The German Open-End Fund Crisis – A Valuation Problem?
Christian Weistroffer · Steffen Sebastian
Published online: 19 December 2014

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.