Valuation practice of German open-ended real estate funds

The German valuation system is frequently accused of being not only unique in its institutional setting but also of the degree of smoothness it achieves. Formally adhering to a market value concept, German valuers are perceived to merely deliver on the promises made by fund managers who advertise a ìsteady growthî and ìlow volatilityî investment alternative. However, empirical evidence is scarce with regard to the scope and degree of return smoothing and other systematic appraisal errors. A thorough investigation of the German valuation practice seems warranted, as it will help to gain better understanding of observed property valuations and its implication for the stability of German open-ended funds. To what extent do valuations understate true return volatility? Do valuations lag prices and do they introduce a systematic bias to reported performance measures? Is the German legal/ regulatory framework to blame for such possible shortcomings or do the problems root in actual valuation practice? These and related questions will be addressed within this project.