MSREF's new mission

Morgan Stanley Real Estate Investing has just closed its latest opportunity fund on $4.7bn. In closing the largest private equity real estate fund post-Lehman, MSREI is refocusing attention on its future, rather than the recent past. MSREI CEO Owen Thomas and CIO Jay Mantz talk about the challenges of the past 18 months – and how the New York-based platform is investing its capital once again.

Morgan Stanley Real Estate Investing has just closed its latest global fund, MSREF Global VII on $4.7 billion. G7, as the fund has been dubbed internally, is the largest private real estate vehicle to close following the collapse of Lehman Brothers. The fundraise cements the firm’s position as the second largest private equity real estate firm in the world, according to PERE’s ranking of the industry, and equips the New York-based real estate platform with an arsenal of dry powder most firms could only dream of.

Stanley HQ

Yet, despite this announcement, MSREI will not be found in a triumphal, self-congratulatory mode.

That is, perhaps, unsurprising. The firm has been publicly chastised for investing tens of billions of dollars at the height of the market in 2006 and 2007. In April, the Wall Street Journal revealed that, as of the third quarter last year, the firm’s 2006 vintage fund, the $8 billion Morgan Stanley Real Estate Fund VI International, had written down its equity by more than 60 percent, prompting many investors and rival fund managers to question how MSREI got it so wrong. Even Sam Zell waded in on the MSREI issue that month, when the Equity Group Investment chairman told the Urban Land Institution spring conference the firm “lost control of [its] ability to make investments”.

In a global property downturn that saw prices fall by up to 50 percent, all eyes have been on Morgan Stanley Real Estate Investing. However, in closing G7, MSREI is hoping to refocus that attention as much to the future as to the past.


“We have been a real estate player over a very long period of time, and we get a lot of attention because we are large,” accepts Owen Thomas, chairman and chief executive officer of MSREI. “We didn’t achieve our performance goals in two of our funds,” adds MSREI president and chief investment officer Jay Mantz. “People are allowed to be disappointed, and they are allowed to be vocal about it.”

Thomas and Mantz both stress that MSREI’s recent poor performance has been centred on two vehicles, MSREF Fund V US and MSREF Fund VI International, which were invested before the crash of 2008. “I don’t think anyone was particularly well-prepared for the financial correction the world experienced in 2008,” Thomas says. “It was probably the worst market sell-off since the Great Depression and that clearly had a big impact on real estate.”

For those that thought MSREI was not in business though, think again. The firm has spent the past 18 months actively talking with its investors and lenders and is now – as one senior executive at the group says – putting its name out there as “ready, willing and able” to make new investments.

Morgan Stanley’s pain

Of course, the attention afforded MSREI is due, in part, to the fact the firm has been around so long and is such an establishment name on the private equity real estate circuit. The Morgan Stanley real estate franchise started in 1969, with the MSREF fund series being created in 1991. MSREI has raised 10 opportunistic funds totalling more than $25 billion in commitments, as well as seven core and special situation funds, in addition to separate accounts. During its history, MSREI – primarily through its MSREF vehicles – has expanded from predominantly US investments, into Europe in 1996 followed by Asia in 1998. In 2003 MSREI acquired the US investment management business of Lend Lease, including the open-ended commingled fund, the Prime Property Fund.

Jay Mantz

“We got into the real estate business in 1991,” says Mantz. “We made some big strategic decisions when we went international, first to Europe and then to Asia.” In growing out the business in terms of geographies and products, Mantz says MSREI achieved top quartile performance and benefitted from having a globally diverse portfolio.

Mantz admits, though, that MSREI’s timing was off in the most recent vintage funds. “We bought at the top of the market. We did not anticipate the level of dislocation and repricing that would occur in a very short time frame.” 

Among some of MSREI’s larger deals included the February 2008 purchase of the Citigroup Center and Shinsei Bank headquarters in Tokyo for a combined total of $1.5 billion, according to data provider Real Capital Analytics, followed by Berlin’s Sony Center for $946 million in July 2008, in partnership with German investment fund Sireo Real Estate and Chicago-based fund manager John Buck Company. By the end of 2007, MSREF VI International had invested or committed $7.4 billion of its original $8 billion of commitments, according to the Contra Costa County Employees Retirement Association.

