Net asset value (NAV) is the total sum of all assets measured at fair value less all the liabilities of a company.1 The origins of NAV as a method for the valuation of companies lie in the US, where the concept was developed to value property stock corporations or stock corporations with large property holdings. It is also used for property funds. Unlike non-property companies, which are normally valued using the DCF method, for property stock corporations that fact has to be taken into account that depreciation often does not occur in reality. Rather, increases in value usually more likely than depreciation.2 Furthermore, conventional valuation indicators such as the price to sales ratio cannot be used for property stock corporations as their sales cannot be compared with those of conventional industrial companies. These facts are taken into account in the calculation of net asset value.
For property companies, NAV is calculated as the sum of fair values as calculated by third-party experts plus the value of other assets less all liabilities.3 The value is then corrected by the respective equities analyst by additions or deductions to produce the market value. This is the result of various valuation criteria. These include the quality of company transparency, the quality of management, the focus on core competencies and access to new capital.4 The difference between NAV and public pricing (market capitalisation) is due to the fact that the market value includes the costs of the company’s administrative activities, which are left out in the fair value assessment (as the basis of NAV). The same applies to tax issues at company level, which are not taken into account in the expert valuation. Furthermore, the expert valuation does not consider the size or diversification of the property portfolio or the company’s fungibility. However, it has a significant influence on a company’s market value. A further difference is due to the periods analysed for the two different values. While the fair value assessment predominantly takes into account past data, market valuation is more of a future assessment of the market. Moreover, the accounting transparency and information policy of a property stock corporation are not included in expert valuation, while these components also have a significant influence on its market price.5 The net asset value therefore has to be corrected by appropriate additions or deductions to produce the fair market value.
Formally NAV is calculated as follows:
Fair value of properties
+ Value of other assets
- Borrowed capital
- (Capitalised overheads)
= Net asset value6
NAV is also becoming increasingly important as a comparative and target figure for property funds as they are not priced each trading day. Here, too, there is no uniform method of calculation in the industry, though it is recommended to follow the recommendations of the industry associations BVI (Germany) or INREV (Europe) in calculating NAV.7