Open-ended Property Funds – A Real Estate Investment Vehicle between Liquidity Risk and Diversification Benefits Lars Helge Haß IM BH Overview Part I Introduction Introduction . 2 Part II Essays Open-ended Property Funds: Risk and Return Profile. .. 9 Do Alternative Real Estate Investment Vehicles Add Value to REITs? Evidence from German Open-ended Property Funds. 58 What drives Contagion in Financial Markets? Liquidity Effects versus Information Spill-Over. 96 Part III Conclusion Conclusion . 140 I Table of Contents Overview ......................................................................................................................................... I Table of Contents .......................................................................................................................... II List of Tables .................................................................................................................................. V List of Figures ............................................................................................................................. VII 1 Introduction ................................................................................................................................. 2 References .................................................................................................................................... 7 2 Open-ended Property Funds: Risk and Return Profile ........................................................... 9 2.1 Introduction .................................................................................................................... 10 2.2 Literature Review ........................................................................................................... 12 2.3 The German OPF Market ............................................................................................... 14 2.3.1 Fundamental Features ................................................................................................. 14 2.3.2 Construction of Open-ended Property Fund Indices .................................................. 19 2.4 Portfolio Effects from the Addition of OPFs – A Descriptive Analysis ........................ 20 2.5 Efficient Asset Allocation under Different Risk Measures ............................................ 26 2.5.1 Description of the Optimization Procedure ................................................................ 26 2.5.2 Open-ended Property Funds in Retail Investor Portfolios ......................................... 28 2.5.3 Open-ended Property Funds in Institutional Investor Portfolios ................................ 32 2.5.4 The Suitability of Open-ended Property Funds for Different Holding Periods ......... 34 2.6 Sensitivity Analysis ........................................................................................................ 36 II 2.7 Individual Investor’s Perspective ................................................................................... 40 2.8 Conclusion ...................................................................................................................... 42 2.9 References ...................................................................................................................... 44 2.10 Appendix ........................................................................................................................ 51 3 Do Alternative Real Estate Investment Vehicles Add Value to REITs? Evidence from German Open-ended Property Funds, ................................................................. 58 3.1 Introduction .................................................................................................................... 59 3.2 The German OPF Market ............................................................................................... 61 3.2.1 Fundamental Features ................................................................................................. 61 3.2.2 Construction of Open-ended Property Fund Indices .................................................. 66 3.3 Diversification Benefits of Real Estate .......................................................................... 67 3.4 REIT Liquidity ............................................................................................................... 69 3.5 Comparison of OPF and REIT Liquidity ....................................................................... 71 3.5.1 General Liquidity of OPFs and REITs ....................................................................... 72 3.5.2 Special OPF Liquidity Risk ........................................................................................ 75 3.6 Conclusion ...................................................................................................................... 88 3.7 References ...................................................................................................................... 90 3.8 Appendix ........................................................................................................................ 93 4 What drives Contagion in Financial Markets? Liquidity Effects versus Information Spill-Over, .................................................................................................... 96 4.1 Introduction .................................................................................................................... 97 4.2 The German OFP Market – Fundamental Features ...................................................... 101 4.3 Capital Market Reactions to Temporal Suspensions of Share Redemptions ............... 107 III 4.4 Empirical Estimation of the Liquidity Risk and from Impending NAV Impairment ................................................................................................................... 114 4.4.1 Theoretical Background ........................................................................................... 115 4.4.2 Calibration Exercise ................................................................................................. 118 4.4.3 Forecast-Ability of the Initial Discount to Temporal Suspension of Share Redemptions ............................................................................................................. 125 4.5 Conclusion .................................................................................................................... 129 4.6 References .................................................................................................................... 131 4.7 Appendix ...................................................................................................................... 134 5 Conclusion ................................................................................................................................ 139 References ................................................................................................................................ 142 IV List of Tables Table 2-1: Overview of the German OPF Market ................................................................ 16 Table 2-2: Autocorrelation Structure of OPFs ..................................................................... 21 Table 2-3: Descriptive Statistics for Monthly Return Distributions .................................... 24 Table 2-4: Correlation Matrix .............................................................................................. 25 Table 2-5: Optimal Portfolio Weights and Risk Reduction Potential of all Asset Classes (Markowitz Approach) .......................................................................... 31 Table 2-6: Sharpe Ratio Test ................................................................................................ 32 Table 2-7: Sensitivity of OPF Asset Allocation to Changes in Mean and Standard Deviation .............................................................................................. 38 Table 2-8: Distribution of Mean Returns of OPF Investment .............................................. 41 Table 2-A1: Optimal Portfolio Weights and Risk Reduction Potential of all Asset Classes for U.S. Investors (Markowitz Approach) ............................................ 54 Table 2-A2: Portfolio Return and Risk for Various Holding Periods ..................................... 55 Table 3-1: Overview of the German OPF Market ................................................................ 63 Table 3-2: Secondary Market Comparison of Market Phases when all OPFs are Redeemable and When some are Temporarily Suspended ................................. 82 Table 3-3: Logit Model Predicting Depreciation of Property Portfolio Value within the Period of Temporary Share Redemption Suspension ......................................... 85 Table 3-4: Ordinary Least Squares Regression Explaining the Depreciation of OPF Portfolio Property Values ................................................................................... 85 Table 3-5: Buy-and-Hold Abnormal Returns for Temporarily Suspended OPFs ................ 87 Table 3-A1: Descriptive Statistics for Monthly Return Distributions .................................... 93 Table 3-A2: Correlation Matrix .............................................................................................. 94 Table 3-A3: Summary of Suspension Dates of Temporary Share Redemptions and Related OPF Names ...........................................................................................