The Determinants of German Open-End Real Estate Fund Closures

One third of all German open-end real estate retail funds were forced to close during the first fund crisis in 2005/2006 and the second fund crisis in October 2008. We establish a panel logit model to test if fund closure probability, besides fundamentals, is also driven by external effects. Our results indicate that there is a significant influence of bank run risk, economies of scale and scope and industrywide spillover effects regarding the fund`s closure probability. Our hand-collected monthly dataset contains the entire population of German open-end real estate retail funds from August 2002 to June 2016. A fund closure implies a serious challenge for the funds management and existing investors, since fund closures predominantly lead to fund liquidation. Hence, the fund management is forced to sell their real estate assets, which is associated with high selling pressure and significant fees. Furthermore, the fund investor`s capital is entirely constrained (i.e. investors are only able to sell their shares at the secondary marketfor significantly discounted price). Knowing the determinants of fund closure would help the fund management to adjust their portfolio strategy and diminish closure risk. However, the fund management`s responsibility for closure is limited due to the degree of industrywide and macroeconomic influences.