IDEAS home Printed from
MyIDEAS: Login to save this article

Open-ended property funds: Risk and return profile — Diversification benefits and liquidity risks

  • Haß, Lars Helge
  • Johanning, Lutz
  • Rudolph, Bernd
  • Schweizer, Denis
Registered author(s):

    In addition to the well-established forms of real estate investing (direct and listed), investors can also choose open-ended property funds (OPFs), which are considered a complementary real estate investment option. OPF fund managers generally provide daily liquidity, and these funds must maintain at least 5% liquidity. If liquidity falls below 5%, share redemptions will be temporarily suspended, for a period of up to two years. During this time, investors can only sell shares on the secondary market (exchange), and are thus subject to significant liquidity risk. The objective of this paper is to examine the impact of OPFs as an investment vehicle on the risk and return profile. OPFs in principle have the same underlying as direct and listed real estate investments, but they are subject to a different regulatory regime. Therefore, we analyze the diversification benefits of OPFs in mixed-asset portfolios for various risk measures, investor types, and holding periods. We find that OPFs are ideally suited to reduce portfolio risk. This result holds independent of the holding period and whether in- or out-of-sample Monte Carlo portfolio simulations are used. However, these positive effects come at the cost of increased risk from temporary share redemption suspensions. During these periods, investors may have to accept an average 6% discount in the secondary market compared to the net asset value calculated by OPFs themselves. These discounts can go as high as 20% if investors fear that OPF management will not be able to ensure liquidity within the two-year time limit, and will have to “fire-sell” properties.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 21 (2012)
    Issue (Month): C ()
    Pages: 90-107

    in new window

    Handle: RePEc:eee:finana:v:21:y:2012:i:c:p:90-107
    Contact details of provider: Web page:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:21:y:2012:i:c:p:90-107. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.