Private Equity Real Estate: Asymmetric Effects of Gearing and Drivers of Performance

19 Pages Posted: 7 Nov 2014

See all articles by Franz Fuerst

Franz Fuerst

University of Cambridge - Department of Land Economy; University of Melbourne; City University of New York - Center for Urban Research

Wayne Lim

University of Cambridge

George Matysiak

City University London - Faculty of Finance

Date Written: November 6, 2014

Abstract

This research investigates the key drivers of European non-listed real estate funds performance. In particular, it seeks to understand the extent to which funds’ underlying market and sector exposure, gearing, and fund size, contribute to a fund’s total return. Using a proprietary database covering the period 2001-2012, we construct a unique fund-specific performance benchmark based on average weighted return data in the markets and property types to which each fund is exposed. We track fund performance and its drivers through the years of rapid expansion of the non-listed real estate sector that was followed by the sharp contraction during the global financial crisis and establish whether performance drivers have a differential impact during market upturns and downturns. We find that fund performance during the study period was predominantly driven by the underlying direct real estate market and sector exposure of a fund along with the level of gearing and the size of a fund. The effect of gearing on returns is asymmetric, i.e. the negative effect of gearing is larger in a downturn than the positive effect during an upturn at each level of gearing, particularly for highly geared funds. Our empirical analysis also suggests that larger funds exhibit higher total returns while controlling for other factors and find a J-curve effect where funds in the first two years of their existence are marked by lower performance than fully operational or more mature funds.

Keywords: real estate, private equity, non-listed funds, asymmetric effects of gearing, performance drivers

JEL Classification: C23, F21, G11

Suggested Citation

Fuerst, Franz and Lim, Wayne and Matysiak, George A., Private Equity Real Estate: Asymmetric Effects of Gearing and Drivers of Performance (November 6, 2014). Available at SSRN: https://ssrn.com/abstract=2519794 or http://dx.doi.org/10.2139/ssrn.2519794

Franz Fuerst (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

HOME PAGE: http://www.landecon.cam.ac.uk/directory/dr-franz-fuerst

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

City University of New York - Center for Urban Research

CUNY The Graduate Center
New York, NY 10011
United States

Wayne Lim

University of Cambridge ( email )

Queens' College
Silver Street
Cambridge, CB3 9ET
United Kingdom

George A. Matysiak

City University London - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain
+44 171 477 8218 (Phone)
+44 171 477 8573 (Fax)

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