Steffen P. Sebastian

Inflation Convergence after the Introduction of the Euro

Using the Johansen test for cointegration, we examine to which extent inflation rates in the Euro area have converged after the introduction of a single currency. Since the assumption of non-stationary variables represents the pivotal point in cointegration analyses we pay special attention to the appropriate identification of non-stationary inflation rates by the application of six different unit root tests. We compare two periods, the first ranging from 1993 to 1998 and the second from 1993 to 2002 with monthly observations. The Johansen test only finds partial convergence for the former period and no convergence for the latter.

The links between property and the economy – evidence from the British and German markets

This study supplies empirical evidence on the dynamic interactions between the property markets in Germany and the United Kingdom and their country‐specific macroeconomic environment. Using a VECM framework, the findings contribute to improving the evaluation of the properties’ behaviour by considering a wide range of macroeconomic risk factors. On a long‐term basis, we find remarkable similarities between both examined real estate markets with respect to significance, signs and magnitude of coefficients, despite essential differences in terms of market structure, conditions and performance. This suggests that the fundamental role of property markets in an economy dominates the country‐specific characteristics in the long run. However, the distinctive features of the national property markets, including differences with respect to the financial systems, are primarily relevant during the short‐term adjustment process back to the long‐term equilibrium.

German Open-End Real Estate Funds

Open-end Real Estate Funds (OEREFs) are the predominant type of securitized real estate investments Germany. This chapter explains the institutional and legal environment of this investment vehicle, which is designed to provide the risk-return benefits of private market real estate. We review the historical performance and portfolio composition of German OEREFs as well as possible reasons for their track record. A special emphasis is placed on the turbulences in the aftermath of the recent financial crisis and the legal changes that were undertaken to stabilize German OEREFs.

German valuation: Review of methods and legal framework

Purpose – There is a continuing discussion about whether German valuation methods are inaccurate and inferior to the British standard, and the enduring efforts for a European and internationally standardised valuation method and value definitions intensify this discussion. The German valuation system is said to lead to valuations which do not reflect actual market conditions and excessive smoothing. Not surprisingly, German surveyors usually disagree and claim that the German valuation approach, with its sustainable rental value, fulfils not only its purpose but is more transparent and thus superior to the approach usually applied in UK. The purpose of this paper is to discuss the recently adjusted German valuation methods.Design/methodology/approach – The paper analyses the German valuation methods and highlights the predominant differences to the British valuation standards.Findings – The paper shows that the discussed valuation methods should lead to comparable results. The legal framework of the Germa...

Dynamics of commercial real estate asset markets, return volatility and the investment horizon

The term structure of return volatility is estimated for both UK and US direct and securitised commercial real estate, using vector autoregressions. In a similar manner to the general stock market, returns of UK direct real estate and property shares, as well as US real estate investment trust returns, exhibit strong mean reversion. By contrast, US direct real estate returns show a considerable mean aversion effect over short investment horizons. This can be explained by the positive correlation between cash-flow and discount rate news, which can be interpreted as an under-reaction to cash-flow news. When estimating the return volatility of direct real estate markets, long-term investors need not be concerned about the choice of the parameter value used to unsmooth appraisal-based returns, because estimates of long-term volatility are almost unaffected by this choice.

Immobilienfonds und Immobilienaktiengesellschaften als finanzwirtschaftliche Substitute für Immobiliendirektanlagen

Immobilien sind bedeutende, aber in Form der Direktanlage mit erheblichen Friktionen belastete Anlagen. Fur den Kapitalanleger ist der Erwerb von Anteilen an offenen Immobilienfonds oder Immobilienaktiengesellschaften eine Moglichkeit, die damit verbundenen Probleme zu vermeiden. Es wird ein Uberblick der institutionellen Rahmenbedingungen dieser Gesellschaften am deutschen und an anderen wichtigen internationalen Finanzmarkten gegeben. Weiterhin wird die Konstruktion reprasentativer Portefeuilles aus deutschen Immobilienaktiengesellschaften und offenen Immobilienfonds aufgezeigt. Zentraler Untersuchungsgegenstand dieser Arbeit ist ein Vergleich der finanzwirtschaftlichen Eigenschaften dieser Anlagemoglichkeiten. Neben der steuerlichen Behandlung werden Diversifikationspotentiale und Inflationsschutzeigenschaften uberpruft.

