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Return Patterns of German Open-End Real Estate Funds

An Empirical Explanation of Smooth Fund Returns


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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4.1 Introduction Returns of German open-end real estate retail funds have shown a remarkably stable development over the last decades. The annualized standard deviations of returns of GOEFs with more than ten years return history is for nine out of 13 funds below one percent on average over the last ten years. Three funds realized standard deviations close to one percent, and only one fund showed more vola- tile returns with a standard deviation of 2.18%. Those thirteen funds make up the IPD OFIX-10 index which realized an annual volatility of 0.52% between 1999 and 2008 (IPD GmbH, 2009a). From an international perspective, annual- ised volatilities of monthly fund returns of one percent are exceptionally low. Using data of two commingled real estate funds (CREF) in the US, Bruegge- mann et al. (1992) report annualised volatilities of 5.7% and 6.2% between 1972 and 1989. Gallo, Lockwood, and Rodriguez (2006) examine 65 pension CREFs in the US during 1985 to 2002 of which 23 funds are open-end. Annualised standard deviations of individual fund returns ranged between 1.87% and 13.40%. The index of 23 open-end CREFs shows a standard deviation of 2.76%. Mueller et al. (2008) analysed monthly returns from listed property companies and Real Estate Investment Trusts (REIT) in the US and the EU from 1987 to 2005. They built portfolios of all listed companies and classified times of low volatility on the index level when volatilities ranged between 1.5% and 3.9%. Even in times of low market volatility, the volatility...

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