Academic journal article Journal of Real Estate Literature

Analysis of Closed Real Estate Funds in Italy

Academic journal article Journal of Real Estate Literature

Analysis of Closed Real Estate Funds in Italy

Article excerpt

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The management of real estate owned by public administrations is a thorny issue. First, there is the problem of reducing the financial resources available to the public, and the consequent need to rationalize spending. Second, there is the need to transform public real assets, which are often considered a passive voice in a government budget, into a resource.

A lot of policymakers stress that government should orient its decisions through public / private partnerships that employ innovative financing instruments that enable the development of modern actions, effective and efficient in managing and using public assets. The real challenge is to be found in the enhancement of the public as a strategic lever to overcome the balance crisis.

In Italy since 1999 disposals of public assets have been made by using securitization or real estate funds. In Italy, securitization has led to significant divestments by both banks (mainly loans) and government institutions.

In this paper, we deal with the subject of the performance of public real estate funds. This is a financial instrument that allows the investor to participate in the economic results of private enterprises taken in the housing sector, not using the typical pattern of participation in a company, but the scheme of assets managed by a professional intermediary. We tackle the issue of performance, not according to what is typically called the closed-end fund puzzle, but by focusing on public real estate funds.

The difficulties of the Italian government are extensively known, and certainly exacerbated, by the persistent state of international crisis. Indeed, Italy, having accumulated a huge public debt, has decided to use these financial instruments to address different needs regarding public spending, health, and welfare. These difficulties, mainly to be reconnected to the high level of public debt, in January 2013 have exceeded the remarkable level of 2,000 billion euros. Among the various economic policy tools with which Italy has decided to deal with this crisis, there are closed real estate funds. Through these instruments, Italy is providing the sale of public assets through their implementation in financial instruments in the form of closed end funds.

Innovation in the literature coming from our paper is mainly due to the evidence that the central topic of analysis is real estate funds that are in the public domain. To our knowledge, this situation is specific to Italy and is not typical of any other countries.

This paper is organized as follows. We begin by providing an overview of the literature on closed real estate funds and REITs. We then describe investment vehicles in an Italian context. We also describe the framework of the Italian case, including the impact of the international financial crisis. In addition, we discuss public real estate funds, summarize current challenges, and provide a comparison between these financial instruments and Italian and international vehicles. We close with concluding remarks about this vehicle in the Italian context.

LITERATURE REVIEW

Several studies deal with real estate funds performance (Morri and Erbanni, 2008; Gallo, Lockwood, and Rutherford, 2000; O'Neal and Page, 2000), which is measured with several risk adjusted performance indicators such as the Sharpe ratio and the Treynor ratio (Scholz and Wilkens, 2005; Eling, 2008). Ong, Teh, Soh, and Yan (2012) examine the investment performance of conventional and Islamic real estate investment trusts (REITs) listed in Malaysia over the 2005-2010 period. Analysis reveals that both conventional and Islamic REITs experienced negative monthly return during the recent global financial crisis (GFC), and positive monthly return in the post GFC period. Compared to market indices, most REITs underperformed before the GFC. Based on Treynor and Sharpe measurements, most REITs underperformed the market portfolio during and after the GFC. …

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