Do Alternative Real Estate Investment Vehicles Add Value to Reits? Evidence from German Open-Ended Property Funds

Posted: 29 May 2013

See all articles by Lutz Johanning

Lutz Johanning

WHU - Otto Beisheim School of Management

Bernd Rudolph

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Denis Schweizer

Concordia University

Date Written: May 29, 2013

Abstract

Besides the more commonly used REITs, German investors can also invest in a lesser-known real estate vehicle, Open-Ended Property Funds. OPFs are considered a compromise between listed and direct real estate investments. OPF fund managers generally provide daily (perfect) liquidity. However, if liquidity falls below 5%, share redemptions in these funds can be temporarily suspended for a period of up to two years. During this time, investors will only be able to sell shares on the secondary market (exchange), and are thus subject to significant liquidity risk.

The objective of this paper is to analyze whether OPFs add value to investor portfolios above that provided by REITs. We show that OPFs have a diversification advantage over REITs in common stock, but OPFs exhibit an average initial discount to funds' NAV of about 6% when share redemptions are temporarily suspended. However, in the long-run, this potential redemption suspension does not negatively influence OPF performance, (in case OPFs reopen again). This makes OPFs an attractive investment alternative to REITs for investors who have a high level of risk aversion and a long-term investment horizon, such as endowments, insurance companies, and pension funds.

Keywords: liquidity, Open-Ended Property Funds, REITs, temporary suspension of share redemptions

Suggested Citation

Johanning, Lutz and Rudolph, Bernd and Schweizer, Denis, Do Alternative Real Estate Investment Vehicles Add Value to Reits? Evidence from German Open-Ended Property Funds (May 29, 2013). Journal of Real Estate Finance and Economics, Vol. 47, No. 1, 2013. Available at SSRN: https://ssrn.com/abstract=2271680

Lutz Johanning

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49 261 6509 720 (Phone)

Bernd Rudolph

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Kaulbachstr. 45
Munich, DE 80539
Germany

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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