Performance vs prospectus = transparency in German closed-ended real estate funds?

Publication Date05 Mar 2018
Pages158-170
DOIhttps://doi.org/10.1108/JPIF-11-2016-0084
AuthorMichael Nadler
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
Performance vs prospectus ¼
transparency in German
closed-ended real estate funds?
Michael Nadler
Department of Real Estate Development,
TU Dortmund University, Dortmund, Germany
Abstract
Purpose The purpose of this paper is to close the transparency gap by comparing ex ante and ex post
performance disclosure, thus providing important conclusions regarding the transparency of this important
German market segment.
Design/methodology/approach Closed-ended real estate funds (CEREFs) are one of the biggest
segments of unlisted private equity funds in Germany. CEREFs have a central profitability promisethat is
based on ex ante forecasts given in the prospectus. Typically, equity is tied to these investments for up to
20-30 years, leaving investors highly insecure whether their expectations will be fulfilled and fund managers
actually achieve prospected performances ex post.
Findings The performancevariance analysis ofall German CEREFs outstandingduring the global financial
crisis reveals that prospect-performance disclosures as well as prospect-performance variances cause
substantial problems in Germany due to overestimation biases of many fund managers.
Research limitations/implications As typical for the recent scho larly debate, also the pa st
disclosure practice in Germany prohibits a long-term performance analysis, unless researchers apply
instruments of modern i nvestment analysis li ke comprehensive fina ncial plans (Visualisa tion of
Financial Implicatio ns).
Practical implications The transparency developments in CEREF-reporting of the last decade deliver
precise recommendations regarding the internal and external performancevariance analysis, risk-profiles and
stress tests for the future fund management.
Social implications The introduced methodology would increase transparency in the segment of CEREF
and, thus, improve investor protection. Since private households in Germany mainly acquire these funds, this
is a contribution to sustainability in private asset management.
Originality/value The paper develops a new methodological framework for performance measurement of
unlisted funds. It then assesses for the first time the impact of transparency and trust on fund performances
by applying a performance variance analysis.
Keywords Performance disclosure, Performance variation analysis, Prospectus underwriting,
Real estate private equity, Unlisted funds, Visualization of financial implications (VoFis)
Paper type Research paper
1. Introduction
According to the JLL Global Real Estate Transparency Index (GRETI), the transparency of
the German investment market has improved steadily since 2004, leading to a highly
transparent market segment in 2016. While this is also true for the performance
measurement of listed investment vehicles, the GRETI-subcategories display problems in
the regulatory and legal framework. One sector with less transparency is the unlisted
investment segment. Here, closed-ended real estate funds (CEREFs) have been subject to
intense discussions since the Global Financial Crisis (GFC) due to fraud, liquidity problems
and insolvencies of fund issuers especially in the years following the Lehman bankruptcy.
CEREFs have a project-related view, a fixed maturity and a central profitability promise
that is based on ex ante forecasts given in the prospectus. With a fixed investment sum and
debt, the management closes the fu nd after having raised the require d equity.
Typically, equity is tied to these investments for up to 20-30 years, leaving investors
highly insecure whether their expectations will be fulfilled and fund managers actually
Journal of Property Investment &
Finance
Vol. 36 No. 2, 2018
pp. 158-170
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-11-2016-0084
Received 1 November 2016
Revised 30 May 2017
Accepted 3 July 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
158
JPIF
36,2

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