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Net Asset Value (NAV) – What lies beneath?

We have observed a substantial change in the way REIT market view methodology behind asset valuation, an increase in the levels of scrutiny of the real estate valuations which form the basis of NAV. Investors, auditors and shareholders increasingly realise the importance of robust, prudent and independent valuations.

May 30, 2018

Since the start of 2018 we have observed a substantial change in the way the REIT market views the methodology behind asset valuation. That is to say, a sudden increase in the levels of scrutiny of the real estate valuations which form the basis of NAV. Investors, auditors and shareholders increasingly realise the importance of robust, prudent and independent valuations. Valuations that are completed to international standards are, more and more seen as a critical component in determining REIT values.

Not only have the number of REITs and listed real estate funds approaching JLL’s valuation team, requesting 2018 June or September financial year end valuations increased precipitously, but so too have the number of fund managers. When we ask fund managers the reason for this striking change, the answer is invariably the same; times are changing, scrutiny is increasing and the days of valuers conducting the same valuations year after year for the same fund without rotation are now over.

This sea-change is more comprehensive than merely requiring the REITs to change valuers regularly. We are aware of a number of market players that post audit, have been instructed to change their internal processes.  There is a perception that  there has been too much influence exercised from owners in determining consultant’s final values. Many of these controls have been masked as “procedural” efficiencies, but to many of us valuers in the market, the reality has been clear for some time. Procedures, models and processes that have been forced on the valuation industry have been measures set in place to extend influence over the final result.

But times are changing. The message from the market, the regulator and auditors is that this will no longer be tolerated, valuers must be credible, methodologies must be robust and determined by valuers themselves. That is to say independent processes which are  regulated and are accountable to international standards. The valuers’ independent opinion as to what is appropriate for each asset is a fundamental underpinning to the market’s trust in the industry.

Vanguard elements in the market, particularly listed sector investors, have started to ask some very relevant questions. What lies beneath the seemingly unceasingly growing NAVs which are reported each year in companies’ annual results? What methodologies have been used? Were the results based on market evidence of completed transactions or textbook abstractions and generous, ever improving econometric assumptions?

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