Faculty of Economics and Business Administration Publications Database

The Liquidity Crisis of German Open-end Real Estate Funds and their Impact on Optimal Asset Allocation in Retirement

Rogalla, Ralph
Shen, Yuanyuan
Volume: 82
Number: 1
Pages: 79 - 107
Month: January
ISSN-Print: 0044-2372
ISSN-Online: 1861-8928
Link External Source: Online Version
Year: 2012
Keywords: Real estate; Mutual funds; Portfolio choice; Liquidity; Retirement planning

In course of the recent turmoil in the financial markets, several open-end real estate funds froze redemption of their units, resulting in unanticipated and unprecedented liquidity and performance shocks for investors. Against this background, we analyze the long- and short-term risk and return profiles of open-end real estate funds and their role in efficient multi-asset retirement portfolios. To this end, we introduce the Retirement Efficient Frontier, describing those investment strategies that minimize the lifetime probability of ruin for specific levels of periodic withdrawals from a given retirement wealth. We find that for low to moderate periodic withdrawals, efficient portfolios consist of up to 85% real estate fund investments in case fund units are continuously redeemable. Moreover we show that even if there is a monthly probability of 2.5% that redemption of fund units is temporarily suspended, the allocation into real estate funds in risk-efficient portfolios is only slightly affected. Yet, if funds additionally face a high risk of having to depreciate their property portfolio during a liquidity crisis, their share in efficient retirement portfolios is reduced significantly.