BLUEPRINT: G7 game plan

In investing its $4.7 billion G7 fund, Morgan Stanley Real Estate Investing says it will be more disciplined and targeted in the deals it sources. The US, Western Europe and Japan will be the fund’s primary focus. PERE magazine June 2010

In raising $4.7 billion for its latest fund, MSREF VII Global, Morgan Stanley Real Estate Investing will try to draw a line under the performance of its two predecessor funds. At just six percent invested, G7 has the potential to be a great vintage for the platform.

Focused primarily on the US, Western Europe and Japan, the global vehicle will be more targeted in the deals it closes. This narrow focus is partly a reflection of the opportunities currently being seen in the market, which are largely concentrated in developed markets in the three regions mentioned above. However it is also perhaps an attempt to avoid stretching itself too thinly across the globe, and a response to investor calls for increasingly specialised, niche vehicles.

The focus going forward will be to be more disciplined, pointed and targeted.

Marcus Merner, chief operating officer for MSREI Japan

“I think the focus going forward will be to be more disciplined, pointed and targeted,” says Marcus Merner, chief operating officer for MSREI Japan, who works with recently appointed chief executive officer of Japan Yoshihiko Shigenari. “It could be that we look to two to three products [sectors], versus four to six products for example. We know what we do well, and we should focus on our strengths. We have to underwrite and reflect current market conditions and not rely on high growth in the future. We will take a targeted approach, and an enhanced focus on project level/unlevered cash flow.”

It’s a sentiment echoed across the MSREI platform globally, not least by MSREI’s head of Europe, Middle East and Africa (EMEA) Oliver de Poulpiquet, who was rehired by the firm following a four-year spell as chief investment officer at Pirelli Real Estate. “There has been a tendency by real estate investment managers over the past few years to look at any deals on the market to deploy capital. Sometimes you don’t step back enough to say, where are we the best, and stick to the areas where you have the competitive advantage.”

There was perception in the outside world that we were not in business for a while. For the past few months we’ve been actively getting back into the marketplace and putting our name out there, as ready, willing and able to make new investments.

John Klopp, head of Americas

Across the US, Europe, Japan and Asia, MSREI is sensing an unlocking of opportunities. In response, the heads of each of the four regions have been getting the MSREI name back out into the marketplace.

“I think there was perception in the outside world that we were not in business for a while,” says John Klopp, who was hired from listed real estate firm Capital Trust to lead the Americas group and global debt investing at the start of the year. “For the past few months we’ve been actively getting back into the marketplace and putting our name out there, as ready, willing and able to make new investments.”

And new deals are starting to happen. One of the first G7 US deals to close was the recapitalisation of a 564,000-square-foot office in Atlanta, developed by a long-standing Morgan Stanley operating partner, Cousins Properties.

Terminus 200 was a speculative development in the Buckhead area of Atlanta, where vacancy rates were north of 20 percent. Completed in the third quarter of 2009, Cousins had a partial-recourse construction loan on the property coming due and had leased just nine percent of the space – but with a law firm on the sidelines willing to sign a 95,000-square-foot lease. By providing additional equity to help pay down debt and cover tenant improvements and leasing commissions, MSREI helped Cousins extend and restructure the loan with its lenders, taking an undisclosed equity stake in the property in May.

Similar opportunities are emerging in Europe, according to de Poulpiquet, particularly in the banking sector. He says the firm is currently working with a large European-wide bank eager to team up with real estate investors who could potentially either form a joint venture with the institution in relation to its real estate loan book, or purchase the loan pool.

But, like MSREI’s other regional heads, de Poulpiquet says the firm is not “going to rush to make investments. We will make the right investments for our investors and we will take our time”.

John Klopp
MSREI head of Americas, global head of debt investing.
Joined MSREI January 2010. Co-founder and former chief executive officer of listed real estate firm Capital Trust

“When I decided at the end of 2009 I wanted to do something different, I wanted to be in the market – in 2010 – with a firm that had resources, partners and capital. This is a great franchise and a great platform that had had some difficult times, and it was a good time to be the new guy.


