Open-ended real estate funds: from flows to property

Date01 August 2019
Published date01 August 2019
AuthorEszter Baranyai
Subject MatterProperty management & built environment
Open-ended real estate funds:
from flows to property
Eszter Baranyai
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 managerstrade 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 fundsreal estate holdingsif they occurred 1218 monthsearlier. Inflows
(outflows) in thepreceding six months demonstrably lower(increase) fundsreal estate holdings ratio. Beyond
this relationship, findings donot suggest that less funds are channelledto real estate as CRE heatintensifies.
Practical implications In an environment marke d by strong cash inflows , the investment lag can
translate into a signif icant drop in fundsexposure 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 20112017.
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 fundsaverage 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
investment strategy.
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 managersand regulatorsrole.
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 fundsliquidity 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
pp. 555-569
© Emerald PublishingLimited
DOI 10.1108/JPIF-06-2019-0080
Received 13 June 2019
Revised 5 July 2019
Accepted 7 July 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
OEREFs: from
flows to

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