Risk and Return of Open-End Real-Estate Funds: The German Case

Due to the recent downturn in international equity markets, the interest in real-estate investments has soared. However, the well-known problems of direct real-estate investments complicate becoming well-diversified with this investment class. Indirect real-estate investments can provide a solution to this problem. Shares of real-estate investment companies are very popular in this context. The German market for securitised real-estate investments additionally provides open-ended real-estate funds (so called “Offene Immobilienfonds”). An open-end real-estate fund is a pool of money from many investors, with which a special investment company, acting as a trustee, invests it in real estate. Thus, the individual investors are directly involved in the real-estate market. This study is based on monthly and yearly return data from January 1975 to December 2002. It seeks to identify the short and long-term financial characteristics of investments into open-ended real-estate funds, and to compare them with those of other major asset classes like bonds, equities, and money market investments. In this sense, the considerations comprise extensive univariate and multivariate analyses of real-estate fund returns. Furthermore, the long-term risk/return profile of real-estate fund investments relative to other investment opportunities is investigated. Additionally, this paper provides a brief overview of the institutional design and role of German open-end real-estate mutual funds. Empirical evidence suggests that the financial characteristics of open-ended real-estate funds clearly distinguish them from other (financial) asset classes. These characteristics are in many respects similar to those known from dir ect real-estate investments. Accordingly, the German open-end real-estate funds qualify themselves more for medium and long-term investment horizons, than for short holding periods. All in all, this indirect real-estate investment vehicle is characterised by moderate and relatively stable returns over time. [e