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Return Patterns of German Open-End Real Estate Funds

An Empirical Explanation of Smooth Fund Returns

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Sebastian Gläsner

The aim of this study is to better understand stable capital growth of German properties and to contribute to the explanation of stable fund returns. In the course of the investigation, evidence is found that both phenomena are interrelated. All analyses are based on publicly available data; therefore they are not limited by client interests. Results show three different pieces of evidence on return smoothing, namely the influence on valuation, the timing of valuations, and the influence on returns resulting in return differences by calendar months. Together with the notion of internationally uniquely stable returns, it seems impossible to extract true asset volatility from the observed appraisal-based time series.

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LIST OF TABLES ................................................................................................... IX LIST OF FIGURES ................................................................................................... X LIST OF ABBREVIATIONS ..................................................................................... XI LIST OF SYMBOLS ............................................................................................... XII 1 INTRODUCTION AND OVERVIEW ................................................................ 1 1.1 INTRODUCTION ........................................................................................... 1 1.2 ESSAY 1: RESEARCH QUESTION AND MAIN FINDINGS .................................. 2 1.3 ESSAY 2: RESEARCH QUESTION AND MAIN FINDINGS .................................. 3 1.4 ESSAY 3: RESEARCH QUESTION AND MAIN FINDINGS .................................. 3 1.5 ESSAY 4: RESEARCH QUESTION AND MAIN FINDINGS .................................. 4 2 APPRAISAL WITHIN OPEN-END REAL ESTATE FUNDS: EVIDENCE ON BIASED APPRAISALS IN FUND CRISIS YEAR 2006 ......................................... 5 2.1 INTRODUCTION ........................................................................................... 5 2.2 LITERATURE REVIEW .................................................................................. 6 2.2.1 Fund management influence on appraisers ............................................... 7 2.2.2 Biased appraisals on the portfolio level .................................................. 11 2.2.3 Return variance and portfolio diversification implications .................... 12 2.3 DATA AND RESEARCH METHOD ................................................................ 13 2.3.1 Data ......................................................................................................... 13 2.3.2 Research method ..................................................................................... 14 2.3.2.1 Differentiating value changes by portfolio ownership ...................... 14 2.3.2.2 Attributing value changes to portfolio characteristics ....................... 16 2.4 RESULTS ................................................................................................... 17 2.4.1 Value changes by portfolio ownership ................................................... 17 2.4.2 Attribution of value changes by portfolio characteristics ....................... 22 2.4.3 Accounting for the change in the occupancy rate ................................... 27 2.5 CONCLUSION ............................................................................................ 30 3 LACK OF GERMAN REAL ESTATE FUND VOLATILITY - IS THE MARKET OR THE VALUER TO BLAME? ...................................................... 35 3.1 INTRODUCTION ......................................................................................... 35 3.2 PREVIOUS RESEARCH ............................................................................... 36 3.3 RESEARCH DESIGN AND DATASET ........................................................... 40 3.4 RESULTS ................................................................................................... 42 viii 3.4.1 Comparing capital growth and rental value growth ................................ 42 3.4.1.1 Capital growth rates of GOEF portfolios vs. locally held portfolios . 42 3.4.1.2 Rental value growth of GOEF portfolios vs. locally held portfolios . 46 3.4.2 Constituents of the capital growth .......................................................... 47 3.4.3 Quantile regression of rent multiplier ..................................................... 52...

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