Performance Drivers of German Institutional Property Funds

The goal of this paper is to improve the understanding of what drives the performance of non-listed real estate funds, adding to the limited literature on this topic. We performed a panel regression analysis on the basis of an extensive sample from Investment Property Databank (IPD) covering returns and selected characteristics of German Spezialfonds over a period of five years from 2006 until 2010. The analysis was performed for the whole sample as well as separately for three distinctively different subperiods: the boom of 2006-2007, the downturn of 2008-2009 and the recovery of 2010. The analysis uncovered significant differences in the drivers across the cyclical phases. During the boom phase, leverage and global portfolio allocation positively affected returns, while allocation to Germany had a negative effect. In contrast, fund volume, management costs and allocation to offices led to underperformance. Finally, in the recovery of 2010, leverage, allocation to Germany and diversification across property types improved performance, while higher liquidity and focus on retail had a negative impact. In addition to providing extensive and unique insights into the determinants of performance of the German Spezialfonds, the results should be of interest to fund managers looking for advice on the optimal positioning of their funds in response to changing economic environments.