The Illiquidity Premium of Non-listed Real Estate Investment Funds

This paper explores the illiquidity premium for non-listed real estate funds, using secondary market transaction data to calculate fund-level total excess returns and Amihud's illiquidity measure. Employing quarterly data from 2010Q1 to 2025Q2 in the UK, Fama-MacBeth regressions provide indicative evidence of an illiquidity premium after controlling for systematic risk factors. The average annual illiquidity premium is between 1.6% and 2.2%, ranging from 17.4% to 23.3% of the total risk premium. We find slightly smaller numbers using unsmoothed appraisal-based returns. This emphasizes the importance of using secondary market transaction-based returns. Limited statistical evidence suggests that the down-market return is a significant determinant of changes in trading volume, consistent with findings from Chordia, Roll and Subrahmanyam (2001).