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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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2 APPRAISAL WITHIN OPEN-END REAL ESTATE FUNDS: EVIDENCE ON BIASED APPRAISALS IN FUND CRISIS YEAR 2006

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5 2 Appraisal within open-end real estate funds: Evidence on bi- ased appraisals in fund crisis year 2006 2.1 Introduction German property markets experienced in 2006 and 2007 an unprecedented yield compression. Market analysts like AtisReal, BulwienGesa, CBRE and DEGI reported a decline of yields in all mayor German office markets due to high capital inflows by foreign investors (Figure 2.1). The unweighted average office prime yield of the German top five office mar- kets Berlin, Düsseldorf, Frankfurt, Hamburg and Munich declined by more than 60 basis points between 2004 and 2007. For the year 2006, the strongest yield compression is reported. The figure shows average (not capital weighted) prime yields of the top 5 German office loca- tions Berlin, Düsseldorf, Frankfurt, Hamburg and Munich as reported by major real estate consultants. Figure 2.1 Prime office yields of the top 5 German office markets 2004-2007 5.27 5.15 4.57 4.76 5.75 5.00 5.62 5.46 5.38 4.92 4.544.62 4.70 4.00 4.20 4.40 4.60 4.80 5.00 5.20 5.40 5.60 5.80 6.00 2004 2005 2006 2007 AtisReal BulwienGesa CBRE DEGI 6 Analogue to the rise in demand and the decline in yields, market participants agree that property values in Germany in the years 2006 and 2007 rose signifi- cantly (Crosby, 2007). At the same time, the beginning of 2006 demarks a severe crisis for the German open-end fund industry, because for the first time in the 50-year history, three out of 24 funds3 had to stop the redemption of participations. Funds state...

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