INREV NAV adjusts the accounts towards what the units are worth, but two of its lines are sunk costs, and a secondary buyer has to know which.
INREV NAV is IFRS NAV plus a handful of adjustments: debt and other financial instruments at fair value, accounting deferred tax replaced by the tax the fund expects to pay, and set-up and acquisition costs capitalised and written off over five years. On an illustrative fund, an IFRS NAV of 199.0 million becomes an INREV NAV of 230.58 million, 15.87 per cent higher. For a secondary buyer the question is which of those adjustments are value: here 11.40 million of them are sunk costs.
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 →
Many European non-listed real estate funds report both figures, and secondary bids are quoted against one of them, often INREV NAV because it is the number on the investor report. The adjustments were designed to make NAV a better estimate of what the units are worth to their holders, and several of them do. The cost lines exist for a different reason: so that an investor entering at launch does not see an immediate loss from costs every investor bears. That logic does not carry over to someone buying in later at a price.
| Line | Value |
|---|---|
| Properties at fair value (GAV) | 400.0 |
| Cash and other assets | 18.0 |
| Fixed-rate debt at amortised cost, 3.0% coupon, 4 years left | 200.0 |
| Other liabilities | 7.0 |
| Deferred tax liability under IFRS | 12.0 |
| IFRS NAV | 199.0 |
| Market rate for equivalent debt today | 5.0% |
| Tax expected on exit, share of the IFRS liability (share sale planned) | 50% |
| Set-up costs, incurred two years ago | 3.0 |
| Acquisition costs, 4.0% of 300.0 of properties bought a year ago | 12.0 |
INREV NAV = IFRS NAV + (debt at book − debt at fair value) + (IFRS deferred tax − expected tax) + unamortised set-up costs + unamortised acquisition costs
Unamortised cost = cost × (5 − years elapsed) ÷ 5
For the debt, in Excel: =-PV(0.05, 4, 6, 200) returns 185.82.
Step 1: IFRS NAV. 400.0 + 18.0 − 200.0 − 7.0 − 12.0 = 199.0.
Step 2: debt at fair value. Four coupons of 6.0 and the 200.0 repayment, discounted at 5.0 per cent, are worth 185.82. The fund owes 14.18 less in today's money than its balance sheet shows. The full method is in marking fixed-rate debt to market.
Step 3: deferred tax. IFRS books tax on the revaluation gain as if each building were sold directly. The fund expects to sell shares in its property companies, and estimates the tax that would actually arise at half the accounting figure, 6.0. The adjustment adds back the other 6.0.
Step 4: set-up costs. 3.0 written off over five years, two of them gone: 3.0 × 3 ÷ 5 = 1.80 stays in INREV NAV.
Step 5: acquisition costs. Transfer taxes, fees and due diligence on the 300.0 of properties came to 12.0. IFRS adds them to cost at purchase and then loses them at the first fair value measurement, because fair value excludes them. INREV capitalises them and writes them off over five years: 12.0 × 4 ÷ 5 = 9.60 remains.
| Line | Amount | Recoverable by a buyer? |
|---|---|---|
| IFRS NAV | 199.0 | |
| Debt at fair value | 14.18 | Yes, until the loan matures |
| Deferred tax, excess over expected | 6.0 | Yes, if the share sale happens |
| Unamortised set-up costs | 1.80 | No |
| Unamortised acquisition costs | 9.60 | No |
| INREV NAV | 230.58 |
INREV NAV is 31.58 above IFRS NAV. 20.18 of the difference is value the buyer inherits: a cheap loan and a tax bill smaller than the accounts show. The other 11.40, 4.94 per cent of INREV NAV, is money already spent. A buyer's own NAV, IFRS plus the two recoverable lines, is 219.18.
Take a 10 per cent interest offered at 10 per cent below INREV NAV: 23.06 less 10 per cent, a price of 20.75. Against IFRS NAV, 19.90, that is a 4.28 per cent premium. Against the buyer's 21.92, it is a discount of 5.32 per cent, about half the headline. The same price is three different discounts depending on the NAV it is quoted against, which is the starting point of what an 18 per cent discount actually buys.
The cost lines wear off. With set-up and acquisitions at the same age, the gap between INREV NAV and the buyer's NAV falls by a fifth of the costs each year:
| Years | Set-up costs left | Acquisition costs left | Gap to buyer NAV | Gap, % of buyer NAV |
|---|---|---|---|---|
| 0 | 3.00 | 12.00 | 15.00 | 6.84% |
| 1 | 2.40 | 9.60 | 12.00 | 5.47% |
| 2 | 1.80 | 7.20 | 9.00 | 4.11% |
| 3 | 1.20 | 4.80 | 6.00 | 2.74% |
| 4 | 0.60 | 2.40 | 3.00 | 1.37% |
| 5 | 0.00 | 0.00 | 0.00 | 0.00% |
A young fund that has just bought its assets carries the largest gap; a fund in year six reports the two NAVs apart only by debt and tax. Leverage magnifies the cost line: acquisition costs of 3.0 per cent of GAV are 6.03 per cent of IFRS NAV at 50 per cent loan-to-value.
Treating INREV NAV as the value of the units. It is a better reporting number than IFRS NAV for an investor who holds to the end, because it spreads the costs of entry over the years that benefit from them. For a buyer it includes 11.40 of costs that no future sale will recover. The opposite mistake is to strip the debt mark and the tax adjustment as well and price off IFRS NAV, which hands the seller 20.18 of genuine value for nothing.
INREV's guidelines contain further adjustments, for property held at cost, development property and non-controlling interests among them, and each fund applies them in its own way. The figures here are illustrative; the reconciliation in the investor report is the place to start.
The book's net asset value is taken apart layer by layer in the free workbooks for this case; the bridge from gross to net asset value is in GAV to NAV in a real estate fund.
Usually because of three adjustments: below-market fixed-rate debt marked to fair value, accounting deferred tax replaced by the tax the fund actually expects to pay on exit, and set-up and property acquisition costs capitalised instead of expensed. On the illustrative fund they add 14.18m, 6.0m and 11.40m, taking 199.0m to 230.58m, 15.87 per cent more.
Five. INREV capitalises the costs of setting up the vehicle and of acquiring its properties and writes them off over five years. 3.0m of set-up costs two years into the life of the fund leave 1.80m in INREV NAV; 12.0m of acquisition costs one year after purchase leave 9.60m. After year five both are zero and the two NAVs differ only by the debt and tax lines.
Off neither without adjustment. The debt and deferred tax lines in INREV NAV are value a buyer can recover; unamortised set-up and acquisition costs are not. On the example, a 10 per cent discount to INREV NAV is a 4.28 per cent premium to IFRS NAV and a 5.32 per cent discount to the 219.18m a buyer would actually underwrite.
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.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.