasper will often gather comparable sales and leasing transactions and other market benchmarks to ensure that our GAV and NAV measures are in line with the market. All investments that are offered on the Jasper platform are backed by thorough independent market valuations and sense checked by an investment committee.
Posted on 7 Nov 2019
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