EPRA’s new best practice recommendations for NAV calculations, which kick in this January, introduce three discrete NAV measures to replace the old ones. Are you ready?
It is well known that the UK listed sector (in aggregate) currently trades at a significant discount to underlying NAV. This masks sharp divergences between sectors, and management teams, but is true of the two bellwether stocks Land Securities and British Land, which are used by generalist investors to gain exposure to the sector. The key questions to be asked are, firstly, which NAV calculation is used, and secondly, is NAV the only/optimal valuation measure for UK REITs throughout the cycle?
The purpose of this article is to look at the recently announced changes to recommendations on best practice for NAV calculation from EPRA (the European Public Real Estate Association). These will be implemented for accounting periods starting 1 January 2020. A second article, next quarter, will look at alternative (non-NAV) valuation measures, which are used globally to determine if they have relevance to the UK, and who would be the winners and losers from these methodologies.
The UK uses IFRS accounting standards, which include mark-to-market valuations of assets. It also has a highly regarded valuation system, a long (more than 30 years) data series of valuations of assets in the direct market, a highly regarded valuation profession and a so-called Red Book that contains the rules and best practice guidelines for undertaking these valuations to ensure consistent application across the profession. What then, could possibly go wrong? In short, two things:
- Share prices do not have a consistent relationship with the valuation of the underlying assets (see chart 1). They range broadly from a 10% premium to a 45% discount.
- Not everyone calculates their NAV in a similar manner.
Chart 1: Long-term sector premium/(discount) to NAV (%)