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Do alternative real estate investment vehicles add value to REITs?:evidence from German open-ended property funds

Schweizer, Denis and Hass, Lars Helge and Johanning, Lutz and Rudolph, Bernd (2013) Do alternative real estate investment vehicles add value to REITs?:evidence from German open-ended property funds. Journal of Real Estate Finance and Economics, 47 (1). pp. 65-82.

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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 low-risk portfolios, despite their larger potential liquidity risk. REIT liquidity is comparable to that of ordinary 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.

Item Type: Article
Journal or Publication Title: Journal of Real Estate Finance and Economics
Uncontrolled Keywords: Liquidity ; Open-ended property funds ; REITs ; Temporary suspension of share redemptions
Subjects: H Social Sciences > HB Economic Theory
Departments: Lancaster University Management School > Accounting & Finance
ID Code: 53201
Deposited By: ep_importer_pure
Deposited On: 19 Mar 2012 12:14
Refereed?: Yes
Published?: Published
Last Modified: 14 Aug 2013 11:52
Identification Number:
URI: http://eprints.lancs.ac.uk/id/eprint/53201

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