UK property investors looking to compare valuations to their US counterparts have a problem. US real estate companies and investors don’t use price to net asset value (NAV) ratios, the UK sector’s long-preferred valuation method. Could they be on to something?
NAV calculates a company’s property at market value, less the debt on a company’s balance sheet. It is essentially shareholders’ equity, less the mark-to-market of financial instruments, as well as deferred tax. Some disclose its sibling, net tangible assets (NTA), or NAV excluding intangible assets such as goodwill. These metrics should illustrate to investors whether the shares trade at a premium or a discount to the underlying value of the portfolio.
So far so good. But are there issues? Firstly, these valuations, carried out by independent third parties such as Savills and CBRE, are backward-looking. They may also be incorrect, or subject to dramatic fluctuations. For example, LondonMetric’s (LMP) portfolio was revalued upwards by about a third – £0.6bn – in 2022, before being marked down by the same value the following year. Remember that price discovery is trickier in commercial real estate than in residential, where thousands of transactions happen every day. Valuations also do not take into account the transaction costs a company would incur if it were forced to sell its portfolio.