The relevance of ratings for investors of (semi-)open-end real estate funds: Evidence from Germany

This paper investigates the relevance of investment ratings of German (semi-)open-end real estate funds (GOEREFs) from a capital markets perspective. GOEREFs are investment vehicles which, under normal circumstances, offer their investors a permanent redemption option at their estimated net asset values (NAVs) while their shares are also floating on secondary markets. However, share redemptions are suspended when investors’ redemption demands exceed liquid assets. This setting provides a unique opportunity to study the information content of investment ratings when there is uncertainty with respect to the estimation of NAVs and the risk of “runs on the bank” (i.e., runs on the fund). Using a comprehensive hand-collected sample of 409 rating announcements for 49 funds and information from annual reports during the period 2004-2020, this study finds that whereas the predictive power of ratings for future fund returns does not exceed the predictive power of readily available publicly available information, ratings correlate significantly with the likelihood of future redemption suspensions. An event study shows that the spread between NAVs and secondary market share prices as well as trading volume react significantly to rating changes. The reactions of spreads are particularly pronounced when share redemptions are suspended, whereas trading volume is comparatively lower. The impact on spreads reverses only partially in the long run. The results do not show evidence for rating changes having an impact on contemporaneous or near-term monthly net funds flows. However, the impact of downgrades on net fund flows might be masked by downgrades being more frequently followed by redemption suspensions.