Gross asset value (GAV) and net asset value (NAV) are two important terms in investing and accounting, especially when it comes to real estate. While they can be used in other areas, we only use the real estate sector in this article for the sake of simplicity and illustration. Read on to find out everything about GAV and NAV, including their calculation, use cases, and more.
Net Asset Value (NAV) and Gross Asset Value (GAV)
GAV and NAV both convey the property's investment worth. These metrics are frequently used for REITs (Real Estate Investment Trusts) and property funds.
In addition, the metrics are frequently used by investors considering investing in the secondary market to determine ongoing management and performance fees.
Gross Asset Value (GAV) Simply Explained
The current value of all assets held inside a property fund is called GAV. It does not cover acquisition or setup expenditures but does include equity and debt holdings. The market value of all the assets in a fund is another way to think of GAV.
Net Asset Value (NAV) Simply Explained
The current value of all assets held inside a property fund, less any debt attached to the fund is referred to as the NAV. NAV typically operates on a per-share basis, displaying the market value of each share inside a fund.
To ensure the asking price is in accordance with the underlying market value, investors intending to invest in the secondary market will compare the NAV with it.
- Understanding GAV from a buyer's standpoint enables the investor to contrast the price they are willing to pay for a property with the vendor's asking price.
- Understanding NAV gives an investor wanting to buy a share in a company, fund, or trust a valuable benchmark to evaluate against the asking price per share.
- Although determining the NAV might be challenging, a reliable strategy, like the DCF approach, enables investors to assess possible risks and consider an asset's potential for future growth.
How Are GAV And NAV Calculated?
GAV and NAV are metrics management use in a property fund to convey the investment value of the fund's assets. The techniques used to calculate these metrics change depending on the region, sector, and investor preferences.
The market value of each asset in a fund is added together to form GAV, while the fund's debt is taken into consideration for determining NAV. The discounted cash flow (DCF) method is one of the most popular valuation techniques utilized to calculate GAV and NAV.
Read more in detail about Current Assets vs. Noncurrent Assets.
The Principle Behind GAV And NAV
This idea's core tenet is that an asset's value is based on the potential future cash flows it will provide. Future rental income and sale profits are the two types of future cash flows that apply to commercial real estate.
To calculate the asset's future cash flows, an investor will first anticipate future rental streams, future vacancies, tenant incentives, operational costs, and future sale proceeds.
The Purpose Of GAV And NAV
For an investor, cash now is more valuable than cash afterward. As a consequence, investors will appropriately discount the promise of future cash flows to reflect how risky they think those cash flows will be in the future.
Applying a discount to future unlevered cash flows results in the calculation of GAV using the DCF analysis. In contrast, future levered cash flows result in the calculation of NAV. When investing in the secondary market, investors frequently use NAV as a standard to judge deals.
A greater GAV and NAV will be produced by a mix of strong projected rent growth, low operating expenditure increase, and less anticipated volatility of cash flows.
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