The turnaround in the underlying core real estate market in the US has been mirrored by high demand for open-ended institutional property funds. Stephanie Schwartz-Driver looks at why entry queues have replaced mass redemptions

Risk-averse investors seeking real estate yields continue to flock to open-ended funds in the US, despite entry queues lasting as much as nine months.

This is not a new situation. Last autumn and winter, entry queues attracted a great deal of attention in the industry. At the time, the fact that entry queues had replaced exit queues was celebrated as an indication that investor interest had returned to the asset class. After the market collapse in 2008-09, exit queues developed, reaching their peak at the beginning of 2009, and amounting to around $11bn (€7.6bn). Entry queues began forming in their place in the second half of 2010.

By mid-2011, the situation had begun to show signs of stabilising. "Over the last six months, the queues have gone down a bit, but not much," says Avery Robinson, vice-president, real assets, at Callan Associates. Open-ended real estate funds remain the most conservative real estate equity strategy.

Callan research has found that the funds with the largest entry queues now are the ones that had substantial entry queues at the beginning of 2011. "They are the favourites based on their recent results," Robinson says.

UBS Trumbull Property fund, managed by UBS Realty Investors, was estimated to have a $2bn entry queue at the end of 2010. Since then it has attracted further allocations from investors, including the Kansas Public Employees Retirement System and Denmark's ATP Real Estate. ATP also committed additional capital to one of Morgan Stanley's core funds - the Morgan Stanley Prime Property fund.

Another fund with a substantial queue is JP Morgan's Strategic Property Fund. The $15bn fund has an entry queue that amounts to some $2bn. At that level, and for that size of fund, the queue would take around nine months to clear, estimates Kevin Faxon, managing director and head of real estate, Americas, at JP Morgan Asset Management.
"We were at the forefront of client commitments back into real estate," Faxon says. "We navigated the downturn well and, as a result, were the beneficiary of significant capital commitments by the second quarter of 2010. Our exit queues evaporated at the beginning of 2010."

Investors wanting exposure without the long wait have several alternatives. Open-ended real estate funds without entry queues are one option. Just because a fund does not have a queue does not make it a poor choice, but investors tend to ask more questions when a fund is not receiving as much attention.

"Investors will have to do their due diligence to find out why those funds do not have a queue," Robinson says. "To a large extent, the funds that have queues are those that performed best in the last downturn." Several funds with smaller queues do have long track records, making them viable alternatives.

"We have seen an emergence of some new funds over the past two years, anticipating the flood of capital seeking core real estate," Robinson adds. "The capabilities of the entire organisation trump all. A firm may have a particular core fund with a short history, but it may be run by a group of people who have been investing in the core space for a long time." He points out that some funds with track records of three years or less still have queues because of the reputation of the fund management company.

Separate accounts and joint ventures with other investors are also alternative strategies, but open-ended funds remain the most common choice. "Open-ended funds provide instant access, with the caveat of the queues," Robinson says. "It will take longer to prudently build a diversified separate account."

Ultimately, the decision to join a lengthy queue - rather than opt for alternative means of accessing core US real estate - will rest with the investor. A deciding factor can be whether an investor is making a debut allocation or just increasing its weighting. "It is based on the client," Robinson says. "Some want a particular fund and are willing to wait. Others want immediate exposure. To an extent, it depends on whether they are already exposed to the asset class."

Faxon notes that client willingness to wait out the queue also depends on their perception of their stake in the fund. "Our investors are making a strategic allocation to the asset class and expect to hold the position for 10-plus years," he explains. "They understand that it will take some time. We do not see our investor base pulling funds from the queue or shifting focus. Would you rather wait for the fund you want, or take shortcuts? Patience is rewarded."

Callan estimates that the entry queues will decline eventually. "Historically there have been times with longer queues to get in, and sometimes queues to get out," Robinson says.

Faxon agrees: "If you look back to 2005-06, the queues were around this size as a percentage of net asset value. Fund managers are used to managing queues into and out of their funds."

One trend that might alleviate some of the queues is a change in market sentiment, as investors become less risk averse. "Investors have already started to look up the risk spectrum," Robinson says.