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The Discount to NAV of Distressed Open-End Real Estate Funds

Author

Listed:
  • Sebastian Schnejdar

    (University of Regensburg)

  • Michael Heinrich

    (University of Regensburg)

  • René-Ojas Woltering

    (University of Applied Sciences Western Switzerland)

  • Steffen Sebastian

    (University of Regensburg)

Abstract

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.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:jrefec:v:61:y:2020:i:1:d:10.1007_s11146-018-9694-8
    DOI: 10.1007/s11146-018-9694-8
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Open-end real estate funds; Liquidity transformation; Discount to NAV; Liquidity crisis; Uncertainty; Spillover effects;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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