© ipd 2011 1ipd.com why do property values melt when funds go into liquidation? sebastian gläsner...

© IPD 2011 1ipd.com

Why do property values melt when funds go into liquidation?

Sebastian Gläsner18.06.2011


Agenda

• Performance of funds in liquidation• Data and research design• Testing hypothesis on drivers of capital

growth of standing investment properties of GOEFs– H1: German valuation practice results in

smoothed capital growth– H2: High NAV-discount is associated with

negative capital growth– H3: Property acquisition date in boom phase

results in negative capital growth thereafter– H4: Properties of funds in liquidation show

negative capital growth


Redemption stops of German open ended funds

• As to March 2011, 22 GOEFs open for

retail investors comprise 75.4 bn. EUR

NAV

• Nine out of those funds with NAV of

21.7 bn. EUR have stopped the

redemption of shares

• Two funds with 1.8 bn. EUR NAV are

in liquidation

• Funds in liquidation recently have

shown very negative performance,

which is unprecedented in the 50-year-

history of German open ended funds

Public data


Performance of funds in liquidationNAV-base performance

• While the performance of

the group of funds with

redemption stops is only

slightly worse than the

performance open funds,

funds in liquidation loose

about a third of their value

in comparison to the third

quarter 2008

Source: NAV-publications of the funds

Public data


• Besides poor NAV-based

performance, funds in liquidation

also show a high discount on

NAV

• Within the first year of

redemption stops, discounts

were lower than 10%

• Starting 2010, discounts

increased up to 50%

• Investors forced to or willing to

sell off their shares of funds in

liquidation lost more than 50% of

their investment over the last two

years

Source: Stock exchange Hamburg

Performance of funds in liquidationDiscounts on the NAV at the secondary market

Public data


Agenda








• Germany, France, UK and the Netherlands are the

biggest investment markets of German funds

• Real estate performance of GOEFs is analysed using

French and Dutch office investments because:

• Office properties are the predominant assets in

GOEF portfolios and analysis is limited for

comparability reasons

• German properties are not being analysed, as the

IPD dataset used for comparison is too much

influenced by GOEFs

• UK properties are not being analysed due to very

few investments held by the two funds in liquidation

• Dutch properties may interest audience in

Eindhoven

Source: BVI

Focus on French and Dutch officesAsset allocation of GOEFs as to 12/2010

Public data


• German funds publish capital values (and other information) of each

single asset on a yearly basis since 2006

• The reports are in the public domain, and no confidentiality issues arise,

which is in sharp contrast to IPD client data• When using IPD client data as a benchmark, confidentiality is maintained

on fund level and on property level

• The capital values of standing investments of French and Dutch offices

have been collected from publicly available sources to calculate the

annual capital growth rate (cg)

• Four frequently stated hypotheses on German funds are being

investigated

Data: Fund reports


Agenda








Distribution of capital growth FranceGOEFs

Source: Annual fund reports

• Turning point 2010, peaks at 0% cg,

fat tails at -5% and +5% in 2006

• Mean returns range between -1.4%

and 6.5%, compared to -5.3% and

9.9% of local investorsPublic data


Distribution of capital growth The NetherlandsGOEFs


• Turning point 2009, peaks at 0% cg, fat

tails at -5% and +5% in 2006

• Mean returns range between -1.9% and

1.5%, compared to -5.2% and 4.8% of

local investors

Public data


Valuation inertiaAnalysis of value changes of +-1% of GOEFs, FR+NL

• Classes: <-5%<-1%<1%<5%<20%

• Areas of histogram misleading regarding density

• In the years 2007 and 2008 about one fifth of all

properties showed a capital growth between -1%

and +1%

• In the years 2009 and 2010 more than one third

of all properties showed a capital growth

between -1% and +1%

• Funds in liquidation (red figures):

