The bridge from gross asset value to net asset value is five lines, and it decides what a secondary discount to NAV really says about the buildings.
A real estate fund's NAV is its gross asset value plus cash and other assets, less debt, other liabilities and deferred tax. On an illustrative fund with €500.0 million of property, €525.0 million of total assets becomes a NAV of €261.0 million, 52.2 per cent of GAV, so at 50 per cent loan-to-value every 1 per cent move in property values moves NAV by about 1.92 per cent. That ratio is what turns a secondary discount to NAV into a statement about the buildings.
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 →
Secondary bids on real estate fund interests are quoted against reported NAV. The properties, though, are valued gross, and the buyer's real question is what the price implies the buildings are worth. Answering it needs the bridge from GAV to NAV laid out line by line, with one line most reports leave out.
| Line | € m |
|---|---|
| Properties at appraised value (GAV) | 500.0 |
| Cash | 20.0 |
| Other assets (receivables, prepayments) | 5.0 |
| Total assets | 525.0 |
| Fixed-rate debt at face, 3.00% coupon, four years to maturity | 250.0 |
| Other liabilities (payables, accrued fees) | 8.0 |
| Deferred tax on revaluation gains | 6.0 |
| Market rate for equivalent debt today (illustrative) | 5.00% |
Reported NAV = GAV + cash + other assets − debt at face − other liabilities − deferred tax
Adjusted NAV = reported NAV + (debt at face − debt at fair value)
NAV sensitivity ≈ GAV ÷ NAV per 1% of GAV
In Excel, the fair value of a bullet loan paying annual interest: =-PV(Market_Rate,Years,Face*Coupon,Face).
Why the debt line matters. Many funds carry debt at amortised cost, so a loan fixed when rates were lower appears at face even though it is an asset to whoever owns the equity until it matures. A 10 per cent interest in this fund is reported at €26.10 million and is worth €27.87 million with the debt marked. In the other direction, debt fixed above today's rates, or a large swap liability, is a hidden cost. Listed REIT analysts make the same deduction at fair value when they build NAV per share.
Suppose the interest is offered at 15 per cent below reported NAV. On the whole fund that is a price of €221.85 million, a discount of €39.15 million. Spread across the properties, which is where the risk actually sits, it is 39.15 ÷ 500.0 = 7.8 per cent below appraisal, not 15. Once the below-market debt is counted the price is 20.4 per cent below adjusted NAV, and the implied discount on the buildings rises to 11.4 per cent.
| Discount to reported NAV | Price, € m | Implied GAV discount | With debt marked | Discount to adjusted NAV |
|---|---|---|---|---|
| 10% | 234.90 | 5.2% | 8.8% | 15.7% |
| 15% | 221.85 | 7.8% | 11.4% | 20.4% |
| 20% | 208.80 | 10.4% | 14.0% | 25.1% |
| 25% | 195.75 | 13.1% | 16.6% | 29.8% |
The middle columns are the ones to argue about. A seller who believes the appraisals are within 5 per cent of value will see a 15 per cent discount as generous; a buyer who believes values are 10 per cent below appraisal will see it as thin. Both are talking about the same price. Whether the appraisal itself lags the market is a separate question, and unsmoothing the appraisal series is how the book answers it.
| GAV change | GAV, € m | NAV, € m | NAV change | 10% stake, € m |
|---|---|---|---|---|
| −15% | 425.0 | 186.0 | −28.7% | 18.60 |
| −10% | 450.0 | 211.0 | −19.2% | 21.10 |
| −5% | 475.0 | 236.0 | −9.6% | 23.60 |
| 0% | 500.0 | 261.0 | 0.0% | 26.10 |
| +5% | 525.0 | 286.0 | +9.6% | 28.60 |
Every 5 per cent of property value is 9.6 per cent of NAV. A 15 per cent valuation fall, well within what a repricing cycle can do, takes 28.7 per cent off the equity, and a 52.2 per cent fall wipes it out. This is why a secondary buyer pricing a geared fund cannot simply apply a view on property values to NAV one for one.
The common mistake is to read a discount to NAV as a discount to the buildings. A 15 per cent discount on a fund at 50 per cent loan-to-value is a 7.8 per cent haircut to the appraisals, a far smaller margin of safety than it sounds. The second mistake is to take reported NAV as the base without asking how the debt is carried: here that leaves €17.73 million, or 6.8 per cent of NAV, out of the picture. With cheap debt the two errors pull in opposite directions: the first overstates the cushion on the buildings (15 per cent), the second understates it (7.8 per cent), and only the full bridge gives 11.4 per cent. With expensive debt the second error flips sign and the true cushion falls below 7.8 per cent.
Build the bridge before quoting the discount: total assets, less debt, liabilities and deferred tax, then mark the debt. On this fund, €500.0 million of property supports €261.0 million of reported NAV and €278.73 million of adjusted NAV, and a 15 per cent discount buys a 7.8 per cent cushion on the buildings, 11.4 per cent once the debt is marked. The free workbooks for this book rebuild an interest from the asset tape and value its in-place debt, and what an 18 per cent discount actually buys takes the same interest through smoothing, unfunded commitments and fees.
GAV is the appraised value of the properties, sometimes with cash and other assets added. NAV is what is left for the equity after debt, other liabilities and deferred tax. In the illustrative fund €525.0m of total assets less €250.0m of debt, €8.0m of liabilities and €6.0m of deferred tax gives a NAV of €261.0m, 52.2 per cent of the €500.0m property value.
Because the debt does not fall with the buildings. With GAV at 1.92 times NAV, every 1 per cent move in property values moves NAV by about 1.92 per cent. A 10 per cent fall in GAV, from €500.0m to €450.0m, takes NAV from €261.0m to €211.0m, a 19.2 per cent loss, and a 52.2 per cent fall would wipe the equity out.
Yes, when the debt is fixed below today's rates and will stay in place. Here €250.0m at 3.00 per cent with four years to run is worth €232.27m at a 5.00 per cent market rate, a gain of €17.73m that the reported NAV omits. Adjusted NAV becomes €278.73m, and a price at 15 per cent below reported NAV is really 20.4 per cent below adjusted NAV.
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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