The data room compares sale prices with the last appraisal, which the valuer has already moved to the agreed price. The test that matters uses an earlier one.
Compare each sale price with the appraisal made before the asset went to market, not with the last one before closing, which the valuer has already moved towards the agreed price. On an illustrative fund whose six sales came in only 0.67 per cent below the last appraisals, the same sales were 5.53 per cent below the pre-marketing appraisals. Applied to the remaining €600.0m portfolio, that cuts NAV by 10.37 per cent and turns a 12 per cent headline discount into 1.82 per cent.
Worked in full in The Real Estate Secondaries Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A secondary buyer pricing an interest in a property fund is pricing someone else's appraisals. The fund's own disposal record is the best evidence of how good they are, because every sale is a point where an appraisal met a buyer with money. Most data rooms present that evidence in the form that flatters it most: sale price against the last reported value. The test that matters uses an earlier appraisal.
| Asset | Clean appraisal | Last appraisal | Sale price | Sale vs clean | Sale vs last |
|---|---|---|---|---|---|
| A | 52.0 | 49.5 | 48.8 | −6.2% | −1.4% |
| B | 31.0 | 30.2 | 30.5 | −1.6% | 1.0% |
| C | 44.0 | 41.0 | 40.6 | −7.7% | −1.0% |
| D | 18.5 | 18.9 | 19.2 | 3.8% | 1.6% |
| E | 66.0 | 61.5 | 60.9 | −7.7% | −1.0% |
| F | 23.5 | 22.4 | 22.0 | −6.4% | −1.8% |
| Total | 235.0 | 223.5 | 222.0 | −5.53% | −0.67% |
The fund still holds €600.0m of property against €270.0m of debt and €10.0m of other net liabilities: a NAV of €320.0m. The interest on offer is 5 per cent of the fund, a NAV of €16.0m, at a 12 per cent discount, €14.08m.
Sale vs last = 222.0 ÷ 223.5 − 1 = −0.67%
Sale vs clean = 222.0 ÷ 235.0 − 1 = −5.53%
Excel: =SUM(Sale)/SUM(Clean)-1. The equal-weighted average is −4.30 per cent; weight by value, because the large assets carry the NAV.
Adjusted GAV = 600.0 × (1 − 5.53%) = 566.8, a reduction of 33.2
Adjusted NAV = 566.8 − 270.0 − 10.0 = 286.8, 10.37 per cent below the reported 320.0
Price = 320.0 × 88% = 281.6 for the whole fund; 281.6 ÷ 286.8 = a discount of 1.82% to the adjusted NAV
The last-appraisal test says the valuer is within a percentage point of the market, and all six last appraisals were indeed within 1.8 per cent of the price. That is because by the last quarter before closing the valuer knew the price. Five of the six sales also came in below the clean appraisal, by 6 to 8 per cent on four of them, including the two largest. The clean test measures the appraisal a buyer of the remaining assets is actually relying on: one made with no offer on the table.
The gearing does the rest. GAV is 1.875 times NAV, so a 5.53 per cent gap on property is a 10.37 per cent gap on equity. Deduct vendor's sale costs of 1.5 per cent on eventual disposal, 8.50, and the realisable NAV is 278.3: at 281.6 the buyer is paying a premium of 1.18 per cent. For the 5 per cent interest, €14.08m buys a realisable €13.92m.
| Gap applied | Adjusted NAV | NAV change | Discount to adjusted NAV |
|---|---|---|---|
| 0.0% | 320.0 | 0.00% | 12.00% |
| −1.0% | 314.0 | −1.88% | 10.32% |
| −3.0% | 302.0 | −5.63% | 6.75% |
| −5.0% | 290.0 | −9.38% | 2.90% |
| −7.0% | 278.0 | −13.12% | −1.29% |
To buy at a true 12 per cent below the adjusted NAV, the headline bid would have to be 21.13 per cent below reported NAV. That is the number to take into the negotiation, with the six sales as the evidence.
Accepting the sale-versus-last-appraisal table from the data room as proof of valuation quality. It measures how quickly the valuer caught up with a known price. Ask for the appraisal history of each sold asset and pick the quarter before marketing began; if the fund cannot supply it, that is information too.
Gap = sum of sale prices ÷ sum of pre-marketing appraisals − 1; NAV effect = gap × GAV ÷ NAV. Here −5.53 per cent on property is −10.37 per cent on NAV, and a 12 per cent headline discount is worth 1.82 per cent. The same appraisal problem, read from the return series rather than from sales, is how to unsmooth appraisal-based returns, and the leverage step is the one in how much cap rate expansion a secondary discount absorbs. The book's own offer, taken from headline to real discount, is in the free workbook for this case.
The one made before the asset was marketed, typically two quarters before launch, because later appraisals are informed by the offers. In the illustrative fund the last appraisals were 0.67 per cent above the sale prices in aggregate, while the clean appraisals were 5.53 per cent above them on a value-weighted basis.
Apply the gap to the remaining gross asset value and recompute NAV through the debt. With 600.0m of property, 270.0m of debt and 10.0m of other liabilities, a 5.53 per cent gap cuts NAV from 320.0m to 286.8m, so a price 12 per cent below reported NAV is only 1.82 per cent below the adjusted figure.
Only as a range. Funds tend to sell their most liquid assets first, so the remaining ones may be harder to sell, and a falling market may already be reflected in later marks. Six sales running from +3.8 to −7.7 per cent against clean appraisals, −5.53 per cent value-weighted, justify pricing across a range such as −1 to −7 per cent, which moves the discount to adjusted NAV from 10.32 to −1.29 per cent.
This article is one calculation from The Real Estate Secondaries Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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