GDP Mimicking Portfolios and the Cross-Section of Stock Returns

The components of GDP (residential investment, durables, nondurables, equipment and software, and business structures) display a pronounced lead-lag structure. We investigate the implications of this lead-lag structure for the cross-section of asset returns. We find that the leading GDP components perform well in explaining the returns of 25 size and book-to-market portfolios and do reasonably well in explaining the returns of 10 momentum portfolios. The lagging components do a poor job at explaining the returns of 25 size and book-to-market portfolios but explain the return of momentum portfolios very well. A three-factor model with the market risk premium, one leading and one lagging GDP component compares very favorably with the Carhart four-factor model in jointly explaining the returns on 25 size/book-to-market portfolios, 10 momentum portfolios and 30 industry portfolios.

Real Estate Fund Openings and Cannibalization

This paper examines the trade-offs in launching new real estate funds, specifically open-end, direct-property funds. This investment vehicle, which is designed to provide the risk-return benefits of private market real estate, is available to retail investors in a number of countries. At the same time, these funds are also subject to liquidity risk, because they hold an inherently illiquid asset in an open-end structure. This format presents fund-family managers with unique challenges, particularly with the decision to open new funds. The data consists of 2,127 German fund openings across 76 fund families in 12 asset classes over the 1992-2010 period. Including a wide range of asset classes allows for a comparison between real estate and other investment objectives. We find a substantial cannibalization effect across the existing real estate funds of a family, while we note the opposite effect – i.e., flows into existing funds increase following a fund opening within the same objective – for all other asset classes. Our analysis of fund opening determinants shows that inflows mitigate the cannibalization risk for new real estate funds. Additional evidence highlights the role of scale and scope economies in real estate fund openings. Overall, the results provide new insights into the relatively large size and small number of real estate funds when compared to mutual funds dedicated to other investment objectives.

New Insights into the NAV Spread Puzzle of Listed Real Estate: Idiosyncratic and Systematic Evidence

This paper presents novel insights into the NAV spread puzzle of listed real estate. We find 1) that increasing company size reduces NAV discounts and increases NAV premiums which can be explained by economies of scale and the popularity of large stocks among investors. 2) Increasing company-specific risk increases the discount as risk of potential default decreases attractiveness among investors. Contrary to existing research, rising leverage reduces the discount and increases the NAV premium accordingly, which can be explained by a potential positive leverage effect on the return on equity. 3) Long-term credit market indicators help to explain the NAV spread puzzle: An increase in the default spread, increases the discount and decreases the premium. However, the results for the short-term credit market indicator term spread do not help to solve the NAV spread puzzle. 4) Increasing positive stock market and property sector sentiment reduces NAV discounts as was found by past research accordingly and is in line with the noise trader theory. The analysis is based on monthly data over the 2005-2014 period for a global sample of 447 listed real estate companies (REITs and REOCs) in 12 countries. This rich setting offers substantial heterogeneity in NAV spreads, idiosyncratic and systematic factors across time and countries.

Real Estate Fund Openings and Cannibalization: Real Estate Fund Openings and Cannibalization

This article examines the trade‐offs in launching new real estate funds, specifically open‐end, direct‐property funds. This investment vehicle, which is designed to provide the risk‐return benefits of private market real estate, is available to retail investors in a number of countries. At the same time, these funds are also subject to liquidity risk, because they hold an inherently illiquid asset in an open‐end structure. This format presents fund‐family managers with unique challenges, particularly with the decision to open new funds. The data consist of 2,127 German fund openings across 76 fund families in 12 asset classes over the 1992–2010 period. Including a wide range of asset classes allows for a comparison between real estate and other investment objectives. We find a substantial cannibalization effect across the existing real estate funds of a family, while we note the opposite effect—i.e., flows into existing funds increase following a fund opening within the same objective—for all other asset classes. Our analysis of fund opening determinants shows that inflows mitigate the cannibalization risk for new real estate funds. Additional evidence highlights the role of scale and scope economies in real estate fund openings. Overall, the results provide new insights into the relatively large size and small number of real estate funds when compared to mutual funds dedicated to other investment objectives.