Open-end real estate fund performance - A German fund study

Abstract

For the past sixty years German open-end real estate funds have been considered attractive assets in the world of investment. They have a reputation to achieve stable returns and potentially perform better than other real estate investment vehicles, such as REITs or direct property investment. Their complex structure and tumultuous past led to unique characteristics and created many possibilities to assess their general role in the industry of real estate investments.

A common term for successful investments is often referred to as performance, however its underlying assumptions, determination, calculation and interpretation can be considered vague and heterogenic across the literature and real estate economy. This may be reasoned in the lack of transparency and information inefficiency of real estate and its fund markets. The universality of a performance formula that complies with all types of assets is consequently reduced.

This thesis aims to discuss fund performance and performance influencing variables in regard to the fund’s characteristics. The empirical research is based on the fund’s annual reports, share price and secondary market share price development. The results suggest that the most commonly used parameter for fund performance determination in Germany, the BVI-return often differs from the performance of the portfolio, although it can be adjusted by the fund managers through various mechanisms, namely a sales strategy to adjust for changes in appreciation of the underlying assets. For the years 2016 to 2019 the secondary market share price development exhibited a positive correlation with the share price development for most of the funds and may partially be used as substitute for the performance measurement. In summary, fund performance measurement still requires transparent assumptions, clear and understandable models and detailed description of the data that is used to achieve a higher level of comparability between funds and allocate the performance driving components.