Appraisal within open-end real estate funds: Evidence on biased appraisals in fund crisis year 2006 Sebastian Glaesner - Contact Author - Doctoral Candidate European Business School International University Soehnleinstr. 8/D Wiesbaden

ERES Conference Sebastian Gläsner The Role of GOEFs in the German Retail Market  GOEFs play with a fund volume in excess of 80 billion € major role in German retail market  Real estate held in trust by an investment company (KAG)  Investments in commercial and residential properties as well as developments  Constant issuance and redemption of units  Unlimited number of unit owners  First open-end real estate fund set up in Germany in 1959 by the Bayerische Immobilien- und Wechselbank and the Bayerische Vereinsbank  First legal regulation in 1969  The number of funds in Germany has increased from 8 (1972) to 43 (12/2008)  Open-end real estate funds exist in Switzerland, Germany, Luxemburg and France as well as in various other European countries

ERES Conference Sebastian Gläsner Low, but extremely stable nominal returns ( , by fund) SEB ImmoInvest achieved the highest returns in the ten year horizon and at the same time realised those returns with the lowest volatility of merely 0.61%. The majority of the remaining funds show an annualized return volatility slightly below one percent. As already mentioned in the introduction, grundbesitz europa has by far the highest volatility of 2.13% due to its high returns of 4.5% in February and 4.6% in March 2007

ERES Conference Sebastian Gläsner Explanations for stable or smoothed returns  product characteristics stabilizing returns  stable cash flows from long lease duration  diversification across Europe / worldwide  investment in cash and bonds  product characteristics concealing return volatility  twelve month valuation cycle lags market developments  potential influence other than market developments on return volatility  intentional valuation smoothing/ influence (dissertation paper 2)  intentional timing of valuations to smooth monthly fund returns (dissertation paper 3)

ERES Conference Sebastian Gläsner Strong yield compression in 2006

ERES Conference Sebastian Gläsner Strong capital redemptions among many funds in crisis years 2005/2006

ERES Conference Sebastian Gläsner German properties of open-end funds

ERES Conference Sebastian Gläsner Negative value changes and high dispersion in 2006

ERES Conference Sebastian Gläsner High valuation disparity among funds

ERES Conference Sebastian Gläsner Significant valuation differences among funds >>> The research hypothesis „All means of value changes of German properties over all funds are equal” is rejected

ERES Conference Sebastian Gläsner Descriptive statistics of regression model The model includes three factors to explain the changes in market values (D.MV): year.of.purchase occupancy rate percentage ending leases The factor change in occupancy rate (D.OCR) is not included due to data limitations.

ERES Conference Sebastian Gläsner Significant valuation differences among funds (I)

ERES Conference Sebastian Gläsner Significant valuation differences among funds (II)

ERES Conference Sebastian Gläsner Summary (I)  significant differences of property valuation between funds’ portfolios especially in 2006  likely explanation for different mean value changes of properties by portfolio: funds exerted an influence on the valuation of their properties  alternative interpretation: not fully diversified portfolios  high vacancy rates explain devaluations in many (not all) portfolios  The fact that the same model is far less significant and the explained variance is lower in 2005 and 2007 strengthens the argument that in fund crisis year 2006 many German properties were prepared for sale at (adjusted) market values

ERES Conference Sebastian Gläsner Summary (II)  big valuation differences by portfolio holding question research and indices neglecting this variable  Consequences for the idiosyncratic risk of property portfolios: if a big proportion of property value change variance stems from portfolio belonging and not from property-specific factors, idiosyncratic risk of property portfolios may be overestimated

ERES Conference Sebastian Gläsner Thank You