"The Discount to NAV of Distressed Open-End Real Estate Funds" with Michael Heinrich, Rene-Ojas Woltering und Steffen Sebastian (2020), The Journal of Real Estate Finance and Economics, 61, 80–114 (2020). https://doi.org/10.1007/s11146-018-9694-8
This paper examines the discount to NAV in the context of distressed German open-end real estate funds. This is a unique setting to study NAV discounts because distressed real estate funds are forced to sell off their property portfolios and pay out the proceeds to investors. In contrast, the discount to NAV of closed-end funds or REITs can theoretically persist forever. This enables us to study how investors price the risks associated with the forced liquidation of direct-property portfolios. Our hand-collected dataset covers the complete crisis and post-crisis period from October 2008 through June 2016. Using panel regression methods, we find that the discount to NAV is driven by fundamental risk because it is positively correlated with a fund’s leverage ratio and it decreases with the share of liquid assets. We also provide evidence that the discount is related to conflicts of interest between investors and fund management. Besides these fund-specific factors, we find that NAV discounts are driven by spillover effects from the announcement of other funds’ liquidations, as well as by investor sentiment, which is proxied by the aggregate level of capital flows into the industry and by the degree of macroeconomic uncertainty.
Link (Read only): https://link.springer.com/epdf/10.1007/s11146-018-9694-8?author_access_token=A6xG4kD7V4lVRvvy2uYJxfe4RwlQNchNByi7wbcMAY4oQKum0NHSnMkYDUyTvCR6OQBuJb3GpELDfRCU-hjpignYyQZ7u-zg_XnAjqRRzEzCrHXTkBg4TJUWlwvyWKK4gD2LVjwI8tXdTbSOGEQJ_Q%3D%3D
The Determinants of Real Estate Fund Closures
During the October 2008 fund crisis, approximately one-third of German open-end real estate retail funds, with total assets under management of about EUR 30 billion, were forced to close (suspend share redemptions). A fund closure generally leads to fund liquidation, which poses a serious challenge to management and investors. As a consequence, the fund management is forced to liquidate the fund by selling the real estate assets. The liquidation often occurs under conditions of high selling pressure, and may involve significant fees. Furthermore, in the event of a fund closure, fund investors’ capital is totally constrained (i.e., investors can only sell their shares on the secondary market, but for significantly discounted prices). Thus, knowing the determinants of fund closures could help fund management adjust investment strategies and diminish closure risk. Our monthly panel dataset contains fund specific information such as the liquidity ratio, capital net inflows, leverage ratio, and management fees for the entire population of German open-end real estate retail funds over the August 2002-June 2016 period. The results of our logit model suggest a significantly positive influence of fund run risk and industrywide spillover effects, as well as a negative influence of economies of scale and scope on fund closure probability. Our results also indicate that having a greater share of institutional investors tends to increase fund closure probability.
Link to document: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3236569