Morgan Stanley took huge hit on real estate fund, report says

Morgan Stanley, which once ran the biggest property-investment arm among Wall Street banks, expects to lose $5.4 billion, or 61 percent, of its $8.8 billion global fund from 2007, said a person familiar with the situation.

The firm sent a fourth-quarter update to investors in recent weeks showing the fund was likely to recover $3.4 billion of the investment, said the person, who declined to be identified because the information wasn’t public. A spokesman for New York-based Morgan Stanley declined to comment.

Morgan Stanley raised the fund, Morgan Stanley Real Estate Fund VI International, toward the end of the property surge when market prices were at or near the peak. At the time, it was the largest private fund ever raised targeting high-return real estate investments.

The expected loss was reported yesterday by the Wall Street Journal.

Morgan Stanley invested its 2007 fund around the world, including Asia and Europe. In the U.S., the firm defaulted last year on a $2 billion loan to buy Crescent Real Estate Equities Co. in 2007 and handed over 17 million square feet of office buildings to lender Barclays Capital. Morgan Stanley agreed in 2009 to relinquish five San Francisco office buildings to its lender, two years after buying them from Blackstone Group LP.

Once the second-largest U.S. securities firm, Morgan Stanley converted to a bank holding company in September 2008 and accepted $10 billion of government bailout funds to survive the credit crisis.