Why do ASX REITs trade at a discount to NTA and is it a good or bad sign?

So, your ASX REIT is trading at a ‘discount to NTA’ (Net Tangible Assets). What does this mean – is it a good sign or a bad sign? And is it the most important thing for investors to consider?

Many experienced investors in REITs may know the answer here, but there are always some new investors to the sector who raise eyebrows each reporting season when so many investors focus on a metric seemingly irrelevant to every other sector. To such investors, we hope this gets your understanding started.

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But first, what is NTA?

NTA (Net Tangible Assets) represents the value of a company’s tangible assets minus its liabilities. In simple terms, it’s what would theoretically be left for shareholders if the company sold all its physical assets (like property, equipment and cash), paid off its debts, and excluded intangible items like goodwill and brand value.

For a REIT (Real Estate Investment Trust), NTA is especially important because the core assets are physical properties that are regularly independently valued. In Australia, for example, REITs such as Scentre Group or Goodman Group report NTA per unit based largely on the fair value of their property portfolios minus debt. That NTA figure effectively represents the net market value of the real estate backing each security.

P/NTA (Price-to-NTA) compares the market price of the REIT to its underlying asset backing. If a REIT trades at 0.90× P/NTA, it’s trading at a 10% discount to the net value of its properties. If it trades at 1.20×, investors are paying a 20% premium to the appraised property value.

Why is P/NTA more appropriate than other multiples?

There are several reasons.

First, REIT earnings are heavily influenced by non-cash accounting items. Property values are revalued regularly, and those revaluations flow through profit. A rise in property values can inflate earnings, while a decline can depress them, even though no cash has changed hands. This can make P/E volatile and less reflective of underlying operating performance.

Second, REITs carry large depreciation charges. Accounting rules require buildings to be depreciated over time, but in reality, well-located property often appreciates rather than declines in value. This accounting distortion can artificially reduce reported net profit, making P/E appear high even when the underlying property portfolio is performing well.

Third, REITs are asset-backed, capital-intensive vehicles. Their intrinsic value is more directly tied to the value of the real estate they own and the income those properties generate. Since the assets are independently valued and relatively transparent, investors often think in terms of “am I buying these properties at a discount or premium to their appraised value?” — which is exactly what P/NTA captures.

In contrast, P/E is generally more appropriate for operating businesses where value is driven by future earnings growth, brand strength, intellectual property or scalability — such as technology or consumer companies — where tangible asset backing is not the primary driver of valuation.

That said, P/NTA isn’t perfect. Property valuations can lag real market conditions, especially in fast-moving interest rate environments. A REIT trading at a discount to NTA may be signaling that investors expect asset values to fall, debt to rise, or earnings to weaken. So P/NTA is best interpreted alongside other metrics like funds from operations (FFO), gearing ratios and cap rates.

With that out of the way…

Why REITs might trade at a discount to NTA?

Real Estate Investment Trusts (REITs) often trade at a discount to their Net Tangible Asset (NTA) value due to a variety of factors.

Operational or market matters could have an impact

One of the major causes of this discount is because REITs pay out just about all of its Funds From Operations (FFO) to investors. This means there is less cash available for investments or other activities – this would improve the NTA.

Such a situation puts pressure on the share price, as investors have less capital available for property investments or other activities that improve the underlying net asset value of the trust.

We also observe that some REITs have low liquidity. In other words, there is not enough buying and selling going on in the market to create high liquidity and result in a fair market price. This is the case in respect of ASX REITs with the heaviest P/NTA discounts such as Carindale Property (ASX:CDP).

Finally, REITs tend to be sensitive to changes in interest rates, the broader economy and the specific property market it is focused on. When any of these move unfavourably, investors tend to shy away from these types of securities and prices suffer as a result. You only need to look as the majority of ASX office REITs since the pandemic to see this.

Accounting matters could cause REITs to trade at an NTA discount too

Additionally, NTA values themselves can sometimes be difficult for investors to accurately measure due largely to different accounting methods used by trusts. For example, some trusts may use a cost basis approach while others use current valuations which could lead to discrepancies if assets were purchased at different times.

Furthermore, non-cash items such as appreciation in land values or revaluation reserves may also not be reflected in the NTA figure shown on a trust’s balance sheet. This could lead to further distortions between the share price and NTA value.

So, does a REIT trading at a discount to NTA represent a bargain?

The short answer to this question is – it depends.

As a general rule, we think that if an ASX REIT is trading at a discount of over 20%, there might be underlying issues such as liquidity which mean that such a fund is not an ideal investment. Of course, you shouldn’t rule out an investment just because of this, but it should serve as a ‘yellow flag’. In other words, you need to examine this issue specifically as part of your due diligence.

If an ASX REIT is trading at a slight discount to NTA, but has historically traded at a premium, it may represent a buying opportunity. Investors should nonetheless be careful – considering to why it is trading at a discount.

But ultimately, investors should consider several factors when pondering an investment in an ASX REIT – not just whether it is trading at a premium or a discount to its NTA.

In particular, investors should look at the balance sheet, its P/FFO multiple and yield as well as its P/NTA position.