Why other investment banks did not stay in the race

Several key factors separated the real estate businesses of Goldman Sachs and Morgan Stanley from the rest of the pack.

The property platforms of Goldman Sachs and Morgan Stanley have persevered as formidable forces in private real estate. Although others have overtaken them as the largest managers in the industry, the two firms have managed to overcome the senior turnover and legacy issues that beset them in the aftermath of the global financial crisis. They are now once again raising multibillion dollar funds and positioning themselves for growth.

However, the majority of Goldman Sachs’ and Morgan Stanley’s fellow investment bank cohorts have not similarly endeavored to make comebacks in private real estate. Former executives from these real estate investment platforms, among others, point to the reasons why.

To begin with, the investment bank contingent within private real estate was a limited group. “It wasn’t that many different firms,” says Michael Levy, chief executive officer of Dallas-based manager Crow Holdings and former chief financial officer and chief operating officer at MSREI. “If you look at the BofA Merrill Lynch platform today, they’re not a big alternative investment management firm. I think it was less of a strategic fit for BofA in the modern era. And we know that Lehman went bankrupt. So, there was nothing to rebuild there.”

Meanwhile, other banks got out of the real estate business. Citi, for example, sold its real estate arm, Citi Property Investors, to Apollo Global Management in 2010.

Compared with other investment banks then active in the real estate space, Goldman, Morgan Stanley and Lehman had relatively large private equity real estate teams outside the US supporting their global opportunity funds before the global financial crisis, remarks Sophie van Oosterom, global head of real estate at Schroders Capital, the private markets division of UK asset manager Schroders.

By contrast, other investment bank rivals were more US-focused at the time. After the crisis, most parties dismantled their global strategies in favor of more regionally focused funds and strategies – in line with the changed risk appetite of investors, she notes. Van Oosterom was formerly European head of asset management of Lehman Brothers Real Estate Partners’ private equity funds, which held around $20 billion of assets under management in Europe at its peak.

“The size and competitiveness of the real estate lending arms of the investment banks before the GFC probably also influenced the amount of scar tissue incurred and therefore the willingness to rebuild global real estate private equity franchises after the GFC,” she adds.

Other holdouts

However, a few other banks aside from Goldman Sachs and Morgan Stanley have also stayed in the race. These include JPMorgan, the world’s largest investment bank by revenue, according to data provider Statista. JPMorgan has “a solid business” in private real estate through its asset management arm, JPMorgan Asset Management, according to a former Morgan Stanley executive.

That property platform remains best known for JPMorgan Strategic Property Fund, one of the largest funds in the Open-End Diversified Core Equity index. “Their business has been fairly consistent, but it’s probably been 80 percent or 90 percent core,” the executive points out.

Two other banks still active in private real estate are Credit Suisse and Deutsche Bank. Both companies – which his­torically had significant involvement in real estate – are undergoing “far more transformative and strategic organiza­tional restructuring today, which may explain why they are less visible in the real estate market,” says David Fanger, senior vice-president at Moody’s Inves­tor Service.

Credit Suisse raised two European value-add real estate funds after the crisis, both around €200 million in size, according to PERE data. Although Deutsche Bank had pursued a value-add real estate strategy through its RREEF fund series before the GFC, DWS Group, the bank’s asset management arm, has raised only one core fund, Pan European Core Fund, and one real estate debt fund, DeAWM Senior Loan Fund, since then, PERE data showed. DWS, moreover, became a separate entity through an initial public offering on the Frankfurt Stock Exchange in 2018 as part of the bank’s reorganization.

All three banks, however, have raised and invested little to no capital in non-core and non-debt real estate strategies since the crisis. By contrast, Morgan Stanley and Goldman Sachs each have amassed billions in their most recent value-add real estate equity funds.

For Levy, scale in real estate investment management is the key difference between Morgan Stanley and Goldman and the other bank holdouts. “Morgan and Goldman really built out very scaled and capable global real estate investment management businesses that survived the shocks. And the firms survived too – Goldman and Morgan,” he explains. “Deutsche Bank and others, these are balance sheet firms, not investment management.”

Also critical to the resilience of Goldman Sachs’ and Morgan Stanley’s real estate businesses was the banks’ conviction in those platforms. “They had the best businesses going into the downturn, they then got hit hard by the downturn,” the other Morgan Stanley executive noted. “But both of them stayed committed to the business. That’s why I think they were able to get through it.”

– Peter Benson contributed to this story.