appraisal within open-end real estate funds: evidence on biased appraisals in fund crisis year 2006...

Appraisal within open-end real estate funds:Evidence on biased appraisals in fund crisis year 2006

Sebastian Glaesner

- Contact Author -

Doctoral CandidateEuropean Business School International University Soehnleinstr. 8/D

65201 Wiesbaden

[email protected]

2Sebastian GläsnerERES Conference 2009

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


Low, but extremely stable nominal returns (1998-2007, by fund)

5.12%4.92% 4.79%

4.61% 4.57%

4.15%3.90% 3.89% 3.78%

3.34% 3.28%

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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


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)


Strong yield compression in 2006

5.27

5.15

4.57

4.76

5.75

5.00

5.62

5.465.38

4.92

4.544.624.70

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4.20

4.40

4.60

4.80

5.00

5.20

5.40

5.60

5.80

6.00

2004 2005 2006 2007

AtisReal BulwienGesa CBRE DEGI

The figure shows average (not capital weighted) prime yields of the top 5 German office locations Berlin, Düsseldorf, Frankfurt, Hamburg and Munich as reported by major real estate consultants. All four companies report the strongest yield compression in 2006.


Strong capital redemptions among many funds in crisis years 2005/2006

FV as % 2004-01-31 fund name

FV to 2004-01-31 2004-12-31 2005-12-31 2006-12-31 2007-12-31

AXA Immoselect 296,500 157% 418% 576% 1008% DEGI INTERNATIONAL 381,700 125% 248% 357% 482% Deka-ImmobilienEuropa 9,308,400 2% -10% -26% -27% Deka-ImmobilienFonds 7,047,600 -14% -32% -55% -63% Deka-ImmobilienGlobal 1,929,300 5% 2% -10% -13% grundbesitz-europa 8,332,600 -13% -32% -67% -72% grundbesitz-global 2,175,900 36% 30% 30% 65% HAUS-INVEST europa 11,917,700 -12% -28% -31% -18% KanAm grundinvest Fonds 1,100,000 77% 184% 159% 284% SEB ImmoInvest 4,420,100 13% 21% 31% 59% UBS (D) Euroinvest Immobilien 1,278,400 44% 48% 66% 78% UniImmo: Deutschland 9,353,400 -13% -33% -45% -46% UniImmo: Global 510,700* 125% 163% 236% WestInvest 1 3,280,400 -4% -15% -35% -43% WestInvest InterSelect 1,642,300 37% 55% 56% 55% *FV to 2005-01-31 The table shows fund volumes (FV, as net asset values in EUR) as beg. 2004. The subsequent columns show changes of fund volume relative to 2004.


German properties of open-end funds 2005-2007

2005 2006 2007

fund name sum MV # MV sum MV # MV sum MV # MV

AXA IMMOSELECT 242,312,000 9 388,679,000 10 CS EUROREAL (A) EUR 1,659,120,000 39 DEGI EUROPA 1,248,560,000 16 Deka ImmobilienEuropa 1,609,620,000 27 1,584,349,000 28 1,348,370,000 27 Deka-ImmobilienGlobal 129,790,000 2 Deka-ImmoFonds 4,095,137,091 129 3,457,142,739 126 3,159,100,000 115 EURO ImmoProfil 1,595,280,000 71 grundbesitz europa 4,017,193,000 98 2,468,795,000 66 316,089,000 3 HANSA Immobilia 171,385,000 19 HAUSINVEST europa 1,485,208,000 26 1,522,335,000 25 INTER ImmoProfil 338,680,000 13 MORGAN STANLEY P2 VALUE 68,480,000 2 SEB ImmoInvest 1,855,100,000 62 1,458,300,000 38 TMW Immobilien Weltfonds 90,880,000 2 UBS (D) Euroinvest Immobilien 623,700,000 22 437,500,000 15 UniImmo: Deutschland 3,647,410,000 57 1,967,550,000 22 UniImmo: Europa 1,715,310,000 25 UniImmo: Global 242,881,000 2 363,015,000 3 WestInvest 1 1,812,495,100 71 1,815,168,000 72 1,552,138,000 52 WestInvest InterSelect 442,226,000 11 612,369,000 14 816,655,000 15 total 12,106,461,191 338 18,034,434,739 484 20,217,426,000 512 min. 129,790,000 2 242,312,000 2 68,480,000 2 max. 4,095,137,091 129 3,647,410,000 126 3,159,100,000 115


