Morgan Stanley, once a giant in the real estate business, is in a world of hurt.
Among the wounds afflicting the Morgan Stanley Real Estate group:
•Morgan Stanley is writing down 80% of the properties in Fund V U.S. and 60% in Fund VI International.
•Two investors — the $60.5 billion New Jersey State Investment Council and the $3.86 billion Contra Costa County Employees Retirement Association — backed out of their commitments to its latest closed-end fund, the approximately $5 billion Morgan Stanley Real Estate Fund VII. Contra Costa had committed $75 million; New Jersey, $150 million. (Fund VII is closed to further commitments but is technically open to tie up loose ends, according to sources close to Morgan Stanley.)
•Its $5 billion open-end core real estate fund, the Morgan Stanley Prime Property Fund, has a line of investors asking for a total of more than $500 million in redemptions as of year-end 2008. The fund returned -19.8% for the 12 months ended March 31, underperforming the NCREIF Property index but outperforming the NCREIF Open-End Diversified Core Equity index, according to fund information provided to investors.
•The firm is reducing its geographic footprint, particularly in the emerging markets of Russia and Brazil, and reducing staff because of fewer transactions, investors say.
•Crescent Resources LLC, a joint venture between Morgan Stanley Real Estate Fund V U.S. and Duke Energy Corp., filed for Chapter 11 bankruptcy protection to reduce the debt level and improve the capital structure. Investors in Fund V include the $40 billion Pennsylvania Public School Employees' Retirement System, $119 billion California State Teachers' Retirement System and $6.2 billion San Bernardino County (Calif.) Employees' Retirement Association.
CalSTRS also made a separate commitment of almost $100 million to co-invest in Crescent in October 2006. According to an April CalSTRS real estate report, the system invested $81.5 million and received no profits. CalSTRS' internal rate of return was -34.8% as of Sept. 30, 2008.