Virtually everything we are doing is debt related in one way or another, that’s just the shape of the world today. Our focus is on multiple strategies because we have multiple pools of capital, but certainly G7 is the largest. The entry point for opportunities in the US is to get to the equity through the debt, and that can take a variety of different forms, whether its partnering with existing borrowers to recapitalise projects or portfolios, or in some cases buying the debt and taking control of a property if that’s what makes the most sense. But everything we are doing today starts with debt.

We have closed one such deal to date [the Terminus 200 transaction in Atlanta] and are in active pursuit of a number of additional opportunities and hope to close more in the near future. We are going to move forward at the pace we feel comfortable with, we are going to be careful and we are not going to put money out just because we have it and just because it feels like things are starting to open up. I believe this opportunity is going to stretch out over a number of years and being too impatient isn’t the right way to do.

We have only seen the tip of the iceberg in terms of opportunities, and for G7 right now, the most active marketplace is the US. Over-leveraging is very widespread, the market is beginning to turn in terms of fundamentals and the logjam is beginning to break. We believe, as a team, the US will be very fertile turf for investing.”

MSREI head of Europe. Joined MSREI April 2010. Former Pirelli Real Estate chief investment officer and MSREI Europe executive 1996-2004

de Poulpiquet

“Having worked for Morgan Stanley previously, it’s been interesting to discover how the business and people involved in it have evolved. I’ve actually been very surprised at how many people I know from when I was here six years ago. I can tell you as well that the firm has made much progress on [the legacy issues]. That gives us the ability to focus on new opportunities.

Europe has suffered a pretty significant dislocation. Some markets have rebounded quicker, such as the UK, and there are markets that are taking longer, such as Spain Germany, even France and Italy. We are looking at three main areas for opportunities: sale-leasebacks; using trading partners to help source off-market deals, and also looking at the banking sector, which is sitting on huge portfolios of commercial real estate loans.

We are not going to rush to make investments. We will make the right investments for our investors and we will take our time.”

Shigenari is MSREI chief executive officer Japan and Merner is MSREI chief operating officer Japan. Shigenari joined Morgan Stanley in 1989, working with Merner when MSREI set up a Japan office in the late 1990s


Shigenari: “It’s certainly been a challenging project for us in dealing with the legacy funds, it’s also been challenging for our lenders as well. But we are not exiting from this market, we remained very committed to Japan. We have seen deal activity pick up in 2010, although we don’t get the sense that the floodgates have opened.”

Merner: “Some of the areas where we expect to see increased activity in is the consolidation and merger of the J-REIT industry. A lot of J-REITs are offloading assets as they go into these mergers. We are also seeing hard asset trades that come out of defaulted CMBS. In general, the owners of CMBS securities are taking a wait and see approach, allowing the underlying loans to default and then collect through the asset sale, rather than selling out of their positions. Another area we expect to result in opportunities is corporate real estate. Japanese corporations own a tremendous amount of real estate and although they have not been as active in the past six months, it is picking up, for example, in the consumer finance space.”

Shigenari: “When we start deploying capital we will be careful about it. It’s not about speed or leverage. We are currently in a competitive market and there is a lot of capital around, so it’s understandable people might rush into the market. We have to go back to basics and look at everything deal by deal with an eye to the discipline.”

MSREI head of Asia. Joined Morgan Stanley in 1989. Became head of MSREI Asia in 2008. Former global head of Morgan Stanley real estate investment banking

“There's really good balance right now in terms of what we're working on; a combination of new business, where we're looking at a lot of new deals throughout the region and management of our legacy portfolio.


Regarding the latter, there have been lots of wins and, on the more difficult situations, either resolution or a plan in place for resolution. In terms of new deals, not only has the flow increased but opportunities are definitely starting to look more interesting. We are looking at all kinds of credit-driven situations in Japan; more of a hard asset focus, but we are starting to look at some bigger strategic situations as well, including recapitalisations.

In China the focus is more on entity level opportunities, which are interesting given recent volatility in the capital markets. Hard assets are difficult to access there purely from a valuation standpoint, but the market is beginning to become more capital constrained and we're starting to see some development opportunities that could make sense. We are looking at a wide range of interesting situations in Australia, including opportunities coming out to the fund management and listed property trust sector.”