On Wednesday, Reuters reported that Morgan Stanley (MS) plans to expand its real estate portfolio in Germany through Morgan Stanley Real Estate (MSREF). Based on the regulatory filings in the German cartel office, MSREF and Redos Real Estate are preparing to purchase “Bavaria” managed by METRO Group Asset Management.
MSREF is a part of Morgan Stanley’s Asset Management segment and consists of three integrated businesses – banking, investing and lending.
Morgan Stanley has not yet entered into any contract for buying the portfolio, as per the German multinational Haniel, which has controlling interest of more than 50% together with the Schmidt-Ruthenbeck family in Metro Group. The portfolio is estimated to be valued at approximately €800 million ($1.1 billion) and consists of 43 Metro Cash & Carry stores as well as 19 Real hypermarket sites, a spokesperson of Haniel added.
However, no further clarification regarding the deal has come from Morgan Stanley and Redos Real Estate representatives.
Earlier in May 2010, Reuters had reported that Morgan Stanley decided to stop the sale of shares of its German open real estate fund, P2 Value, until October 30, 2010 due to continued market uncertainly and possible writedowns on the property holdings. The company also said that the fund may suffer a loss of about $5.9 billion, which is almost two-thirds of its total investment value.
Hamburg-based Redos Real Estate is an investor and asset manager that specializes in German Retail assets. METRO Group Asset Management is a part of German retailer METRO GROUP, the third largest trade and retail group in terms of sales, globally.
As one of the largest real estate investment managers, Morgan Stanley has $46.4 billion of asset under management as of March 31, 2010. The company expects to garner larger market share in the sector. Morgan Stanley’s real estate strategy is to enhance the investment opportunities throughout the U.S., Europe and Asia; the German deal fits into this.
However, with the global economic environment continuing to be challenging and earnings visibility remaining low, cyclical pressures in the weak commercial real estate sector increases concern over the near term prospects for returns. Morgan Stanley has incurred and may continue to incur significant losses in the real estate sector as most of the growth is market driven. Many macro-economic factors have adversely affected the pricing, volumes and interest income in this sector. This has contracted the bottom-line results, thereby substantially shrinking dividend to shareholders, book value per share and return on equity as compared to the last couple of years.
All these apprehension is reflected in the current Zacks #5 Rank (‘Strong Sell’) for Morgan Stanley, with an expectation that the stock would underperform the broader U.S. equity market over the next one to three months. We believe that the company’s exposure to the commercial real estate sector, which is still weak, will remain a cause of concern. Hence, we maintain our Underperform recommendation on the stock.
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