Real Estate Fund Openings and Cannibalization

Abstract

This paper examines the trade-offs in launching new real estate funds, specifically open-end, direct-property funds. This investment vehicle, which is designed to provide the risk-return benefits of private market real estate, is available to retail investors in a number of countries. At the same time, these funds are also subject to liquidity risk, because they hold an inherently illiquid asset in an open-end structure. This format presents fund-family managers with unique challenges, particularly with the decision to open new funds. The data consists of 2,127 German fund openings across 76 fund families in 12 asset classes over the 1992-2010 period. Including a wide range of asset classes allows for a comparison between real estate and other investment objectives. We find a substantial cannibalization effect across the existing real estate funds of a family, while we note the opposite effect – i.e., flows into existing funds increase following a fund opening within the same objective – for all other asset classes. Our analysis of fund opening determinants shows that inflows mitigate the cannibalization risk for new real estate funds. Additional evidence highlights the role of scale and scope economies in real estate fund openings. Overall, the results provide new insights into the relatively large size and small number of real estate funds when compared to mutual funds dedicated to other investment objectives.

Keywords: Real Estate, Fund Flows, Fund Openings, Cannibalization

JEL Classification: G11, G17, G29