Rebuilding gross asset value asset by asset, without the reported NAV, is the second road to a secondary price, and the only one that tells you what the appraiser assumed.
Capitalise each asset's estimated rental value, net of the costs the landlord cannot recover, at a market yield; deduct purchaser's costs and the capex still to spend; sum to gross asset value; then deduct debt and other liabilities and take your share. On an illustrative six-asset fund the tape rebuilds GAV at €389.37m against €410.00m reported, so NAV is 8.4 per cent lower than the report and an offer at a 15.0 per cent headline discount is really a 7.2 per cent discount to rebuilt value.
Worked in full in The Real Estate Secondaries Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The reported net asset value is one number built on appraisals the buyer did not commission, dated a quarter or two before the bid, from a series that is smoothed. Unsmoothing the series corrects the lag, but it still starts from the report. The asset tape lets you rebuild the value without it: rents, costs, yields and capex, asset by asset. Because the two methods share no inputs, their agreement is evidence and their disagreement is a question to put to the manager.
| Asset | ERV | Non-recoverable | Yield | Capex |
|---|---|---|---|---|
| Office, city centre | 6.0 | 8% | 4.75% | 4.0 |
| Logistics warehouse | 4.2 | 3% | 5.00% | 0.5 |
| Retail park | 3.6 | 10% | 6.75% | 1.5 |
| Office, secondary city | 4.8 | 7% | 5.25% | 6.0 |
| Residential block | 3.0 | 25% | 4.00% | 1.0 |
| Hotel on a lease | 2.4 | 2% | 5.50% | 0.0 |
| Total | 24.0 | 13.0 |
Fund balance sheet: reported GAV €410.00m, debt €165.0m, other liabilities €7.5m, cash €9.0m. The interest for sale is 12.5 per cent of the fund, offered at 85 per cent of reported NAV. Purchaser's costs are 6.8 per cent. The yields are the buyer's view of today's market, which is the point: they are the inputs you choose, where the appraisal's were chosen for you. All figures are illustrative.
1. Net income = ERV × (1 − non-recoverable ratio). City centre office: 6.0 × 0.92 = 5.520.
2. Gross value = net income / yield = 5.520 / 4.75% = 116.21.
3. Net value = gross / (1 + purchaser's costs) − capex = 116.21 / 1.068 − 4.0 = 104.81.
4. Repeat for each asset and sum: rebuilt GAV = €389.37m, 5.0 per cent below the reported 410.00.
5. NAV = GAV − debt − other liabilities + cash = 389.37 − 165.0 − 7.5 + 9.0 = €225.87m, against 246.50 reported: 8.4 per cent lower.
6. The interest: 12.5% × 225.87 = €28.23m. The offer is 85% × 12.5% × 246.50 = €26.19m, a 7.2 per cent discount to the rebuilt value.
Excel, per asset row: =B2*(1-C2)/D2/(1+6.8%)-E2, then =0.125*(SUM(F2:F7)-165-7.5+9)
| Asset | Net income | Gross value | Value after costs and capex |
|---|---|---|---|
| Office, city centre | 5.520 | 116.21 | 104.81 |
| Logistics warehouse | 4.074 | 81.48 | 75.79 |
| Retail park | 3.240 | 48.00 | 43.44 |
| Office, secondary city | 4.464 | 85.03 | 73.61 |
| Residential block | 2.250 | 56.25 | 51.67 |
| Hotel on a lease | 2.352 | 42.76 | 40.04 |
| Total | 21.900 | 389.37 |
A 5.0 per cent gap in GAV becomes an 8.4 per cent gap in NAV because the debt does not shrink with the buildings: GAV is 1.72 times the rebuilt NAV, and loan-to-value rises from 40.2 per cent on the reported figure to 42.4 per cent on the rebuilt one. Half of the headline discount is not a discount at all; it is the distance between the appraiser's yields and the buyer's.
| Case | GAV | NAV | Interest | Change | Offer vs value |
|---|---|---|---|---|---|
| Base | 389.37 | 225.87 | 28.23 | 0.0% | 7.2% discount |
| Yields +25 bp | 370.23 | 206.73 | 25.84 | −8.5% | 1.3% premium |
| Yields −25 bp | 410.56 | 247.06 | 30.88 | +9.4% | 15.2% discount |
| ERV −5% | 369.25 | 205.75 | 25.72 | −8.9% | 1.8% premium |
| Non-recoverables +2 points | 380.50 | 217.00 | 27.13 | −3.9% | 3.4% discount |
| Yields +25 bp and ERV −5% | 351.07 | 187.57 | 23.45 | −17.0% | 11.7% premium |
Two things stand out. First, the reported GAV is almost exactly what the tape gives at yields 25 bp lower: 410.56 against 410.00. That is the diagnostic. The appraiser has not done anything exotic; the yields are a quarter point keener than the buyer's, which is what a lagging appraisal looks like after a repricing. Second, the margin is thin. Yields only 21 bp above the buyer's base case, or ERVs about 5 per cent lower, take the whole discount away.
A full rebuild from the tape, with the in-place debt marked and the exit-yield stress, is in the free workbook for this case. The opposite road, from reported GAV down to NAV, is in how to get from GAV to NAV, and the debt mark in marking fixed-rate debt to market.
Because the reported NAV rests on appraisals that lag the market and on assumptions you cannot see. The tape shares no inputs with the report, so where the two disagree you find out which yields or rents the appraiser used. On the illustrative fund the rebuild lands 5.0 per cent below the reported GAV, close to what 25 bp lower yields would explain.
More than it moves the buildings. On the illustrative fund, 25 bp higher yields cut GAV by 4.9 per cent and the value of the interest by 8.5 per cent, because debt does not move with the assets: GAV is 1.72 times NAV. That is enough to turn a 7.2 per cent discount to rebuilt value into a 1.3 per cent premium.
For each asset: estimated rental value, the share of costs the landlord cannot recover, a market yield, and the capital expenditure still to be spent, plus the fund's debt, other liabilities and cash. Six assets with 24.0m of ERV, 13.0m of capex and 165.0m of debt are enough here to rebuild the NAV to within a few points.
This article is one calculation from The Real Estate Secondaries Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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