Real Estate Fund Flows and the Flow-Performance Relationship

Abstract

Convexity in the flow-performance relationship of traditional asset class mutual funds is widely documented, however it cannot be assumed to hold for alternative asset classes. This paper addresses this shortcoming in the literature by examining the flow-performance relationship for real estate funds, specifically open-end, direct-property funds. This investment vehicle is designed to provide the risk-return benefits of private market real estate and is available to retail investors in many countries across the globe. An understanding of fund flow dynamics associated with this investment vehicle is of particular interest due to the liquidity risk associated with holding an inherently illiquid asset in an open-end structure. Our analysis draws on the theoretical foundations provided in the literature on mutual fund flows, performance chasing, liquidity risk, participation costs and dynamics across market cycles. We focus on German real estate funds from 1990 to 2010 as this is the largest market globally and there is a high level of confidence in the data. The results show that real estate fund investors chase past performance at the aggregate level and the relationship between flows and relative performance is asymmetric (i.e., convex) at We received excellent feedback from several discussants, including Aleksandar Andonov (2014 MNM Conference), Piet Eichholtz (2015 AREUEA-ASSA), and Michael White (2014 AREUEA-International) as well as helpful comments by participants at those presentations. We appreciate the comments and suggestions of an anonymous referee and the special issue editor S.E. Ong. All authors are grateful for generous support provided by the International Real Estate Business School (IREBS) Foundation. Downs gratefully acknowledges support by The Kornblau Institute at Virginia Commonwealth University. The views expressed in this article are those of the authors only and do not necessarily reflect the views of the European Central Bank.

Price Signaling and Return Chasing: International Evidence from Maturing REIT Markets

“…Downs et al . () examined the flow‐performance relationship for German open‐ended real estate mutual finds. Using a similar approach to Fisher et al .…”

Real Estate Fund Openings and Cannibalization

“…Downs et al . (), however, also find that investors sell more aggressively when cash reserves, or fund liquidity, of poorly performing funds is low. Consequently, the flow‐performance relationship is less asymmetric.…”

“…This analysis complements and can be interpreted in the context of Downs et al . (). That paper examines the flow‐performance relationship of real estate funds and finds that investor reaction to fund performance is asymmetric, i.e ., fund investors buy winners more aggressively than they sell losers, a result that previously had not been documented for real estate funds.…”

The Growing Importance of Secondary Market Activities for Open-end Real Estate Fund Shares in Germany

“…They find that OREFs play an important role in diversifying portfolios; however, potential redemption suspensions and devaluations significantly reduce the optimal fraction of OREFs in retirement portfolios. Downs et al (2016) document a convex flow-performance relationship for OREFs, i.e., investors buy shares of funds that outperform their peers while they are reluctant to sell shares of funds that underperform their peers.…”