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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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3 LACK OF GERMAN REAL ESTATE FUND VOLATILITY - IS THE MARKET OR THE VALUER TO BLAME?

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3.1 Introduction To the 31-12-2008, German open-end funds (GOEFs) hold only 29.9% of their property investments in Germany. European markets without Germany account for 58.1% of property market values and 11.9% are invested outside Europe. The biggest individual markets outside Germany are France with 19.0% and the UK with 9.9% property investment volume (BVI, 2009a). Intriguing is the con- trast between the stable fund performances in times of worldwide financial tur- moil and the developments on the mayor property markets the funds are invested in. The IPD OFIX-ALL26 index for GOEFs shows to the 31-03-2009 a one-year return of 4.7% (IPD GmbH, 2009c). With respect to the German property mar- ket, fund returns are in line with property returns, as the IPD all property Total Return for Germany is 4.5% for 2008 (IPD GmbH, 2009a). With respect to their biggest foreign investment market France, stable fund returns are in contrast to property market developments. The IPD France all property annual index shows a Total Return of -0.9%, and the biannual indicator shows -4.8% for only six month to the end of 2008. For the UK as the second biggest foreign investment market for GOEFs, the picture is even more puzzling: The IPD UK all property index for 2008 shows a Total Return of -22.1% (IPD, 2009b). As funds use fi- nancial leverage of up to 50% of their property values, fund returns are expected to fluctuate even more than the underlying property investments. The question arises why capital weighted returns...

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