Costs and Benefits of Changed Real Estate Valuation Requirements for German Open-End Real Estate Funds

Open-end real estate funds are collective investment undertakings in a diversified portfolio of real estate properties. The companies that launch and manage open-end real estate funds must regularly appraise fund properties because individual market prices are not available, which means that the market prices of properties can significantly deviate from the most recent appraisal values. The German lawmaker responded to this problem by stipulating that management companies must evaluate properties more frequently and strengthen the independence of the experts that carry out such property valuations. This paper estimates the benefits and costs of these required changes from an investor perspective. On the one hand, the results show that the tightened requirements raise appraisal expenses by 0.0402 percentage points. On the other hand, the results suggest that investors benefit from a significantly lower standard deviation and auto-correlation of monthly fund returns