Negative value changes and high dispersion in 2006

D MV analysis year 2005 2006 2007 # properties 338 484 512

mean -4.287 -8.411 -1.716

standard deviation 6.156 13.129 5.752

variance 37.895 172.381 33.091

skewness -1.595 -2.038 -1.396

kurtosis 6.806 5.764 7.697


High valuation disparity among funds

2005 2006 2007

fund name # mean sd skew. kurt. # mean sd skew. kurt. # mean sd skew. kurt.

AXA IMMOSELECT 5 0.045 0.025 0.053 -1.566 5 0.016 0.045 -0.212 -2.168 CS EUROREAL (A) EUR 26 -0.017 0.067 1.593 5.529 DEGI EUROPA 9 -0.037 0.145 -0.090 -0.748 Deka-ImmobilienEuropa 16 -0.051 0.048 -1.419 0.978 22 -0.121 0.099 -0.943 1.061 19 -0.036 0.068 -1.378 3.055 Deka-ImmobilienGlobal 1 0 Deka-ImmoFonds 97 -0.066 0.073 -1.205 5.749 117 -0.194 0.185 -0.749 0.943 52 -0.037 0.079 -1.307 4.011 EURO ImmoProfil 44 -0.031 0.056 0.014 1.251 grundbesitz europa 83 -0.047 0.059 0.110 0.590 65 -0.113 0.073 0.124 -0.290 0 HANSA Immobilia 15 -0.035 0.058 -0.106 1.010 HAUSINVEST europa 19 -0.109 0.162 -1.964 3.027 20 -0.017 0.075 0.022 1.091 INTER ImmoProfil 2 MORGAN STANLEY P2 VALUE 1 SEB ImmoInvest 34 -0.054 0.065 -2.093 5.410 23 -0.021 0.039 -0.907 1.125 TMW Immobilien Weltfonds 2 UBS (D) Euroinvest Immobilien 16 0.002 0.067 0.190 -0.785 9 -0.003 0.057 0.804 -0.978 UniImmo: Deutschland 26 -0.076 0.109 -2.154 5.534 13 -0.045 0.105 -0.285 0.728 UniImmo: Europa 12 -0.040 0.105 -0.504 -1.007 UniImmo: Global 1 WestInvest 1 47 -0.058 0.068 -2.136 7.463 49 -0.041 0.049 -1.087 1.149 38 -0.044 0.075 -0.968 0.758 WestInvest InterSelect 7 -0.038 0.065 -1.279 0.191 11 -0.027 0.048 0.019 -0.820 10 -0.012 0.040 -0.391 -1.081 all properties 338 -4.287 6.156 -1.170 5.509 484 -8.411 13.129 -1.652 4.095 512 -1.716 5.752 -0.689 3.441


Significant valuation differences among fundsTests of Between-Subjects Effects for 2006

Dependent Variable: D MV

Source

Type III Sum of

Squares df Mean Square F Sig.

Partial Eta

Squared

Corrected Model 20909.3 10 2090.9 15.862 .000 .251

Intercept 3505.3 1 3505.1 26.592 .000 .053

fundname 20909.3 10 2090.9 15.862 .000 .251

Error 62350.6 473 131.819

Total 117500.6 484

Corrected Total 83259.9 483

R Squared = .251 (Adjusted R Squared = .235)

>>> The research hypothesis „All means of value changes of German properties over all funds are equal” is rejected


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.

