Shaun A. Bond University of Cincinnati March 25, 2000 ERES Conference 2009 Stockholm The Effect of Focus on the Performance of German Mutual Real Estate Funds Shaun A. Bond University of Cincinnati Steffen Sebastian IRE|BS, University of Regensburg

Agenda March 25, 2000 Motivation Data Empirical Analysis Conclusion

Motivation Research question Specialization or Diversification? March 25, 2000 Research question Specialization or Diversification? Diversification by region or by property type. Effect of diversification on fund return and fund performance. Various performance measures.

Data Desciption March 25, 2000 19 largest Open End Real Estate Funds (about 80% of Market Cap.) Only authorized (retail) funds Sample: I/1980 to II/2007 (unbalanced panel) Data about focus is taken from semiannual reports, included if at least three consecutive years of data. The total market capitalization in our sample increased by a factor of 30 from 2.1 bn in 1980 to 75 bn in 2007. 4

Evolution of OEREF

The Set of Data Observations and Variables March 25, 2000 Focus (Type or Region) The standard measure of focus is the simple Herfindahl-index (HI). The property type HI is defined as: S2 is the fraction of the sum assets that is invested in property type j. The HI can take on any value in the interval [1/m; 1] indicating either full diversification across all or full focus on one specific property types. 6

The Set of Data Observations and Variables March 25, 2000 Focus on Property Type 7

The Set of Data Observations and Variables March 25, 2000 Focus on Region Regional Focus 31.01.1990 31.01.2000 31.01.2008 Germany 98,89% 64,97% 37,81% Overseas / Others 0,00% 8,44% 1,58% Italy 0,20% 4,42% Netherlands 5,04% 5,99% UK 15,71% 11,55% Austria 0,21% 1,94% France 2,52% 17,64% Spain 2,71% Belgium 0,28% 3,18% Portugal 0,07% 0,69% Sweden 2,55% Hungary 0,56% Poland 0,71% Czech Republic Japan 0,83% Ireland Luxembourg 1,08% South Korea 0,78% USA 1,11% 4,20% Finland 0,32% Mexico Turkey 0,13% HHI Region 98,09% 54,85% 28,68% 8

The Set of Data Observations and Variables March 25, 2000 Assets in million euro 9

The Set of Data Observations and Variables March 25, 2000 Performance Have countries and types a influence on the real estate return? Drawbacks: it can not account for any interaction between countries and regions the bs may be unstable over our long sample period 10

The Set of Data Observations and Variables March 25, 2000 Performance 11

The Set of Data Observations and Variables March 25, 2000 Control variables Size (Net Asset Value) Property Ratio Focus Interaction Diversification across regions and property types may be correlated.  bivariate HI. 12

The Set of Data Observations and Variables March 25, 2000 Fund Management Costs and Gross Returns Total Expense Ratio (TER): Fund management remuneration + Depository bank remuneration + Expert Costs + Other expenditures in accordance to General Contractual Terms Costs of fund managing (CFM) Gross returns : possible underperformance arises through high management costs? 13

Further regressions coef. t-value Intercept 5.11E-05 1.273 HHI Property Type 0.009678* 8.566 HHI Regional 0.004332* 7.971 HHI Bivariate -0.048486* -5.367 Market Capitalization -4.49E-14* -5.802 Property Ratio 0.000129* -2.399 R² = 0.194 ; adj. R² = 0.192

Conclusion Preliminary results: March 25, 2000 Preliminary results: Diversification leads to higher return. Property type more important than regions. Negative economics of scale.