Co-investment alignment

In accepting MSREI made mistakes though, the firm flatly rejects Zell’s analysis that the firm “lost control”.
Zell’s argument centres on the perception that in raising ever-larger funds, in ever-faster periods of time, some private equity real estate firms were being driven by the lure of management fees, rather than through the performance of the vehicles and the back-ended payment of carried interest. Bank-sponsored platforms have come in for particular attack, with the parent bank often taking large LP stakes in the funds, thereby reducing the amount of co-investment capital from senior fund managers. Such “pressure to invest” arguments though fail to hold court at MSREI.

Morgan Stanley was a “very significant co-investor” alongside its limited partners, Thomas says. “With a 20 percent investment in Fund V US and VI International, the notion that we were investing to make fees makes no sense.”

Mantz too rejects the supposition that senior managers aren’t aligned with their LPs, saying Morgan Stanley employees put roughly $300 million into Fund VI alone. “Our fees don’t compare to the potential for investment gains if you perform well.”

Capital preservation

As the subprime residential crisis started to slowly impact the commercial real estate markets in the second half of 2007, MSREI tried to monetise some of its investments. MSREI was trying to sell into a shrinking market though. When the investment bank Bear Stearns was taken over by JPMorgan in March 2008, capital market lending had slowed considerably, and property transactions were slowing dramatically. When Lehman Brothers filed for bankruptcy in September 2008, little more than a week after US mortgage finance companies Fannie Mae and Freddie Mac had been placed into conservancy by the Federal Reserve, “people were done”, Mantz says.

We were focused on doing as much as we could operationally and went into capital preservation mode. We looked at the portfolio and we were very conscious of how we were spending capital. It was about harnessing as much liquidity as we could.


“It was a market where you just couldn’t do what you wanted to do,” Mantz continues. “We were focused on doing as much as we could operationally and went into capital preservation mode. We looked at the portfolio and we were very conscious of how we were spending capital. It was about harnessing as much liquidity as we could.”

From the start of 2009 to the first quarter of this year, MSREI has managed to sell roughly $10 billion of assets, predominantly in China where it saw an opportunity to take advantage of increasing market liquidity. In October 2009, the firm sold a 21-storey office building in central Hong Kong for $477 million. The building was originally acquired in August 2006 for $291 million and underwent redevelopment and substantial lease up prior to sale.

The firm has also restructured billions of dollars of loans, including $3.5 billion of debt related to its Investa Property Group deal in Australia. In 2007, MSREI paid A$6.6 billion for Investa, which owns and manages 47 office buildings in Australia, manages A$2.2 billion of real estate funds and has a development pipeline worth A$3.7 billion, according to The Australian newspaper.

Where necessary MSREI has also handed back the keys to a few assets, most recently handing over to lender Royal Bank of Scotland a collection of German offices known as the Pegasus portfolio, reportedly worth €2.1 billion.

The toughest time in your business is when you spend the most amount of time communicating. Now, one year later we’ve accomplished a tremendous amount to recover value for our investors.


Despite the (often public) workout efforts taking place at MSREI, the firm refused to retreat into a “cocoon”, as Mantz says. In tackling the situation head-on, Mantz explains that MSREI almost doubled the number advisory committee meetings and calls, investor calls and reports so that it could “walk [LPs] through what’s going on”. 
He continues: “Early on, we began telling investors the issues we were dealing with and how we are dealing with them in terms of our strategies and the resources we are dedicating to them. The toughest time in your business is when you spend the most amount of time communicating. Now, one year later we’ve accomplished a tremendous amount to recover value for our investors.”

In addition to its communications with LPs, MSREI has also offered existing investors in Funds V US and VI International “significant” concessions relating to management fees, waiving some and materially reducing others. For G7, investors – which include new as well as existing MSREF LPs – were allowed to reduce their commitments to the fund. “We did everything we could to listen to our partners and make accommodations to help them,” says Thomas. “We were very active with investors.”


The issues facing MSREI over the course of the past 18 months have been challenging to say the least. The firm has not only suffered, like many others, from the performance of its funds but it has also suffered several high-profile departures, including the firm’s former co-global heads Sonny Kalsi and John Carrafiell in 2009 and 2008 respectively, followed in early 2010 by the head of Japan, Fred Schmidt.

