Morgan Stanley Raises $2.5 Billion for Real Estate
April 23 2008 - Morgan Stanley, seeking profits amid the decline in real estate values, raised an additional $2.5 billion for a global property fund that will invest part of its assets in U.S. mortgage debt.
About half of the new money in the Special Situations Fund III will be spent in the U.S., Spain and the U.K., as well as other developed markets in Europe and Asia, said John Carrafiell, joint global head of real estate investing for Morgan Stanley. The rest will be invested in emerging markets.
Morgan Stanley, like Blackstone Group LP and Lone Star Funds, is raising money to take advantage of a drop in asset prices following the collapse of the U.S. subprime mortgage market. The second-biggest U.S. securities firm plans to invest $30 million to $100 million of equity per investment, mainly in commercial property assets including offices, hotels, stores and industrial buildings.
“Before June 2007, capital for real estate was abundant and cheap,” Carrafiell, 43, said in a telephone interview today. “Today it is scarce and expensive.”
About 20 percent of the money raised, or $500 million, may be invested in the U.S., said Carrafiell. Morgan Stanley’s fund may buy junior pieces of first mortgages, focusing on loans in which the interest expense is covered by leases in place, Carrafiell said.
Dearth of Investors
“There’s a dearth of investors for that part of the capital structure in the U.S., so you can achieve returns you haven’t been able to achieve for a decade in the U.S. in mortgage debt,” he said.
“We’ve looked at buying from people that have originated the debt and own it,” said Carrafiell. “We’ve also been approached by banks to team up with them to provide that slice of a new mortgage they’re about to write.”
Morgan Stanley also might provide capital to real estate owners and developers through the purchase of preferred equity or mezzanine loans in which the loan-to-value ratio on a property is less than 80 percent, Carrafiell said.
The fund plans to invest part of its capital in developed Asian markets such as Japan, where economic growth has slowed.
“For Class A Tokyo office space, there remains a significant undersupply,” Carrafiell said. “We will look for opportunities that take advantage of that mismatch of supply and demand.”
Credit Mess Continues
Morgan Stanley raised more than half the new capital from non-U.S. investors. The new money brings to $5.9 billion the total equity raised for the Special Situations Fund III since it was formed in 2006, Morgan Stanley said.
Chief Executive Officer John Mack said on April 8 he expected the credit crisis will last “a couple of quarters” longer as it spreads to commercial real estate, subprime mortgages in Europe and U.S. midsized banks.
The collapse of the subprime market in the U.S. has reached its eighth inning or “maybe top of the ninth,” Mack said before the company’s annual meeting, referring to the final period of a baseball game. Europe is in the sixth inning and the market for securities backed by commercial mortgages is “probably in the fifth,” he said.
Morgan Stanley went on a property acquisition spree last year. In May 2007, the company agreed to buy Investa Property Group, Australia’s biggest office owner, for A$4.7 billion, and Crescent Real Estate Equities Co. in the U.S. for $2.78 billion.
Last April, Morgan Stanley agreed to buy 13 hotels in Japan from All Nippon Airways Co. for 281.3 billion yen in what was the largest-ever real estate purchase in that country by an overseas investor.
Morgan Stanley Raises $2.5 Billion for Real Estate
by Hui-yong Yu | Bloomberg