“REITs cannot be redemmed at their NAV”
What does this mean? I thought REITs can be redeemed since they are known for their liquidity?
REITs are listed on a stock exchange, so the price you get when you sell is dependent on the market price of the share not the Net Asset Value.
Unlisted property on the other hand (i.e. not on an exchange) could be redeemed at NAV, as the redemption of units is through the property trust and you receive the value of the units.
Then, what is the difference between the NAV and the market price for an asset or set of assets?
Well the NAV is the intrinsic value, but the market value would be whatever someone would be willing to pay for it.
So for a simple example, lets say that a property trust has only a single property worth $10m. Say the property is 50% geared (liabilities of $5m) and there are 4m units on issue.
NAV would be: (Assets - Liabilities)/Number of units
NAV = (10-5)/4 = $1.25
For an unlisted property, if you redeemed the units with the property fund at NAV, you would receive $1.25 per unit.
Now assume that the property is listed, the REIT would trade at the market price. If someone is willing to buy and another person sells the units in the REIT for $1.30 that would be the market price. Which would mean that the units are trading at a premium to the NAV.
NAV is the value of the assets that the fund holds.
Market price is what investors are willing to pay for a share of the fund.
Market price per share needn’t equal NAV per share; investors sometimes pay more or less than than NAV per share.