The Toolkit: How to Value Property and REITs
Property has its own vocabulary of value. Learn five terms — cap rate, NAV, FFO, gearing and occupancy — and most of the numbers in a property report stop being mysterious.
When you read about a REIT or a building, you meet a cluster of unfamiliar metrics: cap rates, NAV discounts, FFO, loan-to-value. They sound technical, but each answers a plain question — what is this worth, how much debt is behind it, and how reliable is the income? This piece is the toolkit that the rest of the series leans on; you don't need to be an analyst to use it.
Where this sits on the spectrum
Valuation is the lens you apply at every point on the spectrum — to a single building you might buy directly, to a REIT, or to a fund. It connects directly to The Sub-Sectors, because each sub-sector is valued on different assumptions, and to The Hazards, because most of these metrics are really risk measures in disguise.
The five terms that do most of the work
Cap rate (capitalisation rate). The most important single number in property. It is the annual net operating income of a building divided by its value — effectively the property's income yield before financing. A building earning £500,000 a year and valued at £10 million has a 5% cap rate. The key intuition runs backwards from instinct: a lower cap rate means a more expensive property (you're paying more for each pound of income), and a higher cap rate means a cheaper, usually riskier, one. When values rise faster than incomes, cap rates "compress"; when they fall, cap rates "expand" — and because cap rates move with interest rates, this is the channel through which rising rates re-price property. [REFRESH: representative cap rates by sub-sector at draft — these move constantly.]
NAV / NTA (net asset value / net tangible assets). For a REIT, this is the value of all its buildings minus its debt and other liabilities, expressed per share. It tells you what the portfolio is "worth" on the valuers' numbers. The interesting part is that a listed REIT rarely trades exactly at NAV: it trades at a discount (below) or premium (above). A persistent discount can signal that the market doubts the stated property values, expects them to fall, or distrusts management; a premium suggests the opposite. NAV is an estimate, not a market price — that gap is information.
FFO / AFFO (funds from operations / adjusted funds from operations). Ordinary company profit understates a REIT's cash generation, because accounting depreciation treats buildings as wearing out even when they're appreciating. FFO adds that depreciation back to give a truer picture of the cash a REIT produces; AFFO refines it further for recurring capital spending. When you see a REIT's "payout ratio," it is usually measured against FFO or AFFO, not net income — and a distribution that exceeds AFFO is a warning sign.
Gearing / LTV (loan-to-value). The proportion of a property or portfolio funded by debt. Gearing is what makes property returns larger — and what makes them dangerous. Low gearing is conservative and resilient; high gearing amplifies gains in good times and can be ruinous when values fall or debt must be refinanced at higher rates. It is the first number to check in a rising-rate environment. [REFRESH: typical REIT gearing/LTV band at draft.]
Occupancy and WALE. Occupancy is the share of space that's actually let; the weighted average lease expiry (WALE) is how long, on average, until the leases run out. Together they measure how durable the income is: a fully let building on long leases to strong tenants is a very different risk from a half-empty one on short leases.
Putting the toolkit together
These metrics are most useful in combination. A REIT trading at a wide discount to NAV might look cheap — until you notice high gearing and a short WALE, which explain why the market is cautious. A low cap rate on a logistics warehouse might look expensive — until you weigh the long lease to a blue-chip tenant. No single number is a verdict; the toolkit gives you a structured way to ask "what am I paying, how much debt is behind it, and how safe is the income?"
The jurisdiction lens
The vocabulary travels, but the labels and conventions don't always. "NTA" is the more common term in Australian and UK reporting, while "NAV" and the FFO/AFFO framework originate in the US REIT market and are now used globally. Valuation cycles also differ by country, because they track local interest rates: an Australian and a UK portfolio of identical buildings can re-rate at different times as the RBA and the Bank of England move on their own schedules. Read every metric alongside the rate environment of the market it sits in.
The case for and against metric-driven valuation
For. These metrics impose discipline. They let you compare a building in Sydney with a REIT in London on a like-for-like basis, separate cheap from merely cheap-looking, and spot the warning signs — stretched payout ratios, rising gearing, lengthening discounts to NAV — before they become losses.
Against. Every one of them rests on an estimate. Property valuations are appraisals, not transactions, and they lag the market; NAV can be stale, cap rates are judgements, and FFO can be massaged. The metrics are a flashlight, not an X-ray — essential, but not a substitute for understanding the buildings and the debt behind the numbers.
No verdict — valuation tells you the price, not whether to pay it.
FAQ
How do you value a REIT? You look at what its buildings are worth net of debt (NAV/NTA), the cash it generates (FFO/AFFO), the income yield on its assets (cap rate), how much debt it carries (gearing) and how secure its rents are (occupancy and WALE) — in combination, not in isolation.
What is a cap rate? A property's net income as a percentage of its value, before financing. A lower cap rate means a more expensive property; a higher one means a cheaper, usually riskier, asset. It moves with interest rates.
What does "trading at a discount to NAV" mean? The REIT's share price is below the per-share value of its buildings minus debt. It can signal that the market expects property values to fall, or distrusts the stated valuations — useful information, not automatically a bargain.
What is FFO? Funds from operations — a REIT's cash generation with accounting depreciation added back, because property doesn't wear out the way the accounts assume. It's the figure REIT payout ratios are usually measured against.
Is high gearing bad? Not automatically, but it raises the stakes: it amplifies both gains and losses and creates refinancing risk when rates rise. In a rising-rate environment it's the first number to check.
What it sits next to
With the toolkit in hand, we move to the most demanding route of all — owning the bricks yourself, where these numbers stop being abstractions and become your mortgage, your stamp duty and your tenant. Continue to The Direct Route: buy-to-let vs negative gearing (Piece 6), or revisit The Sub-Sectors for what drives the cap rates above.
This article is for general information only and is not investment advice or a recommendation to buy or sell any investment. [Publication] is not a licensed financial adviser. Property values, rents and the value of listed property shares can fall as well as rise, and borrowing magnifies losses as well as gains — you may get back less than you invested. Figures are accurate as of June 2026 and will change. Rules on tax, lending and available products differ by country — do your own research and consider a locally regulated professional.
Sources: Nareit (FFO/AFFO definitions), company reports and annual results (NAV/NTA, gearing, WALE disclosures), CBRE / JLL / Knight Frank (cap-rate data). Top-level resources; confirm representative figures at publish per the perishables register.