There are multiple ways that retail investors are able to determine the market value for each property held by a real estate developer. These include Net Asset Values (NAV), and Revalued Net Asset Value (RNAV). The following will explain them, and how to value real estate stocks.
What is RNAV?
This method is conducted after each property projects’ market value has been determined. The RNAV method is more complex as it requires using the net asset value (NAV), deducting the liabilities to find the Revalued Net Asset Value of the real estate developer.
The process:
1. Value changes within the company’s held investment property
2. Surplus value of held property for development
3. Company’s NAV shown on the balance sheet.
Therefore, the only surplus and change values considered are the properties book values within the portfolio. These are the figures shown on the balance sheet, used for adding the NAV of the company to calculate the Revalued Net Asset Value of the company.
Additionally, some may refer to RNAV as “Revised Net Asset Value”. In either case, there will typically be a premium or discount added to the RNAV, which accounts for factors including the management size, quality and the company’s overall track record, business risk and reputation.
Below is an example RNAV calculation:
Surplus Value: Property 1 ($$ m) 20.0
Surplus Value: Property 2 ($$ m) 10.0
Surplus Value: Property 3 ($$ m) 5.0
Total Surplus 35.0
+ Company Nav ($$ m) 210.0
+ Shareholders Funds ($$ m) 700.0
RNAV ($$ m) 945.0
Discount to RNAV 20%
Discounted RNAV 756.0
Number of Outstanding Shares (m) 800.0
RNAV per share ($) 0.95
What is NAV?
In theory, any type of financial product or business entity with operations of asset and liability accounting can have a Net Asset Value (NAV). When discussing business and company entities, the gap that exists between the asset and liabilities are commonly referred to as the company’s capital, net worth, or net assets.
NAV has become a popular industry trend associated with fund pricing and valuation, which is calculated by dividing difference of company assets and their liabilities by the total number of units or shares that investors hold. Therefore, the NAV of funds reflect the value per share. This is a simple method to use to value and transact shares of the fund.
NAV Formula
Calculating the Net Asset Value of a mutual fund is simple, for example:
Meanwhile, the funds’ asset and liabilities should include the proper qualifying items.
Using NAV with Mutual Funds
While common stock prices are constantly changing one second to the next, mutual funds are not priced in real-time, but based on the assets and liabilities when the day ends. Therefore, the mutual fund assets include the total market value when combining the mutual fund’s cash, investments, accrued and receivables income and cash equivalents. Meanwhile, the market value is determined daily depending on the closing price of securities held within the portfolio.
Because funds can have a specific amount of capital as liquid and cash assets, those are calculated under the heading of cash or cash equivalents. Accrued income includes money earned, but not received by the fund. Receivables refers to items such as interest payments or dividends applied during that day. Finally, all these and the qualifying variations are combined to determine the sum of the fund’s assets.
Generally, mutual fund liabilities include pending payments, a range of fees and charges owed to different associated entities, or money owed to banks. In addition, funds can have foreign liabilities which could include dividends or income to non-residents which are pending, or shares held by non-residents, along with proceeds that are pending repatriation. These can be classified further as short-term or long-term liabilities based on the length of payment.
For calculating NAV for a certain day, all the different items are categorized as assets or liabilities.
Example:
If a mutual fund has $200 million in total investments across multiple securities, based on the closing price for each asset that day. Additionally, it holds $8 million in cash or cash equivalents, $5 million receivable, and the days accrued income was $100,000. Meanwhile, the mutual fund also has $3 million long-term and $14 million short-term liabilities, while the days accrued expenses was $12,000 with 6 million outstanding shares. The following formula is used to calculate the Net Asset Value:
NAV = [($200,000,000 + $8,000,000 + $5,000,000 + $100,000) – ($14,000,000 + $3,000,000 + $12,000)] / 6,000,000 = ($213,100,000 – $10,988,000) / 6,000,000 = $33.69
How is RNAV Different from NAV?
The RNAV is a more complex calculation requiring knowledge of additional company information. Whereas, NAV is a simpler calculation that just divides company assets and liabilities by the number of outstanding shares held by investors.
The RNAV method requires knowledge of the development property or company value, revaluation surplus, and outstanding shares held by investors. Additionally, any RNAV discounts are needed to correctly calculate the Revalued Net Asset Value.
Generally, because of the information requirements a retail investor cannot easily use the RNAV method for valuing real estate developments. Furthermore, acquiring the data to calculate each property’s market value a developer holds, can be costly. Therefore, analyst reports remain the best approach for retail investors when analyzing the developer because the already have access to the information.
How to Value Real Estate Stocks?
Prior to purchasing a property, it is recommended to figure out the value to ensure a fair price and transaction. This rule applies with real estate stock as with any other. There are three methods of analyzing real estate, depending on the property type and data availability.
1. Income
This method is used for estimating property value depending on the revenue generated. This method is frequently useful for properties that are producing income. This approach uses capitalization rates – which is the real estate property’s potential ROI – along with net operating income for estimating the property’s value. Additionally, discounted cash flow is a factor that can help derive property value.
The following is a basic example of the capitalization approach.
a. To find the property value based on capitalization rates, first determine what the net rentals realized, or net operating income is. Then, operating costs (minus monthly mortgages) are deducted from the total rental revenue to determine the net operating income.
b. Figure out the ROI you would like, along with the expected monthly rental. Then, using the following formula we can determine the property value:
Thus,
For example:
If you’re looking to purchase a condo and use it for a rental property that rents for $1,100/month and generates a 5% ROI, you would use the following to calculate the amount to purchase the property at (or below).
($1,100 x 12) / 5% = $264,000
2. Market or Sales Comparison Method
This method estimates the property value by evaluating the recent sell price of other similar properties within the area. The sales comparison method is often used to determine the value for family homes. Although, two different properties will never be the same. Therefore, adjustments will be required for ensuring the sell prices are similar to that of the property features. When a property offers features not available on the comparison properties, the sell price is adjusted upward, or downward when the subject property lacks a feature of a comparison property.
To determine real estate value using the market method:
a. Locate similar properties in the area sold recently.
b. Adjust based on differences in quality, quantity, size, location, etc.
3. Cost Method
This method estimates property value based around the costs for building or replacing the property. The cost method is frequently for purchasing recently constructed properties, which requires knowing the cost for materials and construction. In addition, the method is frequently used for purchasing properties that have hard to find comparisons sold recently, while not currently generating an income. Typically, the cost method considers the land value while including cost to build structures, while subtracting cost of depreciation.
Reproduction refers to the expenses to fully duplicate the property’s structure.
Replacement refers to the cost to build similar structure with updated materials and construction methods. Therefore, replacement costs are more common due to being based around current construction costs.
To estimate the replacement or reproduction cost, there are three common approaches:
1. Comparison or Square-foot approach is based on comparing recently developed properties based on cost per square-foot, multiplying it by the subject property’s total square footage.
2. Unit-in-Place approach is a modified version of a quantity survey. However, rather than analyzing the costs for every item used in construction, it calculates costs of materials, labor, entrepreneurial profit, and overhead for each section of the property. For instance, cost per sq. ft. of walls and roofs.
3. Quantity Survey approach combines the total cost of itemized materials, labor, entrepreneurial profit, and overhead. Appraisers rarely use this approach due to the time and in-depth work required.
