Open-ended real estate funds:
from flows to property
Corvinus University of Budapest, Budapest, Hungary
Purpose –The purpose of this paper is to uncover the relationship between flows and real estate investment
at open-ended real estate funds (OEREFs).
Design/methodology/approach –The study employs fixed-effects panel regressions, relying on data from
the Hungarian fund managers’trade association. First, the effect of lagged flows on allocation to real estate is
assessed. Second, the paper studies how this relationship changes as the cyclical position of CRE market
advances using two proxies.
Findings –Flows are foundto affect funds’real estate holdingsif they occurred 12–18 monthsearlier. Inflows
(outflows) in thepreceding six months demonstrably lower(increase) funds’real estate holdings ratio. Beyond
this relationship, findings donot suggest that less funds are channelledto real estate as “CRE heat”intensifies.
Practical implications –In an environment marke d by strong cash inflows , the investment lag can
translate into a signif icant drop in funds’exposure to real estate. The share of real estate at Hungarian
funds in the sample, for example , fell from 79 to 50 per cent on average over the peri od of 2011–2017.
Measures designed to l imit inflows are in the inte rest of those existing inv estors who wish to avoid a
dilution of the core inv estment strategy.
Originality/value –The paper adds to the literature on OEREFs which has been particularly scarce on
liquidity transformation during non-crisis times and on non-German funds.
Keywords Property, Open-ended mutual funds, EME, Liquidity transformation
Paper type Research paper
Investors of open-ended real estate funds (OEREFs) seek to gain exposure to the property
market yet many of these funds also hold an important part of their assets in cash and
other liquid assets. In the EU liquid assets accounted for around one-third of OEREFs’
assets on average (ESRB, 2018) with Hungarian funds’average of close to 50 per cent, for
example, significantly higher still (HNB, 2019a). Elevated levels of cash, while a form of
cushion, may also represent a drag on performance (Wermers, 2002) and dilute the core
OEREFs are financial intermediaries that collect funds from individual investors and
invest those funds in property and more liquid assets (Downs et al., 2016). Fund shares are
typically not traded on the secondary market, instead the fund management quotes daily
share prices at which shares are issued and redeemed (Fecht and Wedow, 2014).
Given the illiquidity of real estate, the balance between the liquidity risk of the fund and
risk-mitigating measures goes to the core of OEREF managers’and regulators’role.
Regulatory frameworks reflect renewed attempts to address liquidity risk though such
regimes differ considerably. Less stringent (non-buffer related) requirements imply greater
reliance on liquidity buffers to support funds’liquidity transformation. Germany at the
stricter end of the spectrum now requires investors to hold new shares for at least two years
and notify one year ahead of redemptions (Sebastian et al., 2017) whereas in the UK there are
no regulatory obstacles to redemption at short notice during normal market conditions
(IOSCO, 2018). In Hungary, redemption at short notice is currently possible for most funds
though a recently-issued central bank guidance involving a six-month notice applies to new
funds and series from May 15, 2019 (HNB, 2019b).
A long literature studies liquidity transformation and the use of liquidity buffers
at financial intermediaries, most prominently banks (e.g. Diamond and Dybvig, 1983;
Journal of Property Investment &
Vol. 37 No. 6, 2019
© Emerald PublishingLimited
Received 13 June 2019
Revised 5 July 2019
Accepted 7 July 2019
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