12,000

We have over 12,000 students, from over 100 countries, within one of the safest campuses in the UK

93%

93% of Lancaster students go into work or further study within six months of graduating

Home > Research > Publications & Outputs > Open-ended Property Funds: Risk and Return Prof...
View graph of relations

« Back

Open-ended Property Funds: Risk and Return Profile - Diversification Benefits and Liquidity Risks

Research output: Contribution to journalJournal article

Published

Journal publication date01/2012
JournalInternational Review of Financial Analysis
Volume21
Number of pages18
Pages90-107
Original languageEnglish

Abstract

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.