ULI 2010: MSREF ‘lost control’ of investments, says Zell

The Equity Group Investments chairman warned large opportunity funds, such as MSREF and Whitehall, were too big and took too many risks, on the opening day of the spring ULI conference in Boston.

Sam Zell today hit out at the real estate industry’s largest opportunity funds warning they grew too big and lost control of their ability to make investments.

Speaking on the first day of the ULI spring conference in Boston – and in the wake of reports that Morgan Stanley Real Estate Investing faces a potential $5.4 billion loss on its $8.8 billion global fund, MSREF VI – Zell criticised funds such as MSREF and Goldman Sachs’ Whitehall Street saying they became “frankly just too big”.
Asked by a member of the audience to comment on the MSREF write downs, Zell said the Morgan Stanley and Goldman platforms were “examples of funds that were frankly just too big and they lost control of their ability to make investments.”

In the case of Morgan Stanley, Zell said the New York-based real estate group was “significantly more aggressive” in acquiring real estate deals towards the height of the market. “I don't think what we've seen with MSREF is indicative of the whole industry, but it is without question indicative of the kind of risks that fund [MSREF], and a couple of others, took. That was in my opinion the outlier.”

In a question and answer session with economist and advisor Dr Peter Linneman, Zell said the US real estate recession of 1975 and in the 1990s should be considered the “norm”, whereas the current crisis – something he dubbed a demand recession – was the “outlier”.

According to the fund documents seen by the Wall Street Journal, MSREF VI is expected to lose $5.4 billion, of 61 percent, of its $8.8 billion equity. However, Bloomberg later cited sources saying that $3.4 billion of that was likely to be recovered.

Appearing at the ULI conference, Zell also argued that in the US today there were no “great equity opportunities in real estate”, saying the best deals were to be found in debt. Zell revealed he had just acquired nine hotel mortgages for 42.5 cents on the dollar, a deal that would be “difficult” and would require “us to invest both a lot of time and money”.

Zell has been bullish on hotel opportunities for some time, but told the more than 3,000 ULI delegates in Boston that the only other opportunities were in sifting through the “crap in all the banks all over the [US]. It’s going to be priced and sold like the RTC,” he said.