The German Open-End Fund Crisis – A Valuation Problem?

Abstract

Using a unique dataset of appraised values and transaction prices, this paper investigates whether systematic over-appraisals could have been at the heart of the 2005/2006 German open-end fund crisis. Because sold properties are valued more closely to market values than unsold properties, we develop a hedonic pricing model that controls for sample selectivity. The resulting estimates of prices achievable in the market are then compared to appraised values. Our results show that the properties held by open-end real estate funds were likely to have been overvalued prior to the crisis. This supports the view that a fundamentally justified run was at the heart of the 2005/2006 crisis, and it challenges the effectiveness of current valuation practices.