The Discount to NAV of Distressed Open-End Real Estate Funds
- 18 Downloads
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.
KeywordsOpen-end real estate funds Liquidity transformation Discount to NAV Liquidity crisis Uncertainty Spillover effects
JEL ClassificationG230 L85 G33
- Baker, S., Bloom, N., Davis, S. (2015). Measuring economic policy uncertainty. Discussion paper: Centre for economic performance (CEP), No. 1379.Google Scholar
- Barkham, R., & Ward, C. (1999). Investor sentiment and noise traders. Journal of Real Estate Research, 18(2), 291–312.Google Scholar
- Bond, S., & Shilling, J. (2004). An evaluation of property company discounts in Europe Unpublished working paper, EPRA, University of Cambridge.Google Scholar
- Brounen, D., & ter Laak, M. (2005). Understanding the discount: Evidence from European property shares. Journal of Real Estate Portfolio Management, 11 (3), 241–252.Google Scholar
- Cherkes, M. (2003). A positive theory of closed-end funds as an investment vehicle. EFA 2004, Maastricht Meetings Paper No. 1317.Google Scholar
- Malkiel, B., & Xu, Y. (2005). The persistence and predictability of closed-end fund discounts. SSRN Electronic Journal.Google Scholar
- Schnejdar, S., Heinrich, M., Woltering, R.-O., Sebastian, S. (2018). The determinants of real estate fund closures. SSRN, working paper. https://ssrn.com/abstract=3236569.
- Wurtzebach, C., Mueller, G., Machi, D. (1991). The impact of inflation and vacancy of real estate returns. Journal of Real Estate Research, 6(2), 153–168.Google Scholar