Real estate write downs plague Morgan Stanley results

The former investment bank, which has applied to become a bank holding company, took a loss of $1.8bn in its asset management division, which includes real estate and private equity businesses.

Morgan Stanley’s merchant banking division took $355 million in losses this year driven by a $100 million decline in its real estate, infrastructure and private equity investments. That compares to positive revenues of about $2.2 billion in 2007.

Morgan Stanley lost $100 million in its real estate, infrastructure and private equity funds, particularly in Asia.

Morgan Stanley’s chief financial officer Colm Kelleher, highlighted Morgan Stanley Real Estate’s $6.5 billion purchase last year of real estate investment trust, Crescent Real Estate Equities, as one of the reasons for the losses. MSREF paid $22.80 per share in cash for the Fort Worth, Texas-based REIT, assuming about $3.1 billion of Crescent's debt. 

The REIT controls a portfolio of 36 office buildings totaling 17 million square feet in Dallas, Houston, Denver and Las Vegas

Kelleher said during an earnings call yesterday that the losses were caused by the general market deterioration, especially in the real estate market.

The bank closed a $4 billion infrastructure fund called Morgan Stanley Infrastructure Partners in May and has been raising a $6 billion buyout fund. The bank last year raised a $1.5 billion Asia-dedicated private equity fund, Morgan Stanley Private Equity Asia III. 

The losses in merchant banking were part of broader losses in the bank’s asset management division, which posted pre-tax declines of $1.8 billion in 2008, compared with pre-tax income of $1.4 billion last year. Net revenues in the asset management division of $1.3 billion declined $4.2 billion, or 76 percent, from 2007.

Fourth quarter declines in merchant banking exceeded losses for the full year. Net revenues in merchant banking were negative $454 million, down from $505 million in the fourth quarter of 2007.

In the past month, MSREF has pulled out of the separate accounts business in order to focus on its commingled funds, and has deferred the final closing of its latest mega fund, the Morgan Stanley Real Estate Fund VII Global until the first quarter of 2009. The fund, which is targeting $10 billion, has secured $6 billion in commitments with another $2 billion soft circled, according to sources.