• Five out of eight properties (63%) maintain

(+-1%) their values in 2009

• Only one out of nine (11%) maintains its

value in 2010

• Sum up: Similar valuation inertia of funds in

liquidation in 2008 and 2009, differences in 2010Source: Annual fund reports

22% 20%

33%

37%

2/2

red = # properties of funds in liquidation

2/4

1 1

5/8

1 1 1 16/9 2

Public data



20% 13%

26% 41%

• Classes: <-5%<-1%<1%<5%<20%

• Areas of histogram misleading

regarding density

• 2007: Strong appreciation, 20%

stable

• 2008: Tendency towards

appreciation, 32% stable

• 2009: Indifference, 44% stable

• 2010: Strong tendency towards

(minor) depreciation, 30% stable

Valuation inertiaAnalysis of value changes of +-1% of GOEFs in France

Public data


16%

5%

13%

11%

• Classes: <-40%<-20%<-5%<-

1%<1%<5%<20%<40%


regarding density

• Lower proportion of stable capital

values in times of positive value

changes in 2007

• Highest proportion of stable capital

values in years of market turning

2008 and 2010

• Maximum of 16% stable capital

values in 2010 much lower than 41%

stable capital value of German funds

in 2010

Source: IPD

Valuation inertiaAnalysis of value changes of +-1% of local investors in France

IPD data


• Classes: <-5%<-1%<1%<5%<20%


regarding density

• 2007: Indifference between

appreciation and depreciation, 25%

stable

• 2008: Tendency towards

appreciation, 32% stable

• 2009: Indifference, 44% stable

• 2010: Strong tendency towards

(minor) depreciation, 30% stable


25%

32%

44% 30%

Valuation inertiaAnalysis of value changes of +-1% of GOEFs in The Netherlands

Public data


17%

13%6%

7%

• Classes: <-40%<-20%<-5%<-

1%<1%<5%<20%<40%

• Areas of histogram misleading regarding

density

• Lower proportion of stable capital values in

times of negative value changes 2008 and

2009, highest in 2010

• Maximum of 17% stable capital values in

2010 much lower than 44% stable capital

value of German funds in 2009

Source: IPD

Valuation inertiaAnalysis of value changes of +-1% of local investors in The Netherlands

IPD data


• With the exception of France in 2008 where results match, properties of GOEF show a much

higher proportion of stable capital values than properties of local investors

• The average rate of unchanged capital values of GOEF properties reach 25% in France

compared to 11% of local investors, and 33% in The Netherlands compared to 11% of local

investors

• As the proportion of stable capital values of GOEFs is double to three times the figure of local

investors, H1 seems plausible

Source: IPD

H1: German valuation practice results in smoothed capital growthSum up


Agenda








• Three groups are formed:

• Funds with avg. discounts

lower than 20% over the

last 12 months

• Funds with discounts

above 20%

• Funds in liquidation

Source: Hamburg stock exchang

Explaining capital growth by NAV-discountDiscounts on the NAV at the secondary market

Public data


Capital growth FranceLocal investors vs. GOEFs

Indices calculated using capital

weighted individual property

growth rates

•French offices held by local

investors strongly appreciate in

2006 and 2007, and strongly

depreciate in 2008 and 2009,

recovery in 2010

•French offices held by German

funds appreciate from 2006

until 2009, and depreciate in

2010

•Offices held by funds in

liquidation depreciate in 2009

and strongly depreciate in 2010Source: IPD 2011, annual fund reports

3,6%

-8,0%-7,9%

11,8%15,0%

-1,7%

1,7%

6,1%

4,8%3,2%

-8,5%

-1,0%

2,7%

-15%

-10%

-5%

0%

5%

10%

15%

20102009200820072006

Capital growth France office 2006-2010

IPD office GOEF all funds GOEF open for redemption

GOEF redemption stop GOEF high disc. NAV GOEF low disc. NAV

GOEF in liquidation

Public data

IPD data


Capital growth NetherlandsLocal investors vs. GOEFs

• Dutch offices held by local

investors strongly appreciate in

2006 and 2007, and strongly

depreciate in 2008 and 2009,

still depreciate in 2010

• Dutch offices held by German

funds appreciate from 2006

until 2008, and depreciate in

2010

• Offices held by funds in

liquidation depreciate in 2009

and strongly depreciate in

2010

Source: IPD 2011, annual fund reports

Public data

IPD data


Influence on NAV-Discount on valuation?Open funds vs. redemption stop w/o funds in liquidation

• When excluding funds in

liquidation from the high-

discount group, differences

diminish

• France: Open funds’ properties

depreciate slightly less in 2009

and 2010 than both groups of

redemption stop

• Netherlands: High discounts on

NAV are associated with about

one percentage point more

depreciation from 2007 to 2010


Public data


• Only minor effects of NAV-discount on capital growth

• H2 cannot be affirmed

Source: IPD

H2: High NAV-discount is associated with negative capital growthSum up


Agenda




negative capital growth– H3: Property acquisition in a boom phase




Accounting for portfolio differencesExplaining capital growth by hard property characteristics

• Only factors taken into account

that are not influenced by

appraisal assumptions

• In France, long leases are

associated with positive capital

growth, and later acquired

properties tend to depreciate in

2009 and 2010

• In the Netherlands, only lease

duration in 2009 has a

significant positive impact, but

much lower sample size

• No impact of economic building

year

Francecapital growth ~ 2007 2008 2009 2010econ. building year + - + -

vacancy rate + - -** -

ending leases within next 12 months -* -´

avg. lease duration + +´date of purchase - - -* -*

DF=38 DF=43 DF=35 DF=73

Netherlandscapital growth ~ 2007 2008 2009 2010econ. building year - + - -vacancy rate - - + -ending leases within next 12 months - -

avg. lease duration +** -date of purchase + + + -Signif. codes: *** = 0.001 ** = 0.01 * = 0.05 ‘ = 0.1 DF=19 DF=15 DF=35 DF=55

