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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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5.1 Introduction It has been shown that returns of GOEFs are smoothed due to the timing of property valuations (chapter 4). With respect to their German properties, there is evidence that the majority of funds did influence property appraisals in such a way that the strong yield compression in 2006 and 2007 was not reflected in value gains (chapter 2). As a big proportion of those German properties was sold in 2006 and 2007 close to the market values which had not been appreciated in the years before, it is clear that market values in 2006 and 2007 were a quiet close estimate of asset prices at this point of time. One explanation for that is that properties may have been overvalued before 2006. But whether one agrees on the overvaluation argument or not, the fact that German properties did not gain significantly in market value in 2006 and 2007 can be seen as smoothing of property value changes in times of rising markets. Chapter 3 shows that foreign properties of GOEFs do not reflect changes in cap rates to the same extent as properties held by local market participants do. Especially in the case of the UK market it is evident that valuations of GOEFs’ properties are smoothed, if we assume that local valuations truly reflect market movements. All three presented essays find smoothing effects within GOEFs, either on the portfolio level (chap- ter 4) or on the individual property level (chapters 2 and 3). Therefore, we pre- sent...

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