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Analysis of German real estate funds

Selection criteria for investment opportunities perspective

Written by Esther Himbert

Paper category

Master Thesis


Architecture & Real Estate




Master Thesis: 3 Real Estate Funds 3.1 Classification of Investment Funds "Investment funds are specially constituted investment tools, the sole purpose of which is to collect assets from investors and invest these assets in a diversified asset pool. [...] Small investors can Purchasing a professionally managed diversified financial or other asset basket. Indirect costs are dispersed throughout the investor base, reducing the average cost of investors" (European Commission, 2006). The construction of investment funds has existed since 1774 and has been proven to be a popular investment tool. The best example has a triangular structure, as shown in Figure 1. Every currency investment of investors is concentrated in the depository bank, rather than the investment fund company itself. This capital division ensures that investors’ capital is strictly separated from other funds and own assets. investment company. In the case of bankruptcy, this division has the advantage of not affecting investor capital. The main task of investment fund companies is to manage funds and make investment decisions (BVI, 2012). Real estate fund is a "broad term" that refers to a variety of different products that invest in assets in the real estate industry (European Commission, 2008). In order to understand the classification of fund fields and the integration of real estate funds in the system, the following section will explain the European fund classification system. The European Funds and Asset Management Association (EFAMA) has developed the European Fund Classification (EFC) system to increase transparency and provide standards for comparing funds. EFC categorizes funds according to the main asset types it invests in and creates six basic fund categories: stocks, bonds, multi-asset, money market, absolute return innovation strategy (ARIS) and other types of funds. The last category of "others" includes all types of funds that do not fall into the five large fund categories. In addition to asset-backed securities, capital preservation funds, commodities, convertible bonds, guarantee funds, infrastructure funds, life cycle funds and REITS, real estate funds, that is, open-end and closed-end real estate funds also fall into this category. (EFAMA, 2012). Figure 2 provides an overview of fund classification according to EFAMA. Real estate funds are an important category of the fund classification system, providing investors with opportunities to invest in real estate, land and other real estate-related assets (Galiniene & Bumeleyte, 2011). The following section will analyze in detail two types of real estate funds, namely closed-end real estate funds (CEREF) and open-end real estate funds (OEREF). 3.2 Open-end real estate funds Open-end real estate funds pool the funds of many investors so that fund management companies can use these funds to invest in real estate assets. Investing in an open real estate fund means buying shares in an investment fund company. Open-end real estate funds are not traded in secondary markets such as stocks, but investors can purchase and redeem funds from investment management companies (Maurer et al., 2004). Stock purchases can be achieved every day; however, this is not always feasible for redemption of stocks because special rules and time constraints must be observed (BVIa, 2014). As long as the fund provides liquidity, the price of open real estate fund shares corresponds to the net asset value (NAV), which is equal to the total value of the assets in the portfolio minus the liabilities divided by the total number of outstanding shares. The price is calculated at the end of each trading day (CEFA, 2006). The price of issued fund shares is slightly higher than the net asset value because it contains approximately 5% of issuance costs (Maurer et al., 2004). If the fund's liquidity ratio falls below the critical line of 5%, the stock price is determined by supply and demand, and investors can choose to sell their shares on the secondary market (Schweizer & Haß, 2013). OEREF invests its capital in commercial properties such as offices, retail properties, hotels or logistics. To this end, fund managers analyze different regions and markets, and strive to ensure that investments are well distributed between geographic locations and property types. Their performance is measured by rental income, interest income and property valuation. But compared to equity funds, OEREF is much less volatile and usually provides stable returns (BVIa, 2014). Real estate asset investment is a long-term investment, with high transaction costs, usually between 4-7.5%, depending on the individual country in which the fund operates. High transaction costs stem from management costs and applied transfer taxes, and make investments in OEREF unsuitable for short-term investments. Generally, the investment period of OEREF is at least 5 years (European Commission, 2008). Each European country that provides open-end real estate funds has a specific system to regulate OEREF. But there are also some common aspects that all countries need. First, each OEREFthesis and its management company must be authorized by the financial regulatory agency. OEREF is obliged to hold a minimum amount of liquidity to ensure the frequency of redemption by investors. Read Less