2005 mean sd n NA year.of.purchase 1993.2 8.6 338 0 occupancy.rate 0.821 0.243 251 87 D.OCR -0.019 0.145 97 241 perc.ending.leases 0.142 0.248 251 87 YP 14.98 2.45 337 1 D.YP -0.010 0.044 336 2 D.ERV -0.034 0.049 336 2 D.MV -0.043 0.062 338 0 2006 mean sd n NA year.of.purchase 1993.9 9.0 484 0 occupancy.rate 0.831 0.241 474 10 D.OCR -0.009 0.152 378 106 perc.ending.leases 0.128 0.219 379 105 YP 14.50 2.86 471 13 D.YP -0.039 0.097 471 13 D.ERV -0.051 0.084 471 13 D.MV -0.084 0.131 484 0 2007 mean sd n NA year.of.purchase 1995.1 8.7 512 0 occupancy.rate 0.843 0.243 442 70 D.OCR -0.011 0.139 428 84 perc.ending.leases 0.141 0.198 284 228 YP 14.94 2.74 496 16 D.YP -0.004 0.040 494 18 D.ERV -0.013 0.046 494 18 D.MV -0.017 0.058 512 0


Significant valuation differences among funds (I) model variables

fund p-

value DF adjusted R

squared occupancy.

rate year.of. purchase

perc.ending. leases

Deka-ImmobilienEuropa 0.052 24 0.427 0.207 0.017 0.098 (2.050) (1.543) (0.245) Deka-ImmoFonds 0.000 113 0.374 0.361 0.001 -0.148 (4.949) (0.751) (-2.160) grundbesitz europa 0.008 62 0.243 0.168 -0.001 -0.005 (2.942) (-0.937) (-0.067) HAUSINVEST europa 0.397 11 0.467 0.172 0.004 -0.367 (0.700) (0.571) (-0.660) SEB ImmoInvest 0.152 17 0.351 0.097 -0.001 -0.073 (1.457) (-0.653) (-0.614) UBS (D) Euroinvest Immobilien 0.094 17 0.149 0.110 -0.016 -0.003 (2.305) (-2.272) (-0.052) UniImmo: Deutschland 0.149 53 0.218 0.035 0.001 -0.151 (0.465) (1.472) (-1.273) WestInvest 1 0.012 35 0.059 0.011 0.001 -0.048 (0.131) (0.466) (-1.602) WestInvest InterSelect 0.532 5 -0.191 0.023 -0.010 -0.063 (0.108) (-0.513) (-1.411)

The table reports results of the linear regression D.MV ~ occupancy.rate + year.of.purchase + perc.ending.leases. The three colums to the left report p-values, degrees of freedom and adjusted R squared values of the model, while the three colums to the right state the estimates of the independent variables. Figures in parentesis under the corresponding estimates report the t-values. Bold coefficients imply a p-value of 0.1 or lower


Significant valuation differences among funds (II) model variables

fund p-

value DF adjusted R

squared occupancy.

rate year.of.

purchase perc.ending.

leases AXA IMMOSELECT 0.001 7 0.891 -0.024 (-5.304) Deka-ImmobilienEuropa 0.011 25 0.436 0.181 0.018 (2.668) (1.671) Deka-ImmoFonds 0.000 113 0.374 0.361 0.001 -0.148 (4.949) (0.751) (-2.160) grundbesitz europa 0.000 64 0.255 0.166 (3.941) HAUSINVEST europa 0.072 24 0.388 0.413 (1.880 SEB ImmoInvest 0.002 60 0.106 0.081 (3.159) UBS (D) Euroinvest Immobilien 0.044 18 0.197 0.111 -0.016 (2.274) (-2.295) UniImmo: Deutschland 0.145 55 0.227 -0.164 (-1.478) WestInvest 1 0.002 69 0.196 0.061 0.003 (1.457) (1.995) WestInvest InterSelect 0.953 11 -0.159 0.026 -0.005 (0.215) (-0.287)

The table reports results of the linear regression D.MV ~ occupancy.rate + year.of.purchase + perc.ending.leases for those funds for which all three variables are significant. Not significant variables have been excluded from the model. The three colums to the left report p-values, degrees of freedom and adjusted R squared values of the model, while the three colums to the right state the estimates of the independent variables. Figures in parentesis under the corresponding estimates report the t-values. Bold coefficients imply a p-value of 0.1 or lower


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 portfolioshigh vacancy rates explain devaluations in many (not all)

portfoliosThe 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


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


Thank You

appraisal within open-end real estate funds: evidence on biased appraisals in fund crisis year 2006...

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