Should a REIT trade above NAV or below NAV?
A common argument is that REITs should actually trade above their NAV. Why so? There are a few reasons given:
- A REIT is more liquid that a property itself. As such, a "premium" or value should be placed on this added liquidity as compared to a real property. An investor in a REIT can basically liquidate his holdings in the stock market as compared to holding a real property which requires time and effort to get rid of.
- Smaller upfront capital required as compared to a real property.
- Professional management without hassle of being a landlord yourself
- Divesification into various properties
- NAV was determined sometime back and it is likely that today's NAV of the property is higher
- Foreign Exchange risk
- Drop in property value
- Potential drop in distributions
- Country Risk
- Uncertainty about the future outlook of the REIT
- NAV was determined sometime back and it is likely that today's NAV of the property is lower