Just two months after it extended the life of its $4.7 billion Morgan Stanley Real Estate Fund (MSREF) VII Global, Morgan Stanley Real Estate Investing (MSREI) reportedly is eyeing a new US-focused fund. According to an article in the Wall Street Journal last month, the New York-based real estate investment platform is targeting $1 billion in equity for the new vehicle.
One reason for launching a new US real estate fund – even while it still has some $2 billion in uncommitted capital to invest on behalf of MSREF VII Global, known as G7 – is that MSREI is reaching the limit for what it can invest in US real estate on behalf of G7. According to a source familiar with the situation, the tax inefficiencies of US investments for global investors was the primary driver of having that cap, which is about 25 percent of the fund’s total assets. Morgan Stanley declined to comment.
MSREI initially had focused on the US for investments on behalf of G7 before ramping activity in Europe and Asia towards the end of 2011. As of December, the firm had closed on more than 20 investments in the US, including the acquisition of 1107 Broadway, a 350,000-square-foot vacant office building in Manhattan. Plans for that acquisition call for MSREI, in partnership with The Witkoff Group, to commit more than $100 million in additional equity towards a condominium conversion. Other US deals have involved purchases of single-family lots and nonperforming loan portfolios.
Although the firm recently has been known for its global vehicles, the new US real estate fund could be an indicator that MSREI once again is exploring regionally-focused opportunity funds. Indeed, while MSREF VI and VII were international or global in focus, MSREI previously had US-targeted vehicles with MSREF V US in 2005, MSREF IV Domestic in 2001 and MSREF III Domestic in 1998.
Of course, all this talk of a new fundraising effort comes in the wake of MSREI reaching a compromise with G7 investors in December to extend that fund’s investment period by 12 months to June 2013. In exchange, the firm agreed to cancel $700 million of the fund’s approximately $2.7 billion in uncommitted capital and cut various fees. While the firm may have done right by that fund’s investors, it remains to be seen how the experience will affect commitments to any new vehicle.
Furthermore, while raising $1 billion for a US-only vehicle might be suitably ambitious, MSREI will be facing a challenging fundraising environment, perhaps the most difficult in the last 25 years. Still, don’t count the Wall Street powerhouse out just yet.
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