Excerpt: Morgan Stanley Property Fund Faces $5.4 Billion Loss

  • Morgan Stanley has told investors in its $8.8 billion real-estate fund that it may lose nearly two-thirds of its money from bum property investments, according to fund documents reviewed by The Wall Street Journal.
  • That would likely make it the biggest dollar loss—$5.4 billion—in the history of private-equity real-estate investing. Over the past 20 years, Morgan Stanley’s real-estate unit was one of the biggest buyers of property around the world, doing some $174 billion in deals since 1991, mostly with money raised from pension funds, college endowments and foreign investors.
  • The struggling MSREF VI fund once projected a 22.1% average annual return on its commercial-real-estate deals around the world.
  • When times were good, the fund generated fat fees for various segments of the bank. In 2007 alone, Morgan Stanley earned $104 million in acquisition fees, $22 million in fund-management fees, $13 million in financing fees, $36 million in real-estate-management fees, and $21 million in financial- advisory fees, according to fund documents reviewed by the Journal.
  • In Germany, the fund on Jan. 1 handed a $2.9 billion portfolio of German office buildings back to the lender, Royal Bank of Scotland Group PLC, according to a February presentation to investors.
  • The fund’s third-quarter report also said it would return an $800 million portfolio of 10 European hotels, including Hiltons, to lender Barclays Capital, a unit of Barclays PLC.
  • While numerous other real-estate funds may lose more than half their values, the dollar value of the $5.4 billion loss at MSREF VI International is likely to dwarf the losses at many competitors because of the fund’s large size. According to data firm Preqin, only two other real-estate funds—managed by Blackstone Group LP and Lone Star Funds—had even raised more than $5.4 billion from investors.
  • As of Sept. 30, Blackstone’s $10.9 billion fund had an unrealized, marked-to-market loss of about 60% and less than half of investors’ money had been spent, according to a report by the Oregon public-employee pension fund. Lone Star’s $7.5 billion fund was up about 15%, according to the report.

Source: Wall Street Journal