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The German Open-End Fund Crisis – A Valuation Problem?

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  • Christian Weistroffer
  • Steffen Sebastian

Abstract

Using a unique dataset of appraised values and transaction prices, this paper investigates whether systematic over-appraisals could have been at the heart of the 2005/2006 German open-end fund crisis. Because sold properties are valued more closely to market values than unsold properties, we develop a hedonic pricing model that controls for sample selectivity. The resulting estimates of prices achievable in the market are then compared to appraised values. Our results show that the properties held by open-end real estate funds were likely to have been overvalued prior to the crisis. This supports the view that a fundamentally justified run was at the heart of the 2005/2006 crisis, and it challenges the effectiveness of current valuation practices. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Christian Weistroffer & Steffen Sebastian, 2015. "The German Open-End Fund Crisis – A Valuation Problem?," The Journal of Real Estate Finance and Economics, Springer, vol. 50(4), pages 517-548, May.
    • Handle: RePEc:kap:jrefec:v:50:y:2015:i:4:p:517-548
    DOI: 10.1007/s11146-014-9485-9
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    References listed on IDEAS

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    Cited by:

    1. Philipp Gerlach & Raimond Maurer, 2020. "The Growing Importance of Secondary Market Activities for Open-end Real Estate Fund Shares in Germany," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 72(1), pages 65-106, February.
    2. Sebastian Schnejdar & Michael Heinrich & René-Ojas Woltering & Steffen Sebastian, 2020. "The Discount to NAV of Distressed Open-End Real Estate Funds," The Journal of Real Estate Finance and Economics, Springer, vol. 61(1), pages 80-114, June.
    3. Eli Beracha & David H. Downs & Greg MacKinnon, 2017. "The 4% rule: Does real estate make a difference?," Journal of Property Research, Taylor & Francis Journals, vol. 34(3), pages 181-210, July.
    4. Molitor, Philippe & Doyle, Nicola & Hermans, Lieven & Weistroffer, Christian, 2016. "Shadow banking in the euro area: risks and vulnerabilities in the investment fund sector," Occasional Paper Series 174, European Central Bank.
    5. Sebastian Schnejdar & Michael Heinrich & René-Ojas Woltering & Steffen Sebastian, 2017. "The Discount to NAV of distressed German open-ended real estate funds," ERES eres2017_160, European Real Estate Society (ERES).

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    More about this item

    Keywords

    Appraisal-based valuation; Transaction-based valuation; Hedonic pricing; Commercial real estate; Open-end real estate funds; G11; G14; G24;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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