Public data


Accounting for portfolio differencesExplaining French capital growth by acquisition date

• Negative impact of newly

purchased properties in 2009

and 2010

• French properties of funds in

liquidation have been acquired

recently and fall into the pattern1998 2001 2004 2007

1998 2001 2004 2007 2010 1998 2001 2004 2007 2010

1998 2001 2004 2007

Public data


Accounting for portfolio differencesExplaining Dutch capital growth by acquisition date

• No significant negative impact

of newly purchased properties

• Dutch properties of funds in

liquidation show negative

capital growth in 2010,

regardless of the acquisition

date1992 1998 2004 1992 1998 2004

1992 1998 2004 2010 1992 1998 2004 2010

Public data


• Some evidence found for French properties, but no dominant pattern

• Fund belonging has to be added as control variable, because funds in liquidation tend to have

acquired their properties at a late point of time

Source: IPD

H3: Property acquisition date in boom phase results in negative capital growth Sum up


Agenda








Explaining capital growthModel including funds as dummy variables

• No significant influence of construction year and

vacancy rate on capital growth

• Purchase date only significant when looking at the

entire period (weak effect)

• Rent multiplier and rental value per sqm positively

correlated to cg

• Market value per sqm negatively correlated to cg

• Funds in liquidation showed lower cg over the entire

period, but DEGI EUROPA had higher cg rates in

2007

• Out of 20 funds not in liquidation, only one fund

showed significantly lower cg rates in 2010

• Inclusion of fund dummies into the regression model

strongly increase the explanatory power in 2007 and

2010

all propertiescapital growth ~ 2007 2008 2009 2010 07-10economic construction year - + + - +vacancy rate - - - - -

date of purchase + + - - -**multiplier + +** +*** + +***

market value per sqm - -** -*** - -***rental value per sqm + +** +*** + +***

country: Netherlands -*** -´ - -´ -***

fund*: DEGI EUROPA (in liquidation) +*** -*** -*

fund: Morgan Stanley P2 Value (in liquidation) -*** -***Adj. R2 30.9% 30.1% 18.0% 40.6% 14.0%Adj. R2 w/o fund dummies 19.0% 29.4% 14.8% 0.0% 9.5%DF 96 112 131 150 612p-value 0.0001 0.0001 0.0001 0.0001 0.0001Signif. codes: *** = 0.001 ** = 0.01 * = 0.05 ‘ = 0.1* One fund with significantly lower cg rates in 2010 not explicitly reported, neither three funds with weakly significant positive cg rates in the years 2007 to 2010

Public data


• Both funds in liquidation show significantly lower capital growth rates in 2010

• H4 cannot be rejected

Source: IPD

H4: Properties of funds in liquidation show negative capital growthSum up


Summary I

• H1: German valuation practice results in smoothed capital growth

• Evidence: Percentage of stable property values of GOEFs between 2007 and 2010 about factor 2 to 3

higher

• Interpretation: Given the strong economic crisis and recovery of the period, valuations of GOEFs seem to

smooth capital growth

• H2: High NAV-discount is associated with negative capital growth

• Evidence: No evidence found

• H3: Property acquisition date in boom phase results in negative capital growth thereafter

• Evidence: Evidence found only for French properties in 2009 and 2010, but when controlling for fund

belonging, no single years but the 2007-2010 period reaches significance

• Interpretation: Effect weaker than often assumed, but valuations of funds not in liquidation may show the

assumed depreciations in the years to come


Summary II

• H4: Properties of funds in liquidation show negative capital growth

• Evidence: Both funds in liquidation show significantly lower capital growth rates of their properties in

2010, and the regression model for 2010 reaches 40% R² when including fund dummies, and 0% R²

when not

• Interpretation: The fact that despite limited sample sizes of the French and the Dutch properties of the

individual funds the fund belonging variable of the funds in liquidation is highly significant shows that

liquidation is the central driver of capital growth of GOEFs in 2010

• Research outlook

• The analysis of the valuations as presented in combination with the transaction results of the portfolios

being sold at the moment will show to which extend valuations match transaction prizes. At this point of

time, for the two funds in liquidation only one sales prize of Dutch and French standing investments was

available


Thank you for your attention!

Sebastian Gläsner

18.06.2011

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