As PERE has previously reported, Carrafiell, who co-led MSREI with Kalsi in 2007 and 2008, left to set up his own advisory firm in late 2008, while Kalsi, who helped build the firm’s operations in Europe and later Asia and led MSREI from 2006, formally resigned in October last year. Schmidt, who led MSREI Japan from 2006, left earlier this year, and has since teamed up with Kalsi and Carrafiell to launch their own real estate investment platform targeting the US, Europe and Asia. MSREI also lost its chief administrative officer Paula Schaefer at the start of April this year.

Such senior departures would impact any firm, and for MSREI it resulted in Thomas – who is also head of Morgan Stanley Asia, based in Hong Kong – returning to the fold as chief executive officer, and Mantz, who was co-head of Morgan Stanley’s merchant banking group, return as chief investment officer.

Mantz says it was “very hard” to lose people with whome you’d built personal relationships. But Morgan Stanley Real Estate is more than just a few people, he adds. “We have a deep team of people here at Morgan Stanley. We have 350 people dedicated to the acquisition, financing and asset management side of the business, and that excludes all the people involved in accounting, legal, and IT. We have also brought on senior talent to further strengthen and lead out team.”

New hires included former Capital Trust founder John Klopp, as head of Americas; ex-Pirelli Real Estate chief investment officer and former co-head of MSREI Europe Olivier de Poulpiquet who leads operations from London; and bringing back Yoshihiko Shigenari, who lead MSREI Japan from 1998 to 2006 and was most recently Morgan Stanley’s head of private equity, who was recently appointed chief executive officer of operations in Japan. With such appointments under its belt – and G7 having its official final close – the firm says it is more than ready to move forward.

Moving forward

As it looks to the future, MSREI is actively sourcing new deals, particularly in the US, Western Europe and Japan. Mantz echoes the thoughts of MSREI’s new head of Americas, John Klopp, when he says he believes there will be “opportunities not just today”, but for years to come.

Both Mantz and Thomas see the US as the most immediately attractive market for MSREI, with the firm looking to access distressed equity through debt structures.

This is a very unique cyclical opportunity to buy real estate because there is a lot of distress. There is a real chance to make a lot of money again for our investors and we are excited about the future.


“We are investing new capital and we’re looking for the right opportunities,” says Mantz. “There’s a prudence to it. We see so much out there, it’s about ensuring you pick out the best deals, and figure out what to do with them. But we are very optimistic for the future.

“We have reinvested in our resources and brought people into the business. We have stepped up and we have really senior talent who have come back to manage it going forward. We are moving forward.”

For Thomas, the best vintage funds are traditionally those investing in the wake of a real estate recession. Although unspoken, there is an expectation at MSREI for G7 to generate significant returns above the fund’s targeted 20 percent IRRs.

“We have had a big drop in values in real estate around the world – and they have certainly been more precipitous in the US and various areas of Europe and Japan,” says Thomas. “That’s why our primary focus will be on those areas. This is a very unique cyclical opportunity to buy real estate because there is a lot of distress. There is a real chance to make a lot of money again for our investors and we are excited about the future.” 

Owen Thomas
Chief executive officer of Morgan Stanley Asia; Chairman, chief executive officer of Morgan Stanley Real Estate Investing (reinstated 2009); Chairman of Mitsubishi UFJ Morgan Stanley Securities

2008:  Chief executive officer of Morgan Stanley Asia
2005:  President of Morgan Stanley Investment Management
2000:  Head of Morgan Stanley Real Estate (banking and investment) globally
1994:  Started managing Morgan Stanley’s real estate investing business
1987:  Joined Morgan Stanley’s real estate investment banking group

Jay Mantz
President and chief investment officer of Morgan Stanley  Real Estate Investing (reinstated 2009)

2007:  Global co-head of Morgan Stanley Merchant Banking Division
2005:  Global co-head of Morgan Stanley Real Estate Investing, with John Carrafiell
1999:  Head of Morgan Stanley Real Estate Investing, responsible for principal global investing
1996:  Moved to London as head of Morgan Stanley Real Estate Funds Europe
1993:  Joined Morgan Stanley Real Estate