Morgan Stanley, the largest real estate investor among Wall Street banks, is raising as much as $8 billion for its sixth international property fund in what would be the biggest-ever high-yield real estate fund.
“We continue to see significant investment opportunities outside the U.S., dominated by activity in Japan,” Jay Mantz, global co-head of Morgan Stanley Real Estate, told the Washington State Investment Board’s private markets committee during a fund- raising presentation in Olympia yesterday. The committee recommended an investment of $440 million in the fund.
Real estate firms are raising record amounts from institutional investors such as pension funds that are seeking higher returns than stocks and bonds. Morgan Stanley is raising an opportunity fund, a type that seeks annual returns of about 20 percent or more. The fund will be invested outside the U.S., with 75 percent in developed markets such as Japan and Germany and 25 percent in emerging markets led by China and India.
Morgan Stanley increased its fees with the new fund, Morgan Stanley Real Estate Fund VI International, which would surpass the $5.25-billion Blackstone Real Estate Partners V fund raised by New York-based Blackstone Group LP in June.
Morgan Stanley Real Estate has acquired about $62.3 billion of property assets worldwide, including Canary Wharf in London, that city’s second financial district. The firm in July made its first real estate in Russia, buying a stake in a local developer, and plans to increase investment in China and India, where fast economic growth is creating more demand for housing and retailers.
`Matched by Few’
“This platform for international real estate investment is matched by few firms,” Michael Humphrey of Courtland Partners, a real estate consultant to Washington State, told the pension trustees. “They have a great deal of skill.”
So-called real estate opportunity funds, many of which got their start buying troubled mortgages from the U.S. government during the early 1990s savings and loan debacle, aim for returns of 20 percent or more. They invest in areas deemed higher risk such as nonperforming loans rather than traditional stable income- producing assets.
Morgan Stanley for the first time plans to charge an acquisition fee of 25 basis points on new investments, Humphrey told the panel. The firm also increased its share of profits after certain return targets are met to 20 percent from 17 percent. These terms would apply to large investors such as Washington, Humphrey said.
“They’ve got the Cadillac vehicle and they’re charging for it,” Humphrey said. “There’s that much capital in the marketplace.”
$30 Billion to Invest
Based on a standard management fee of 1.5 percent of capital committed, the new Morgan Stanley fund would generate $120 million annually in management fees alone. The actual fee on the fund wasn’t disclosed.
Adding borrowings to the fund’s equity of $8 billion could give Morgan Stanley as much as $30 billion to invest, Humphrey said.
“That is a level we haven’t seen before,” he said. “The immediate question that comes to mind is can they access investments at a pace that’s reasonable, given that level of capital,” he said. “Are they simply ramping up the dollar amount of the fund to enhance the level of fees?”
Yields, or capitalization rates, on real estate probably won’t fall much further, said Sonny Kalsi, global head of investing for Morgan Stanley Real Estate. “As we look at things globally, we think cap rates are more likely to go up,” Kalsi told the committee. Economic conditions remain favorable for property income growth in cities such as Tokyo, London and Shanghai,” he said.
Morgan Stanley already has invested about $900 million of equity for the new fund as of Sept. 30 and expects that total could double by the time the fund is closed, Kalsi said. He didn’t specify when a final close would occur.