Property investment downturn hits what was world’s largest ever real estate fund

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Written by Ray Clancy

Thursday, 15 April 2010 10:00

Stanley has told investors that its $8.8 billion real estate fund may lose nearly two thirds of its money due to bad investments.

In a document to investors, Morgan Stanley has warned that its Msref (Morgan Stanley Real Estate Fund) VI International is in line to record a $5.4 billion loss, which is in line to be the biggest in the history of private equity property investing.

A spokeswoman for the fund, which was launched in June 2007 at the peak of the market and boasted of being the ‘largest ever real estate fund’, said it has ‘a long standing history of investing through many different business cycles over the past two decades’. She added; ‘We are committed to managing through this cycle and moving our real estate business forward,’ and declined to say anything else.

Its assets include the headquarters of the European Central Bank in Frankfurt, known as the Eurotower, InterContinental hotels across Europe, and a development project in Tokyo.

However, the value of these properties plummeted with the onset of the credit crisis, forcing Msref VI to make damaging writedowns. The size of the loss reflects the turmoil endured in commercial property markets in the two years from June 2007.

The fund, which aimed to invest across Western Europe, Asia and Latin America, is forecasting a 90% loss on its $77 million investment in the Eurotower and is preparing to walk away from a $350 million stake in a Seoul Square office building. Msref VI has also written off its investment in a collection of German assets, known as the Pegasus portfolio, worth €2.1billion.

Morgan Stanley Real Estate has banking, investing and lending divisions. In the UK, its funds hold a 9.34% stake in Songbird, the majority owner of Canary Wharf, and a share of Drapers Garden, a major City development that will become the headquarters of BlackRock.

A new fund, Msref VII Global, is in the process of raising equity, but so far it is thought to have raised just $5 billion out of a target of $10 billion, following a cautious investor reaction.

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 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 and Lone Star Funds, have raised more than $5.4 billion.