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The Journal of Real Estate Finance and Economics

Erschienen in:

01.07.2013

Do Alternative Real Estate Investment Vehicles Add Value to REITs? Evidence from German Open-ended Property Funds

verfasst von: Denis Schweizer, Lars Helge Haß, Lutz Johanning, Bernd Rudolph

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 1/2013

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Abstract

Besides the more commonly used REITs, German investors can also invest in a lesser-known real estate vehicle, Open-ended Property Funds. OPFs are considered a compromise between listed and direct real estate investments. OPF fund managers generally provide daily (perfect) liquidity. However, if liquidity falls below 5%, share redemptions in these funds can be temporarily suspended for a period of up to two years. During this time, investors will only be able to sell shares on the secondary market (exchange), and are thus subject to significant liquidity risk. The objective of this paper is to analyze whether OPFs add value to investor portfolios above that provided by REITs. We show that OPFs have a diversification advantage over REITs in low-risk portfolios, despite their larger potential liquidity risk. REIT liquidity is comparable to that of ordinary common stock, but OPFs exhibit an average initial discount to funds’ NAV of about 6% when share redemptions are temporarily suspended. However, in the long-run, this potential redemption suspension does not negatively influence OPF performance (in case OPFs reopen again). This makes OPFs an attractive investment alternative to REITs for investors who have a high level of risk aversion and a long-term investment horizon, such as endowments, insurance companies, and pension funds.

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Nächster Artikel An Empirical Investigation of Herding Behavior in the U.S. REIT Market

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See the BVI Bundesverband Investment and Asset Management e.V. press release from June 22, 2010 (BVI Press Release 2010) for a detailed composition of OPFs’ portfolio structures.

See Investmentgesetz (InvG) and (Klug 2008) for further details.

According to data from the BVI Bundesverband Investment, Asset Management e.V. (German Asset Management and Investment Association), and Deutsche Bundesbank (German Central Bank).

Tables and figures are available from the authors upon request.

See, for example, (Maurer et al. 2004).

Historically, there have only been two periods when share redemptions were temporarily suspended (2005/2006 and 2008/2010). Both are discussed in more detail in “OPF Liquidity”.

At the time of purchase, a property may not constitute more than 15% of the OPF’s NAV. Furthermore, the total value of all properties with individual values of more than 10% of a fund’s NAV may not constitute more than 50% of the fund’s NAV. See InvG § 73 (1).

More than 40% of OPF portfolio properties have leases with residual terms that extend longer than January 1, 2014. See the (BVI Bundesverband Investment and Asset Management e.V. press release from July 1, 2008 (BVI Press Release 2008)).

See (Archner 2006) for an extensive analysis.

See (Ross and Zisler 1991) and (Geltner 1991) for an extensive discussion.

Other, more secondary, reasons are inflation-linked lease contracts and the inclusion of inflation in the appraisal. (Maurer et al. 2004) show in this context that the autocorrelation of real returns is substantially lower.

See (McAllister et al. 2003) and (Pagliari et al. 2004) for more detailed discussions.

As a robustness check, we compute three different indices, because not all OPFs are investable, and some funds require a high minimum investment. The first index represents the total OPF market, the second includes only investable funds, and the third includes only funds investable for retail investors. There are only marginal differences among the three indices, and our results do not depend on which one is used. Therefore, we use the total market index in the following analysis. For the other index concepts, tables are available upon request from the authors.

Different calculation methods did not lead to any changes in our results, so we use only the value-weighted index as per (Maurer et al. 2004). Tables for an equally weighted index are available from the authors upon request.

We used three robustness checks to determine the stability of the results from the Markowitz portfolio optimization: 1) additional risk measures such as conditional value at risk, lower partial moment 2, and maximum drawdown to address potential tail risks from non-normally distributed return distributions, 2) a February 1991–September 2007 observation period to test for the influence of the financial crisis on our results, and 3) weight restrictions. All the checks showed that our results for REITs and OPFs remain qualitatively stable. Tables and figures are available from the authors upon request.

See (Maurer et al. 2004; 2012) and (Gullett and Redman 2005) for more extensive discussions.

By law, a fund may only suspend redemptions for a maximum of twelve months. By contractual agreement, this can be extended to twenty-four months. Alternatively, management may opt to only partially suspend redemptions, so that shares can only be redeemed monthly instead of daily.

For a detailed description of events during the 2005/2006 period, see, e.g., (Bannier et al. 2007).

We also calculate AD _t and AAD _t based on capital instead of equal weighting. The results remain stable. Tables are available upon request from the authors.

We calculate accumulated depreciation by checking press releases and semiannual and annual reports of OPFs. When no or insufficient information was provided, we asked public relations departments directly for the information, and we cross-checked the material with their press releases, reports, and newspaper articles found in LexisNexis and Factiva.

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Titel: Do Alternative Real Estate Investment Vehicles Add Value to REITs? Evidence from German Open-ended Property Funds
verfasst von: Denis Schweizer
Lars Helge Haß
Lutz Johanning
Bernd Rudolph
Publikationsdatum: 01.07.2013
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 1/2013
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-011-9342-z

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