Wednesday, April 14, 2010

Morgan Stanley Real Estate: From Cash Cow to Losses of 61%, or $5.4B

The Wall Street Journal reports today that Morgan Stanley (MS, click for alerts) may lose nearly two-thirds of its $8.8B real estate money for is investors, due to "bum property investments". The loss would be around $5.4, the biggest in the history of private-equity real-estate investing.

The paper says that during the the past 20 years, Morgan Stanley's real-estate unit was one of the biggest buyers of property around the world, with about $174B in deals since 1991, "mostly with money raised from pension funds, college endowments and foreign investors. The losses come from investments in properties such as the European Central Bank's Frankfurt headquarters, a big development project in Tokyo and InterContinental hotels across Europe, among others".

Now these real estate deals made a lot of money for the bank and it once projected a 22.1% average annual return on its commercial-real-estate deals. 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,
  • $21 million in financial-advisory fees,
This according to documents reviewed by the Journal. And now is investors will lose principal?

Continues the article: "The soured investments made by the $8.8 billion fund, Msref VI International, continue to be a distraction for Morgan Stanley as it tries to extricate the fund from complex deals around the world. In many cases, the company can't walk away from foundering investments because the fund made billions of dollars in guarantees.

Morgan Stanley now is negotiating with lenders to reduce the fund's obligations on the money it borrowed, its interest payments, renovation costs and other expenses.

Adding to the difficulties, the economic downturn and big real-estate losses have rattled some of Msref's core investors, leading to a challenging fund-raising environment. Morgan Stanley has sought to raise a new, $10 billion fund, Msref VII Global".

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