Year Published
2020
Abstract
This paper documents that development exposure is an important determinant of
private real estate returns and market risk exposure. It also documents that openend
private real estate funds have time-varying, procyclical market risk exposure
through their development activities. As such, these funds are disproportionately
exposed to the downside of the market cycle. Lastly, I find that fund flow pressure
is the primary driver of time-varying development exposure. Funds buy a higher
proportion of safe, liquid assets compared to risky, illiquid assets when they have
larger unfulfilled subscriptions. While this increases assets under management
quicker, it also hurts existing investors by decreasing their market risk exposure
at the time when it is the most desirable and beneficial. Additionally, funds stop
developing as redemption requests increase, leading to lower market risk exposure
when the market recovers.
private real estate returns and market risk exposure. It also documents that openend
private real estate funds have time-varying, procyclical market risk exposure
through their development activities. As such, these funds are disproportionately
exposed to the downside of the market cycle. Lastly, I find that fund flow pressure
is the primary driver of time-varying development exposure. Funds buy a higher
proportion of safe, liquid assets compared to risky, illiquid assets when they have
larger unfulfilled subscriptions. While this increases assets under management
quicker, it also hurts existing investors by decreasing their market risk exposure
at the time when it is the most desirable and beneficial. Additionally, funds stop
developing as redemption requests increase, leading to lower market risk exposure
when the market recovers.
Research Category