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This week’s Chart of the Week examines queue levels of core real estate managers. Real estate’s recent performance along with its yield premium has led to increased investor interest, and consequently the formation of contribution queues. Contribution queues are the value of the cumulative dry-powder to put to work, i.e., what could potentially get called by managers in a quarter. If 100% of capital is called, the contribution queue is eliminated: prior quarter queue − capital called + new investor commitments = current quarter contribution queue.
Queue levels have to be monitored carefully because they could potentially dilute investment returns. The pressure to call capital and earn management fees might outweigh adhering to investment discipline or paying fair value for an asset. Additionally, the pressure to put money to work could lead to style drift by going outside of appropriate geographies or property types in order to increase fund size. If a significant queue exists for a particular manager, he/she may feel the pressure to put this money to work and overpay for an asset, as opposed to adhering to a more disciplined investment process. Such a practice is critical in today’s market: if one overpays in the beginning, an asset’s return potential is decreased.
Evaluating the last two years of data, the industry’s quarterly contribution queue has averaged $6.3B. For the last two years, the average queue into a fund has ranged from $292M to $426M, but two funds are driving an upward bias with these values. Excluding these two managers, the quarterly average queue into a fund has ranged from $84M to $184M. Most important to note is that queue levels have remained relatively stable as prices have rebounded. Overall, the steady level suggests that managers are remaining disciplined when completing transactions and not rushing to put money to work.
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