The loss would be the biggest dollar drop in the history of private-equity real-estate investing in the U.S.- The Wall Street giant is rumored to be planning sales of several major properties.
- Company's $8.8 billion Msref Fund in deep trouble.
- Circling the wagons, hunting for bargains, are KKR, TPG, BlackRock Inc. and Brookfield Asset Management.
- Goldman Sachs Group Inc. also faces huge losses from its Whitehall-branded assets.
- Citigroup Inc. recently sold its $.35 billion real estate investment business to Leon Black's Apollo Global Management.
- Bank of America Corp. earlier this month unloaded the management of its $2.7 billion Asian fund business to Stephen Schwarzman's Blackstone Group.
- Dutch lender and insurer ING Group NV is evaluating the sale of its real estate investment unit.
- President Barack Obama expected to sign historic financial-overhaul bill Wednesday that would limit a bank's stakes in real estate funds.
A whole big shakeout of real estate funds held by U.S. investment banks is on the table.
Morgan Stanley, the biggest real estate investor on Wall Street, already has told shareholders the company faces an estimated $5.4 billion loss from its $8.8 billion Msref Fund.
The loss could turn out to be the biggest dollar drop in the history of private-equity real-estate investing, reports The Wall Street Journal.
Morgan Stanley told investors the $8.8 billion real-estate fund may have lost nearly two-thirds of its money, according to the fund's report for the third quarter of 2009.
The move comes amid a real-estate bear market as well as pending regulation that discourages investment banks from investing their capital in risky assets.
President Barack Obama was expected to sign the historic financial-overhaul bill today (July 21). The legislation would require investment banks to reduce stakes in their real-estate funds.
However, the bill would give banks up to 12 years to sell off certain parts of their real estate portfolios since most real estate is considered hard to sell quickly.
Morgan Stanley could continue to manage the funds and collect management fees even if it reduced its stakes in the funds, according to the WSJ.
After building one of the biggest, most prestigious real-estate-investing businesses on Wall Street, Morgan Stanley is weighing plans to scale back its family of funds known as Msref, knowledgeable industry sources have told the WSJ.
Morgan Stanley officials have not confirmed or denied such a move.
John Mack
Started in the early 1990s and built up under Morgan Stanley's chairman and former chief executive John Mack, Msref has long been considered among the most sophisticated of Wall Street real-estate investors.
Its funds, with about $46 billion in assets, hold investments including a luxury resort in southern China, the European Central Bank's Frankfurt headquarters and a stake in one of Australia's biggest office landlords.
The firm was one of the most aggressive buyers of real estate during the boom, buying at least $53 billion of property and selling only $14 billion from 2005 to 2007, according to research firm Real Capital Analytics.
Now, some of those deals are coming back to haunt the firm as property values plunge, rent rolls erode and financing remains scarce, according to the WSJ.
Private-equity firms looking to expand in this arena, including KKR, TPG, BlackRock Inc. and Brookfield Asset Management, are eyeing the firm's funds, according to industry sources in a position to know.
Many big property funds run by banks emerged out of the wreckage of the last real-estate downturn of the early 1990s.
But now, they have either disappeared or are ailing because of losses tied to the investments they made during the go-go years.
Large bets on property were a primary cause of the collapse of Lehman Brothers Holdings Inc. Goldman Sachs Group Inc.'s real-estate investment unit also has suffered large losses in its funds, which are operated under the Whitehall brand.
Stephen Schwarzman
Earlier this month, Bank of America Corp. unloaded the management of its $2.7 billion Asian fund business to Stephen Schwarzman's Blackstone Group, which already had one of the world's largest real-estate investment businesses.
Dutch lender and insurer ING Groep NV is also evaluating a potential sale of its real-estate investment unit.
Late last year, new Morgan Stanley CEO James Gorman tapped former Merrill Lynch & Co. President Gregory Fleming to shake up the company's asset-management unit, which includes Msref.
James Gorman
But when the commercial-property bubble popped in 2008, that fund and some other top-of-the-market investments suffered, denting the firm's record as a real-estate investor, according to the WSJ.
The ailing deals include its 2007 acquisitions of Crescent Real Estate Equities Co. and five downtown office towers in San Francisco.
The firm in May closed a new $4.7 billion global real-estate fund amid a challenging fund-raising environment. That is about half of its initial fund-raising target set more than two years ago.
As for possible private-equity buyers, owning Msref could allow firms like KKR and TPG that haven't had a real-estate-focused business to further diversify away from their core expertise of leveraged buyouts to become broader-based asset managers, the WSJ reports.
For firms already actively engaged in real estate, like BlackRock and Brookfield, a Msref addition could allow them to access new markets as well as more investors.
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