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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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The analysis of the distribution of appraisals of German open-end fund’s Ger- man properties (chapter 2) has shown that in fund crisis year 2006 there have been significant differences of property valuation between funds’ portfolios. The arguably most likely explanation for different mean value changes of properties by portfolio is that funds exerted an influence on the valuation of their properties in the year 2006. Only those variables differ significantly in 2006 compared to 2005 and 2007 that are derived within the valuation process such as the change in market value, the change in rental value and the change in the year’s pur- chase. In contrast, the variables occupancy rate, change in occupancy rate and the percentage of ending leases, which are central input factors within the valua- tion process, do not change noticeably in 2006. This is further evidence that the valuation results were different in 2006 but not the relevant market develop- ments. The valuation results of GOEF properties in all the investigated foreign markets Belgium, France, Italy, the Netherlands, Spain and the UK (chapter 3) differ significantly from the valuations of the local market participants in the respec- tive markets. Especially when comparing GOEFs UK capital growth rates from Q1 2005 to Q1 2008 to IPD UK capital growth, a substantial smoothing effect is found. While the change in rental values is at least similar within GOEFs com- pared to IPD figures, the yield shift differs extremely. German open-end funds do not change the capitalization rates of...

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