Wednesday, December 19, 2012

REITs Trading Below NAV (Net Asset Value)

Net Asset Value or NAV is one of the factors to consider when investing in REITs.  The NAV is basically the sum of all the REITs' assets (usually property and cash) minus away its liabilities (e.g. bank loans).  Investors often look at the price of the REIT and its NAV to see whether a bargain exists when a REIT is trading at significant discount to its NAV.

Should a REIT trade above NAV or below NAV?

A common argument is that REITs should actually trade above their NAV.  Why so?   There are a few reasons given:
  • A REIT is more liquid that a property itself.  As such, a "premium" or value should be placed on this added liquidity as compared to a real property.  An investor in a REIT can basically liquidate his holdings in the stock market as compared to holding a real property which requires time and effort to get rid of.  
  • Smaller upfront capital required as compared to a real property.  
  • Professional management without hassle of being a landlord yourself
  • Divesification into various properties
  • NAV was determined sometime back and it is likely that today's NAV of the property is higher

However, it is not uncommon to find certain REITs that actually trade at a discount to their NAV.  Many reasons are given for this discount.  The most common answer that links the reason for this discount is that of RISK.  This could be due to:

  • Foreign Exchange risk
  • Drop in property value 
  • Potential drop in distributions
  • Country Risk
  • Uncertainty about the future outlook of the REIT
  • NAV was determined sometime back and it is likely that today's NAV of the property is lower

Just a few years back, when the market sentiment was weaker, most Singapore REITs were trading at significant discount to their NAV.  At the end of 2012,  REITs that are trading at discount to their NAV are much fewer. These include Fortune REIT, Suntec REIT, Frasers Commerical Trust, Saizen, LippoMalls Indonesia Retail Trust, Ascott and Starhill Global.

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