The Determinants of Real Estate Fund Closures

During the October 2008 fund crisis, approximately one-third of German open-end real estate retail funds, with total assets under management of about EUR 30 billion, were forced to close (suspend share redemptions). A fund closure generally leads to fund liquidation, which poses a serious challenge to management and investors. As a consequence, the fund management is forced to liquidate the fund by selling the real estate assets. The liquidation often occurs under conditions of high selling pressure, and may involve significant fees. Furthermore, in the event of a fund closure, fund investors’ capital is totally constrained (i.e., investors can only sell their shares on the secondary market, but for significantly discounted prices). Thus, knowing the determinants of fund closures could help fund management adjust investment strategies and diminish closure risk. Our monthly panel dataset contains fund specific information such as the liquidity ratio, capital net inflows, leverage ratio, and management fees for the entire population of German open-end real estate retail funds over the August 2002-June 2016 period. The results of our logit model suggest a significantly positive influence of fund run risk and industrywide spillover effects, as well as a negative influence of economies of scale and scope on fund closure probability. Our results also indicate that having a greater share of institutional investors tends to increase fund closure probability.