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Morgan Stanley eyes windfall after £1.3bn UK office sale

As the cornerstone investor in the Morgan Stanley Real Estate Special Situations Fund III, the US investment bank is expected take big profits from the fund’s stake in London’s 20 Fenchurch Street after its sale to Hong Kong food company Lee Kum Kee.

US investment bank Morgan Stanley is in line to more than double the equity it invested in one of London’s highest profile office buildings after it was sold to a Hong Kong-based investor for a UK record price. Lee Kum Kee, a company best known for food products including soy sauce, has purchased 20 Fenchurch Street in the City of London for £1.28 billion ($1.68 billion; €1.44 billion), the highest amount of money paid for a single office building in the country to date.

The building was purchased from a 50:50 joint venture between its developer, the London-listed REIT Land Securities, and a consortium including Canary Wharf Group, another London developer now owned by sovereign wealth fund Qatar Investment Authority. Also included in the consortium was Chinese sovereign wealth fund, China Investment Corporation, and Morgan Stanley Real Estate Investing, the unit at Morgan Stanley responsible for its principal property investments. QIA, CIC and MSREI each held stakes of around 12 percent.

The joint venture purchased the land in 2010 for around £90 million and finished development, which is understood to have cost about £350 million, in 2014. These costs would imply that MSREI made approximately £156 million from an original investment of around £53 million in the 670,000 square foot property which is now fully-let to tenants including insurers Markel, RSA and Liberty Mutual.

MSREI’s profit will come via its cornerstone investment in Morgan Stanley Real Estate Special Situations Fund III, an open-ended real estate opportunity fund it launched in 2006, through which it predominantly made investments in real estate operating companies. At its peak, SSF III held almost $6 billion in equity from institutional investors, high net worth individuals as well as Morgan Stanley, which was understood to have as much as 25 percent of the fund’s equity at one point.

In line with opportunistic strategies, the fund is expected to generate an internal rate of return of 20 percent or more.

SSF III is no longer under the management of MSREI after it contravened the Volker Rule of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a piece of regulation introduced after the global financial crisis in 2008 to prevent US financial organizations from making outsized proprietary bets via vehicles they managed. In 2013, its management team spun out to form Proprium Capital Partners and converted the fund, which had approximately $3 billion of assets left at the time, into a closed-ended vehicle with a view to liquidating the holdings, including the stake in 20 Fenchurch Street.

The sale, which analysts at JPMorgan said reflected a net initial yield of just 3.4 percent, was considered a resounding win for MSREI, regardless of it being forced to relinquish its management, given the size of its equity in SSF III. One senior executive at the bank who spoke on the condition of anonymity said of Proprium: “It cannot be they didn’t more than double their money on an unlevered basis. That’s a lot of money.”

He recalled: “We didn’t want to put debt on it so purchased the thing all-equity. We then funded it all-equity. Only after it was open and let did [Land Securities] do a refinancing. I’m sure with that refinancing alone, they could pull out all their money.”

For its part, Land Securities said it expected to receive £634.5 million in net proceeds after transaction costs, unexpired rent-free periods and other commitments were taken into account.

Robert Noel, chief executive of Land Securities, said: “Our decision to sell 20 Fenchurch Street at an exceptional price and return cash to shareholders reflects our disciplined approach to the use of capital. The building has been an immensely successful project for Landsec and our partners.”
MSREI declined to comment while Proprium was unavailable for comment at press time.